Putnam
Tax Exempt
Income Fund
ANNUAL REPORT
September 30, 1995
(Graphic--Balance Scales)
B O S T O N (bullet) L O N D O N (bullet) T O K Y O
<PAGE>
Performance highlights >"Demand for attractively priced municipal bonds is
increasing as new bond sales by states, cities, and
agencies become more scarce. . . . New sales have
fallen 18 percent during the first nine months of
1995."
--Bloomberg, October 13, 1995
> "For those who think that risk and taxes aren't about
to be repealed, it seems like a good time to slap one
up the middle with munis while everybody's swinging
away in stocks."
--Barron's, October 2, 1995
FISCAL 1995 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A Class B Class M(4)
<S> <C> <C> <C> <C> <C> <C>
Total return: NAV POP NAV CDSC NAV POP
..............................................................................................
(change in value
during
period plus
reinvested
distributions)
12 months ended
9/30/95 8.58% 3.38% 8.01% 3.01%
Life of Class M 5.23% 1.81%
Class A Class B Class M
Share value: NAV POP NAV NAV POP
...............................................................................................
9/30/94 $8.55 $8.98 $8.53
2/16/95 (inception of class M shares) $8.61 $8.90
9/30/95 8.74 9.18 8.73 8.75 9.04
Distributions: No. Income Total
...............................................................................................
Class A 12 $0.517064 $0.517064
Class B 12 0.461131 0.461131
Class M 8 0.304882 0.304882
Current return: NAV POP NAV NAV POP
...............................................................................................
End of period
Current dividend
rate(1) 5.71% 5.43% 5.05% 5.36% 5.19%
Taxable
equivalent(2) 9.45 8.99 8.36 8.87 8.59
Current 30-day
SEC yield(3) 5.58 5.31 4.96 5.21 5.02
Taxable
equivalent(2) 9.24 8.79 8.21 8.63 8.31
</TABLE>
Data above represent past results and are not indicative of future
performance. For performance over longer periods, see pages 8 and 9. POP
assumes 4.75% maximum sales charge for class A and 3.25% for class M. CDSC
assumes 5% maximum contingent deferred sales charge. For some investors,
investment income may also be subject to the federal alternative minimum tax.
Investment income may be subject to state and local taxes. (1)Income portion
of most recent distribution, annualized and divided by NAV or POP at end of
period. (2)Assumes maximum 39.6% federal tax rate. Results for investors
subject to lower tax rates would not be as advantageous. (3)Based on
investment income, calculated using SEC guidelines. (4)The fund commenced
operation for class M shares on 2/16/95.
2
<PAGE>
From the Chairman
(Photo of George Putnam)
(c) Karsh, Ottawa
Dear Shareholder:
With plenty to be positive about, tax-exempt investors are finally putting
their summer fears behind them. A few months ago, flat-tax proposals were
floated in the pre-election wind. The mere talk of such a tax, which would
end the beneficial treatment now accorded municipal bonds, was enough to send
the market into decline.
Interest rates are still moderate, inflation remains low, and the economy
seems to have slowed to a more comfortable pace, all factors that gladden
fixed-income investors' hearts. Municipal-bond investors have been further
blessed with yields virtually at the same level as those of taxable bonds and
a favorable ratio of supply to demand.
As Putnam Tax Exempt Income Fund's fiscal year ended on September 30, 1995,
the municipal-bond market was showing new signs of strength, poised for what
could be another positive period of advance. In the report that follows, Fund
Managers David Eurkus and Triet Nguyen review performance and prospects for
the year ahead.
Respectfully yours,
(Signature of George Putnam)
George Putnam
Chairman of the Trustees
November 15, 1995
3
<PAGE>
Report from the Fund Managers
David J. Eurkus
Triet M. Nguyen
Putnam Tax Exempt Income Fund's fiscal year ended on a much brighter note
than it began. During the first half, fixed-income investors witnessed one of
the bleakest economic environments in history, followed by one of the most
dramatic bond market rallies. While your fund was able to rebound in the
brighter environment of calendar 1995, the municipal-bond market faced some
challenges that dampened fund performance relative to taxable income
investments.
> "SOFT LANDING" COMES TO FRUITION
Early in calendar 1995, investors began to see the first signs of success in
the Federal Reserve Board's effort to moderate economic growth and keep
inflation in check. After a year-long series of interest rate increases, the
economy began to slow and bond markets rallied. In early July, in a clear
indication that inflationary pressures had receded, the Fed cut short-term
interest rates for the first time in nearly three years.
By the end of the fund's fiscal year on September 30, 1995, it appeared that
the Fed had achieved its desired "soft landing" -- a slowing in growth
sufficient to contain inflation without leading to a recession. With these
economic conditions providing a favorable climate for fixed-income
investments, bond yields fell and their prices soared.
> PERCEIVED THREAT OF TAX REFORM HINDERS
MUNICIPAL-BOND MARKET
Despite the exuberance of the overall bond market, municipal- bond price
appreciation remained low in relation to Treasuries throughout the latter
half of fiscal 1995. One reason for this lagging performance was tax-reform
rhetoric -- a telling example of the impact investor psychology can have on
financial markets. This past spring, talk of tax reform, and specifically a
flat-tax proposal, began to escalate, causing some nervousness among
municipal-bond investors.
4
<PAGE>
Among the proposals soon to be considered by Congress are those that would
add tax exemptions on several types of investment income, such as U.S.
Treasuries. This would effectively remove municipal bonds' exclusive tax
advantages. It is important to note that we believe any changes to the tax
system, if they happen at all, are unlikely to be as radical as the current
proposals suggest. Furthermore, we do not expect any changes to occur until
after the 1996 election.
Nevertheless, in April, at the onset of this talk, investors began pulling
money out of tax-exempt bond funds. Tax reform concerns also made many
investors reluctant to commit their money to bonds with maturities greater
than 10 years. During the latter half of the fund's fiscal year, bonds at the
short end of the yield curve (those that mature in 10 years or less)
outperformed municipal bonds with longer maturities. Because we believed that
bonds with 15- to 20-year maturities offered the best value, we sold selected
bonds with shorter maturities as well as selected bonds with 30-year
maturities to help capture the greater price appreciation potential.
CREDIT QUALITY OVERVIEW
(pie chart)
51.2% AAA
8.3% AA
9.4% A
24.7% BBB
6.4% BB and below
Based on net assets on 9/30/95. Holdings will vary over time.
A bond rated BBB or higher is considered investment grade. All ratings reflect
Standard & Poor's (R) rating terminology, unless noted otherwise. While the
fund has the flexibility to invest in higher-yielding, lower-rated bonds,
which pose a greater risk of default, generally at least 75% of the portfolio
will be investment grade.
5
<PAGE>
> EMPHASIS ON REGIONS WITH PRICE APPRECIATION POTENTIAL
Your fund continued to benefit from its strategy of investing in a diverse
group of industries across the country. We focused the portfolio's
investments in regions that we believe offered the greatest price
appreciation potential, including such high-tax states as Massachusetts, New
York, and California. In these states, municipal-bond yields have been
especially attractive.
While your fund remained heavily weighted in investment-grade bonds -- those
having a credit quality rating of BBB or above -- we also sought
opportunities in selected lower-rated issues such as bonds issued by the
Foothill/Eastern Transportation Corridor Agency in California. These revenue
bonds support a large, multimillion-dollar toll-road construction project in
the Anaheim/San Diego area. They have provided outstanding performance since
being added to your fund's portfolio in early June.
Another fiscal 1995 success story was your fund's investment in bonds sold to
finance the $4.9 billion Denver International Airport. These bonds, among our
largest holdings, have served the fund well throughout the fiscal year. The
Denver airport project was plagued with problems, including a 16-month delay
in opening and several cost increases. Since opening last February, however,
the facility has overcome many of its problems. In its first six months of
operation, the airport generated more revenue than anticipated, and the bonds
recently qualified for insurance.
> MUNICIPAL-BOND SUPPLY REMAINED SCANT; EVIDENCE OF INCREASED DEMAND
Fiscal 1995 was marked by a considerably low supply of new bond issuance --
which at fiscal year's end was down approximately 25% from 1994 levels.
Demand for municipal bonds, however, was a little more tenuous.
6
<PAGE>
(Bar Chart)
TOP INDUSTRY SECTORS*
Hospitals 18.73%
Transportation 13.11%
Utilities 12.86%
Education 8.35%
Housing 7.90%
*Based on total net assets on 9/30/95. Holdings will vary in the future.
In what we consider to be a premature reaction to tax-reform rhetoric,
individual investors withdrew $4.5 billion from tax- exempt bond funds in the
first eight months of 1995. This outflow continued through late summer,
when investors pulled more than $1 billion from municipal-bond funds in a
single month. As the fiscal year came to a close, however, this trend was
beginning to reverse. Furthermore, as individual investors began putting
money back into the funds, municipal-bond yields, which, like all other bond
yields, move in the opposite direction of bond prices, began to decline. We
believe any increase in demand, combined with scant supply, bodes well for
your fund.
> FAVORABLE ECONOMIC AND SUPPLY/DEMAND
OUTLOOK
We believe the current economic environment -- slow but steady growth with
relatively low inflation -- will continue to benefit your fund in the months
ahead. We're also optimistic about the increased demand for municipal-bond
mutual funds, which became evident toward the end of your fund's fiscal year.
While we don't expect flat-tax jitters among investors to disappear anytime
soon, we do believe that more moderate tax-reform proposals will emerge as
the presidential campaign nears. And, we believe investors will recognize the
relative value of municipal bonds as alternative investments may become
overvalued.
The views expressed in this report are exclusively those of Putnam Management
and are not meant as investment advice. Although the described holdings were
viewed favorably as of 9/30/95, there is no guarantee the fund will continue
to hold these securities in the future.
7
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares changed
over time, assuming you held the shares through the entire period and
reinvested all distributions back into the fund. We show total return in two
ways: on a cumulative long-term basis and on average how the fund might have
grown each year over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
Performance should always be considered in light of a fund's investment
strategy. Putnam Tax Exempt Income Fund is designed for investors seeking
high current income free from federal income tax, consistent with capital
preservation.
TOTAL RETURN FOR PERIODS ENDED 9/30/95
<TABLE>
<CAPTION>
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year 8.58% 3.38% 8.01% 3.01% -- --
- ---------------------------------------------------------------------------------
5 years 51.59 44.46 -- -- -- --
Annual average 8.68 7.63 -- -- -- --
- ---------------------------------------------------------------------------------
10 years 147.27 135.57 -- -- -- --
Annual average 9.48 8.95 -- -- -- --
- ---------------------------------------------------------------------------------
Life of class B -- -- 13.38 10.48 -- --
Annual average -- -- 4.69 3.70 -- --
- ---------------------------------------------------------------------------------
Life of class M -- -- -- -- 5.23% 1.81%
- ---------------------------------------------------------------------------------
</TABLE>
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/95
<TABLE>
<CAPTION>
Lehman Bros. Consumer
Municipal Bond Price
Index Index
- ------------------------------------------------
<S> <C> <C>
1 year 11.18% 2.54%
- ------------------------------------------------
5 years 52.88 15.45
Annual average 8.86 2.91
- ------------------------------------------------
10 years 151.21 41.46
Annual average 9.65 3.53
- ------------------------------------------------
Life of class B 20.11 7.96
Annual average 6.92 2.84
- ------------------------------------------------
Life of class M 9.66 1.93
- ------------------------------------------------
</TABLE>
Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions or, for class A shares, distribution fees
prior to implementation of the class A distribution plan in 1993. Effective
1/4/93, the fund began offering class B shares and on 2/16/95, the fund began
offering class M shares. Performance data represent past results and will
differ for each share class. Investment returns and principal value will
fluctuate so an investor's shares, when sold, may be worth more or less than
their original cost.
8
<PAGE>
GROWTH OF A $10,000 INVESTMENT
(PLOT POINTS FOR LINE CHART)
Fund's Class A
shares at POP Lehman Muni Bond Index Consumer Price Index
9/30/85 9525 10000 10000
9/30/86 11964 12465 10175
9/30/87 11594 12530 10619
9/30/88 13558 14165 11062
9/30/89 14903 15385 11542
9/30/90 15539 16431 12253
9/30/91 17702 18598 12669
9/30/92 19925 20542 13047
9/30/93 22769 23159 13398
9/30/94 21695 22594 13795
9/30/95 23557 25121 14146
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at commencement of operations on 1/4/93 would have
been valued at $11,338 on 9/30/95 ($11,048 with a redemption at the end of the
period). A $10,000 investment in the fund's class M shares at commencement of
operations on 2/16/95 would have been valued at $10,523 at net asset value on
9/30/95 ($10,181 at public offering price).
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 4.75% sales charge for class A shares and 3.25%
for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year to
1% during the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long- term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index does not take into account brokerage commissions or
other costs, may include bonds different from those in the fund, and may pose
different risks than the fund.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
9
<PAGE>
A Putnam perspective on risk and reward
You've probably been told how important it is to understand the relationship
between an investment's potential rewards and its accompanying risks. Given
the cautionary nature of such instructions, it may take most investors a
while to realize that risk has a positive side.
Every risk signals a potential reward. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes
in their rates of return or, in some cases, in their principal values.
Experienced investors know that no investment is truly risk free and are
therefore willing to take on some measure of risk in order to increase their
potential gains.
The greater the risk, the greater the potential reward.
Accepting an appropriate level of investment risk can give you a better
chance of outpacing inflation over time and seeking to maximize your
investment's return. How much risk? Your financial
> A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds, this
is a measure of how sensitive a fund's holdings are to changes in general
market conditions. Remember, though, that securities that lose value quickly
in market declines may also show the strongest gains in more favorable
environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type
of risk is a particular concern for fixed-income investors. However,
interest-rate increases can also have a substantial negative effect on the
stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your
money will begin to lose its purchasing power. Stock investments are
generally considered among the best ways of addressing inflation risk over
the long term.
10
<PAGE>
advisor's feedback and your time horizon can make all the difference in
determining how much risk is compatible with your investment goals and your
peace of mind.
> FITTING YOUR FUND SELECTION TO YOUR
RISK TOLERANCE
How do you find the right balance between investment risks and their
potential rewards? It's helpful to understand the types of risks that can
apply to different types of investments, and to look at your own portfolio
with this perspective.
For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And all
income-oriented investors should consider interest- rate, credit, and
prepayment risks carefully. Within each of Putnam's four investment
categories, you can select funds with differing levels of risk and reward
potential to customize your portfolio.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's
issuer will not be able to meet its payment, while prepayment risk involves
the premature payoff of a loan, with a resulting loss of interest income.
Professional management and in-depth research are invaluable in managing both
these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at
their perceived market values. Liquidity risk can affect the price of
securities held in the fund's portfolio and, thus, the fund's share prices.
This list covers only the most general types of risks; however, each
investment will also have its own specific risks. You will find a more
detailed discussion of these risk considerations in each fund's prospectus.
11
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund*
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
International New Opportunities Fund
Investors Fund
Natural Resources Trust
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
Voyager II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Intermediate Tax Exempt Fund
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds+
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey,
New York, Ohio, and Pennsylvania
LIFESTAGES(SM) FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread your
money across a variety of stocks, bonds, and money
market investments to help maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS++
Putnam money market funds:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts(S).
* Temporarily closed to new investors.
+ Not available in all states.
++ Relative to above.
(S.) Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain a
prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you invest
or send money.
12
<PAGE>
Report of independent accountants
For the year ended September 30, 1995
To the Trustees and Shareholders of Putnam Tax Exempt Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Tax Exempt Income Fund, including the portfolio of investments owned,
as of September 30, 1995, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial
highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of securities
owned as of September 30, 1995, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Tax Exempt Income Fund as of September 30, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each
of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 13, 1995
13
<PAGE>
Portfolio of investments owned
September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Key to Abbreviations
COP --Certificate of Participation
IFB --Inverse Floating Rate Bonds
GO Bonds --General Obligation Bonds
TRAN --Tax Revenue Anticipation Notes
VRDN --Variable Rate Demand Notes
AMBAC --AMBAC Indemnity Corporation
BIGI --Bond Investors Guaranty Insurance
FGIC --Federal Guaranty Insurance Corporation
FHA --Federal Housing Administration
FSA --Financial Security Assurance
GNMA --Government National Mortgage Association
MBIA --Municipal Bond Investors Assurance Corporation
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (96.0%)*
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Alabama (0.6%)
- -------------------------------------------------------------------------------------
$ 4,750,000 Courtland Indl. Dev. Board Solid Waste Rev.
Bonds (Champion Intl. Corp. Project), Ser.
A, 6-3/8s, 3/1/29 BBB $ 4,613,438
10,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. TRAN
7-7/8s, 5/1/19 BB/P 10,525,000
-------------
15,138,438
Alaska (0.5%)
- -------------------------------------------------------------------------------------
12,000,000 AK Hsg. Fin. Corp. Rev. Bonds Ser. B, 7s,
12/1/27 AA 12,285,000
Arizona (1.2%)
- -------------------------------------------------------------------------------------
6,510,000 AZ State Muni. Fin. Program COP Ser. 34, BIGI,
7-1/4s, 8/1/09 AAA 7,584,150
23,000,000 Apache Cnty. Indl. VRDN (Tuscon Electric Power
Co., Project), Ser. B, 3.9s, 10/1/21 VMIG2 23,000,000
-------------
30,584,150
California (10.9%)
- -------------------------------------------------------------------------------------
3,250,000 CA State Pub. Wks. Board Rev. Bonds (Dept.
of Corrections State Prisons), Ser. A, AMBAC,
5-1/4s, 12/1/13 AAA 3,055,000
16,850,000 CA Statewide Cmnty. Dev. Corp. COP
(J. Paul Getty Tr.), MBIA, 5s, 10/1/23 AAA 14,659,500
16,050,000 CA Statewide Cmntys. Dev. Auth. COP (Insured
Hlth. Facs., Unihealth), Ser. A, AMBAC,
5-3/4s, 10/1/25 AAA 15,307,688
10,125,000 Calleguas-Las Virgines Pub. Fing. Auth. Rev.
Bonds (Calleguas Muni. Wtr. Dist. Project),
FGIC, 5-1/8s, 7/1/21 AAA 8,985,938
11,850,000 East Bay, Muni. Util. Dist. Wtr. Syst. Rev.
Bonds MBIA, 5s, 6/1/21 AAA 10,324,313
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
California (continued)
- --------------------------------------------------------------------------------------
$30,000,000 Foothill/Eastern Trans. Corridor Agcy. Rev.
Bonds (California Toll Roads), Ser. A, 6s,
1/1/34 BBB $ 27,825,000
200,000 Los Angeles Cnty. Hsg. Auth. Mutli-Fam. Hsg.
VRDN (Malibu Meadows II Project), Ser. B,
4-1/4s, 12/1/15 VMIGI 200,000
Los Angeles Cnty., Sanitation Dist. Fin. Auth.
Rev. Bonds
13,955,000 (Capital Projects), MBIA, 5-1/4s, 10/1/19 AAA 12,646,719
18,900,000 (Capital Projects), Ser. A, MBIA, 5s, 10/1/23 AAA 16,372,125
7,000,000 Los Angeles Regl. Arpt. Impt. Rev. Bonds
(United Airlines, Inc.), Ser. G, 8.8s,
11/15/21 Baa 7,875,000
14,000,000 Los Angeles Wastewater. Syst. Rev. Bonds Ser.
D, FGIC, 5-3/8s, 11/1/09 AAA 13,842,500
10,000,000 Los Angeles, Dept. Wtr. & Pwr. Elec. Plant
Rev. Bonds (Electric Plant), 2nd Issue, MBIA,
5-1/4s, 11/15/26 AAA 8,962,500
7,500,000 Metro. Wtr. Dist. Rev. Bonds (Southern. CA
Wtrwks.), Ser. A, MBIA, 5-1/2s, 7/1/25 AAA 7,040,625
67,450,000 Modesto, Irrigation Dist. Fin. Auth. Custodial
Receipts (Purchased Rights), (Geysers Pwr
Project), MBIA, 5.692s, 10/1/15 AAA 6,024,634
500,000 Moorpark Multi-Fam. VRDN (LE Club Apartments
Project), Ser. A, 4-1/4s, 11/1/15 VMIGI 500,000
10,565,000 Sacramento, City Fin. Auth. Lease Rev. Bonds
Ser. B, 5.4s, 11/1/20 Aa 9,680,181
11,285,000 San Diego Cnty., COP (Inmate Reception Ctr.
& Cooling), MBIA, 6-3/4s, 8/1/19 AAA 12,103,163
200,000 San Diego Hsg. Auth. Multi-Fam. Hsg. VRDN
(Paseo Apartments), Ser. A, 4.3s, 8/1/15 VMIGI 200,000
17,690,000 San Jose, Redev. Agcy. Tax Alloc. Rev. Bonds
(Merged Area Redev. Project), MBIA, 5s,
8/1/20 AAA 15,434,525
4,680,000 San Pablo Redev. Agcy. G.O. Bonds (Tax
Allocation Merged Area Project), FGIC,
5-1/4s, 12/1/23 AAA 4,212,000
4,375,000 Signal Hill Redev. Agcy. Tax Allocation Rev
Bonds MBIA, 5-1/4s, 10/1/23 AAA 3,937,500
3,930,000 Southern CA Pub. Pwr. Auth. Rev. Bonds
(Transmission Project), MBIA, 5-1/2s,
7/1/20 AAA 3,684,375
U. of CA Rev. Bonds
18,000,000 (USCD Med. Ctr. Satellite Med. Fac.), 7.9s,
12/1/19 Baa 19,282,500
13,075,000 (Multi-Purpose Projects), AMBAC, 5-1/4s,
9/1/16 AAA 11,996,313
5,000,000 (Multi-Purpose Projects), Ser. C, AMBAC,
5-1/8s, 9/1/18 AAA 4,462,500
15
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
California (continued)
- --------------------------------------------------------------------------------------
$21,500,000 (Multi-Purpose Projects), Ser. C, AMBAC, 5s,
9/1/23 AAA $ 18,624,375
7,000,000 5s, 11/1/13 AAA 6,308,750
8,000,000 Vallejo, Sanitation & Flood Control Dist. COP
FGIC, 5s, 7/1/19 AAA 7,100,000
--------------
270,647,724
Colorado (5.6%)
- --------------------------------------------------------------------------------------
Arapahoe Cnty. Cap. Impt. Trust Fund Hwy. Rev.
Bonds
19,450,000 Ser E-470, 7s, 8/31/26 Baa 20,203,688
5,000,000 (470 Project), Ser. E, 6.95s, 8/31/20 Baa 5,181,250
2,910,000 CO Hsg. Fin. Auth. Single Fam. Rev. Bonds Ser.
A, 7-1/4s, 11/1/31 AA 3,019,125
3,900,000 CO. Hlth. Facs. Auth. VRDN (Boulder Cmnty.
Project), Ser. C, MBIA, 3.8s, 10/1/14 VMIGI 3,900,000
Denver, City & Cnty. Arpt. Rev. Bonds
39,000,000 Ser. A, 8-3/4s, 11/15/23 Baa 44,996,250
5,000,000 (Airport & Marina Improvements),
Ser. A, MBIA, 8-3/4s, 11/15/23 AAA 6,018,750
5,255,000 Ser. A, 8-1/2s, 11/15/23 Baa 5,905,306
3,005,000 Ser. A, MBIA, 8-1/2s, 11/15/23 AAA 3,538,372
8,090,000 Ser. A, 8s, 11/15/17 Baa 8,545,063
5,000,000 Ser. B, 7-1/4s, 11/15/23 Baa 5,206,250
18,475,000 Ser. D, 7s, 11/15/25 Baa 18,729,031
13,365,000 Ser. C, MBIA, 6-3/4s, 11/15/13 AAA 14,033,250
--------------
139,276,335
Delaware (0.2%)
- --------------------------------------------------------------------------------------
7,005,000 Delaware River & Bay Del. Auth. Rev. Bonds
MBIA, 4-3/4s, 1/1/24 AAA 5,910,469
District of Columbia (0.3%)
- --------------------------------------------------------------------------------------
7,000,000 DC, Georgetown U. IFB, 8.481s, 4/25/22 AA 7,306,250
Florida (4.0%)
- --------------------------------------------------------------------------------------
3,335,000 Broward Cnty., Resource Recvy. Rev. Bonds
(Waste-Energy LP North Project), 7.95s,
12/1/08 A 3,701,850
5,000,000 FL State Board of Ed. G.O. Bonds Ser. C, 5-1/2s,
6/1/23 AA 4,675,000
3,425,000 FL State Muni. Pwr. Agcy. Rev. Bonds (State
Lucie Project), FGIC, 5-1/4s, 10/1/21 AAA 3,125,313
14,000,000 FL State Rev. Bonds (Dade Cnty. Roads), 5-1/8s,
7/1/17 AA 12,705,000
18,500,000 Hernando Cnty., Rev. Bonds (Criminal Justice
Complex Fin. Project), FGIC, 7.65s, 7/1/16# AAA 23,009,375
16
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Florida (continued)
- --------------------------------------------------------------------------------------
$ 6,000,000 Martin Cnty., Indl. Dev. Auth. Rev. Bonds
(Indiantown Co-generation Project),
Ser. A, 7-7/8s, 12/15/25 BBB $ 6,585,000
17,255,000 Orange Cnty. G.O. Bonds Ser. B, 5-3/8s, 1/1/24 A 15,680,481
4,000,000 Orange Cnty. Hsg. Fin. Auth. VRDN (Sundown
Assoc. II), Ser. B, 3.95s, 6/1/04 VMIGI 4,000,000
14,325,000 Palm Beach Cnty., Solid Waste Indl. Dev. Rev.
Bonds (Okeelanta Pwr. & Lt. Project), Ser.
A, 6.85s, 2/15/21 BB/P 14,128,031
13,000,000 Port Everglades Auth. Port Impt. Rev. Bonds
Ser. A, 5s, 9/1/16 BBB 11,017,500
--------------
98,627,550
Georgia (2.2%)
- --------------------------------------------------------------------------------------
13,015,000 Colquitt Cnty. Dev. Auth. Rev. Bonds zero%,
12/1/21 Aaa 2,147,475
12,000,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds
(Briarcliff Park Apts. Project), Ser. A,
7-1/2s, 4/1/17 A/P 12,270,000
13,740,000 De Kalb Cnty., Wtr & Swr. Rev. Bonds 5-1/4s,
10/1/23 AA 12,640,800
10,460,000 GA State G.O. Bonds Ser. D, 6.8s, 8/1/11 AA 12,081,300
4,770,000 Macon Wtr. & Swr. Auth. Rev. Bonds Ser. B,
5s, 10/1/16 A 4,293,000
Richmond Cnty., Dev. Auth. Rev. Bonds
25,080,000 Ser. A, zero%, 12/1/21 Aaa 4,138,200
3,965,000 Ser. C, zero%, 12/1/21 Aaa 654,225
11,750,000 Savannah, Econ. Dev. Auth. Rev. Bonds zero%,
12/1/21 Aaa 1,938,750
2,000,000 Savannah, Port. Auth. Poll. Control Rev. Bonds
(Union Carbide Corp. Plastic Co., Inc.),
7.55s, 8/1/04 Baa 2,045,000
13,090,000 Washington Cnty., Wilkes Payroll Dev. Auth.
Rev. Bonds zero%, 12/1/21 Aaa 2,159,850
--------------
54,368,600
Hawaii (0.4%)
- --------------------------------------------------------------------------------------
8,760,000 Honolulu City. & Cnty. G.O. Bonds Ser. A, 5.8s,
1/1/07 AA 9,208,950
Illinois (2.0%)
- --------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev.
Bonds
12,500,000 (American Airlines Inc. Project), 8.2s,
12/1/24 Baa 14,593,750
4,660,000 (United Air Lines, Inc.), Ser. C, 8.2s, 5/1/18 Baa 5,102,700
5,590,000 IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.), 8-3/4s, 7/1/11 BBB/P 6,009,250
17
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Illinois (continued)
- --------------------------------------------------------------------------------------
IL Dev. Fin. Auth. Rev. Bonds
$ 3,000,000 (Marriott Retirement Project), Ser. A,
7-3/4s, 8/1/10 A $ 3,213,750
3,670,000 (Marriott Retirement Project), Ser. B,
7-3/4s, 8/1/09 A 3,931,488
IL Hlth. Fac. Auth. IFB
2,000,000 (Methodist Hlth. Project), AMBAC, 9.061s,
5/1/21 AAA 2,272,500
8,000,000 (St. Luke's Med. Ctr.), MBIA, 8.602s, 10/1/24 AAA 9,030,000
4,500,000 IL Hsg. Dev. Auth. IFB (acquired 04/08/92 cost
$4,800,960) 10.309s, 2/1/20++ AA 4,876,875
--------------
49,030,313
Indiana (0.3%)
- --------------------------------------------------------------------------------------
5,000,000 Indianapolis Arpt. Auth. Spcl. Facs. Rev. Bonds
(United Airlines Project), Ser. A, 6-1/2s,
11/15/31 Baa 4,875,000
3,500,000 Indianapolis, Ind. Gas Util. Rev. Bonds
Ser. B, FGIC, 4s, 6/1/15 AAA 2,699,375
--------------
7,574,375
Kansas (0.9%)
- --------------------------------------------------------------------------------------
18,200,000 Burlington, Poll. Control, IFB (KS Gas &
Electric), Ser. 91-4, MBIA (acquired various
dates from 6/20/91 to 2/14/94 cost
$20,181,360), 9.168s, 6/1/31++ AAA 22,067,500
Kentucky (0.8%)
- --------------------------------------------------------------------------------------
10,200,000 Jefferson Cnty. Hosp. IFB (Alliant Hlth. Syst.
Project), MBIA, 6.52s, 10/23/14 AAA 10,633,500
10,000,000 Kenton Cnty., Arpt. Board. Special. Facs. Rev.
Bonds (Delta Air Lines, Inc. Project), Ser.
A, 6-1/8s, 2/1/22 Ba 9,475,000
--------------
20,108,500
Louisiana (1.6%)
- --------------------------------------------------------------------------------------
21,000,000 Lake Charles, Harbor & Term. Dist. Port Facs.
Rev. Bonds (Trunkline Co. Project), 7-3/4s,
8/15/22 Baa 23,415,000
W. Feliciana Parish, Poll. Control Rev. Bonds
8,000,000 (Gulf States Utils. Co.), 8s, 12/1/24 Ba 8,470,000
6,750,000 (Gulf States Utils. Co.), Ser. III, 7.7s,
12/1/14 Ba 7,163,438
--------------
39,048,438
Maine (0.4%)
- --------------------------------------------------------------------------------------
5,000,000 ME Fin. Auth. Solid Waste Recycling Fac. Rev.
Bonds (Great Northern Paper Project),
7-3/4s, 10/1/22 Baa 5,368,750
5,000,000 Skowhegan Poll. Cntrl. Rev. Bonds (Scott Paper
Co. Project), 5.9s, 11/1/13 A 4,831,250
--------------
10,200,000
18
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Maryland (1.3%)
- --------------------------------------------------------------------------------------
MD, State Hlth. & Higher Edl. Fac. Auth. Rev.
Bonds
$ 3,000,000 (Doctors' Cmnty. Hosp. Project), 5-3/4s,
7/1/13 Baa $ 2,677,500
18,000,000 (John Hopkins), 5s, 7/1/23 AA 15,660,000
14,750,000 Montgomery Cnty., Poll. Ctrl. Rev. Bonds
(Potamac Elec. Pwr. Co.), MBIA, 5-3/8s,
2/15/24 AAA 13,625,313
--------------
31,962,813
Massachusetts (9.8%)
- --------------------------------------------------------------------------------------
15,850,000 Boston, Rev. Bonds (Boston City Hosp.), Ser.
A, FHA Insd., 7-5/8s, 2/15/21 Aaa 18,247,313
4,000,000 MA Bay Trans. Auth. Rev. Bonds (Mass. Gen.
Transn.), Ser. B, AMBAC, 5-3/8s, 3/1/25 AAA 3,675,000
4,835,000 MA Muni. Whls. Electric Co. Pwr. Supply Syst.
Rev. Bonds, MBIA, 4-3/4s, 7/1/11 AAA 4,363,588
MA State Cons. Loan G.O. Bonds
4,215,000 Ser. B, 7-1/2s, 4/1/09 Aaa 4,704,994
5,020,000 Ser. C, 7-1/2s, 12/1/07 Aaa 5,785,550
3,000,000 Ser. A, 7-1/2s, 6/1/04 A 3,562,500
MA State Hlth. & Edl. Fac. Auth. IFB
4,340,000 (Youville Hosp.), Ser. A, FHA Insd., 9.1s,
8/1/15 Aa 4,497,325
10,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.02s,
8/15/21 AAA 10,987,500
7,510,000 (Melrose-Wakefield Hosp.), Ser A, 8-5/8s,
7/1/18 AAA 7,913,663
8,000,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8-3/8s, 7/1/15 Baa 8,480,000
4,000,000 (MA Eye & Ear Infirmary), Ser. A, 7-3/8s,
7/1/11 Baa 3,970,000
3,270,000 (Charlton Memorial Hosp.), Ser. B, 7-1/4s,
7/1/13 A 3,429,413
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
1,500,000 (Central MA Med. Ctr.), Ser. A, AMBAC, 7s,
7/1/12 AAA 1,646,250
5,370,000 (Worcester Polytech Inst.-E) 6-5/8s, 9/1/17 A 5,611,650
7,000,000 (Metro West Hlth. Inc.) AMBAC,
6.55s, 6/23/22 AAA 7,446,250
5,000,000 (Metro West Hlth. Inc.), Ser. C, 6.4s,
11/15/11 Baa 4,918,750
2,850,000 (Ctr. for New England Hlth. Syst.), Ser. A,
6-1/8s, 8/1/13 Baa 2,572,125
10,000,000 (Boston College), Ser. K, MBIA, 5-1/4s, 6/1/23 AAA 9,212,500
5,000,000 (Baystate Med. Ctr.), Ser. D, FGIC, 5s, 7/1/12 AAA 4,637,500
2,800,000 (MA Institute of Technology), Ser. H, 5s,
7/1/10 Aaa 2,663,500
5,000,000 (Beth Israel Hosp.), AMBAC, 7.863s, 7/1/25 AAA 5,012,500
19
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Massachusetts (continued)
- --------------------------------------------------------------------------------------
MA State Hlth. & Edl. Facs. Auth. IFB
$18,000,000 (Boston U.), Ser. L, MBIA, 8.736s,
10/1/31 AAA $ 19,777,500
4,000,000 (Capital Assets Program), Ser. D, 4.2s, 1/1/35 VMIGI 4,000,000
6,015,000 MA State Hsg. Fin. Agcy. Hsg. Dev. Rev. Bonds
Ser. A, MBIA, 9s, 12/1/18 BBB 6,308,231
1,955,000 MA State Hsg. Fin. Agcy. Rev. Bonds
(Multi-Fami. Mtge.), Ser. A, GNMA Coll.,
9-1/8s, 12/1/20 AAA 2,006,319
4,995,000 MA State Hsg. Fin. Agcy. Rental Hsg. Rev. Bonds
Ser. A, AMBAC, 7.35s, 1/1/35 AAA 5,388,356
635,000 MA State Hsg. Fin. Agcy. Single Fam. Hsg. Rev.
Bonds Ser. 2, 8-1/4s, 6/1/14 Aa 652,463
MA State Indl. Fin. Agcy. Res. Recvy. Rev.
Bonds
4,500,000 (Southeastern MA Project), Ser. B, 9-1/4s,
7/1/15 BB/P 5,040,000
7,000,000 (Southeastern MA Project), Ser. A, 9s, 7/1/15 BB/P 7,813,750
5,000,000 MA State Indl. Fin. Agcy. Rev. Bonds (Harvard
Cmnty. Hlth.), Ser. B, 8-1/8s, 10/1/17 A 5,406,250
MA State Port Auth. Rev. Bonds
5,700,000 zero%, 7/1/13 AAA/P 4,617,000
7,000,000 Ser. A, FGIC, 7-1/2s, 7/1/20 AAA 7,752,500
4,000,000 MA State Tpk. Auth. Rev. Bonds
Ser. A, 5s, 1/1/20 A 3,495,000
MA State Wtr. Res. Auth. IFB
5,000,000 Ser. A, 6-1/2s, 7/15/19 A 5,450,000
5,000,000 Ser. B, MBIA, 5-1/2s, 3/1/17 AAA 4,743,750
10,000,000 Ser. B, AMBAC, 5-1/2s, 11/1/15 AAA 9,550,000
5,000,000 Ser. C, MBIA, 5-1/4s, 12/1/20 AAA 4,525,000
4,250,000 Ser. C, MBIA, 5-1/4s, 12/1/15 AAA 3,936,563
12,105,000 Ser. B, MBIA, 5s, 3/1/22 AAA 10,546,481
Plymouth-Carver Regl. School Dist. Rev. Bonds
550,000 8-3/4s, 10/1/05 Aaa 566,500
1,000,000 8-3/4s, 10/1/04 Aaa 1,030,000
1,250,000 8-3/4s, 10/1/03 Aaa 1,287,500
1,300,000 8-3/4s, 10/1/02 Aaa 1,339,000
U. of MA Bldg. Auth. Rev. Bonds, Ser. A
3,000,000 7.2s, 5/1/04 A 3,450,000
2,500,000 7.15s, 5/1/03 A 2,850,000
--------------
244,870,034
Michigan (3.5%)
- --------------------------------------------------------------------------------------
7,000,000 Detroit G.O. Bonds
Ser. B, 6-1/4s, 4/1/08 BBB 7,008,750
2,110,000 Greater Detroit, Resource Recvy. Auth. Rev.
Bonds Ser. B, 9-1/4s, 12/13/08 BBB 2,186,488
20
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Michigan (continued)
- --------------------------------------------------------------------------------------
$50,000,000 MI Pub. Pwr. Agcy. Rev. Bonds (Belle River
Project), MBIA, 5-1/4s, 1/1/18 AAA $ 46,062,500
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Detroit
Med. Ctr.), Ser. B, 5-1/2s, 8/15/23 A 4,431,250
MI State Stragetic Fund Solid Waste Disp. Rev.
Bonds
18,000,000 (Genesee Pwr. Station Project), 7-1/2s,
1/1/21 BB/P 18,135,000
10,000,000 (SD Warren Co., Project), Ser. C, 7-3/8s,
1/15/22 BB/P 10,237,500
--------------
88,061,488
Mississippi (0.1%)
- --------------------------------------------------------------------------------------
3,000,000 MS River Bridge Auth. Rev. Bonds 6-3/4s,
11/1/12 A 3,228,750
Missouri (0.9%)
- --------------------------------------------------------------------------------------
6,965,000 Greene Cnty., Single Fam. Mtge. Rev. Bonds
Ser. A, zero%, 7/1/14 A 1,096,988
1,395,000 MO State Environ. Impt. & Energy Resources
Auth. Poll. Control Rev. Bonds, Ser. 1984G,
8-1/4s, 11/15/14 AA 1,466,494
MO State Hlth. & Edl. Fac. Auth. Rev. Bonds
14,400,000 (BJC Hlth. Syst.), Ser. A, 6-1/2s, 5/15/20 AA 15,192,000
6,150,000 (Jefferson Memorial Hosp. Assn. Project),
6s, 8/15/23 Baa 5,665,688
--------------
23,421,170
Montana (0.6%)
- --------------------------------------------------------------------------------------
14,000,000 MT State Hlth. Fac. Auth. Hosp. IFB (Deaconess
Med. Ctr. Project), Ser. B, AMBAC, 8.181s,
2/15/16 AAA 14,875,000
Nebraska (1.5%)
- --------------------------------------------------------------------------------------
9,000,000 NE Investment Fin. Auth. Hosp. IFB MBIA,
8.726s, 11/15/16 AAA 9,776,250
NE Investment Fin. Auth. Single Fam. Mtge.
IFB
10,400,000 GNMA Coll., Ser. B, 9.822s, 9/19/23 AAA 11,323,000
4,550,000 GNMA Coll., 8.664s, 9/15/24 AAA 4,714,938
11,520,000 NE Investment Fin. Auth. Single-Fam. Hsg. Rev.
Bonds Ser. A, 6.7s, 9/1/26 AAA 11,764,800
--------------
37,578,988
New Hampshire (1.7%)
- --------------------------------------------------------------------------------------
3,400,000 NH Higher Edl. & Hlth. Facs. Auth. VRDN (VHA
New England Inc.), Ser. B, AMBAC, 3.6s,
12/1/25 VMIGI 3,400,000
NH State Tpk. Sys. IFB
10,500,000 FGIC, 9.501s, 11/1/17 AAA 12,481,875
21
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
New Hampshire (continued)
- --------------------------------------------------------------------------------------
$31,200,000 5.244s, 2/1/24 A $ 27,456,000
--------------
43,337,875
New Jersey (4.3%)
- --------------------------------------------------------------------------------------
5,000,000 NJ Econ. Dev. Auth. Elec. Energy Fac. Rev.
Bonds (Vineland Cogeneration L.P. Project),
7-7/8s, 6/1/19 BB/P 5,356,250
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
12,000,000 (Raritan Bay Med. Ctr.), 7-1/4s, 7/1/27 BB/P 11,910,000
6,800,000 (Raritan Bay Med. Ctr.), 7-1/4s, 7/1/14 BB/P 6,791,500
6,000,000 NJ State Tpk. Auth. VRDN 4.05s, 1/1/18 AA 6,000,000
NJ State Transn. Trust Fund Auth. Rev. Bonds
10,000,000 (Transportation System), Ser. B, MBIA,
6-1/2s, 6/15/10 AAA 11,237,500
5,000,000 (Transportation System), Ser. A, MBIA,
5-1/2s, 6/15/12 AAA 4,906,250
20,000,000 (Transportation System), Ser. A, MBIA,
5-1/2s, 6/15/11 AAA 19,850,000
10,000,000 (Transportation System), Ser. B, MBIA, 5.4s,
6/15/08 AAA 10,037,500
29,500,000 (Transportation System), Ser. B, MBIA, 5.2s,
6/15/06 AAA 29,721,250
--------------
105,810,250
New York (16.4%)
- --------------------------------------------------------------------------------------
Battery Park, City Auth. Rev. Bonds
5,000,000 Ser. A, FHA Insd., 5-3/4s, 6/1/23 AAA 4,725,000
7,815,000 Ser. A, 5-1/4s, 11/1/17 AA 7,092,113
4,115,000 Clifton Park Wtr. Syst. Auth. Rev. Bonds FGIC,
5s, 10/1/26 AAA 3,580,050
Metro. Trans. Auth. Svcs. Contract Fac. Rev.
Bonds
12,325,000 (Trans. Fac.), Ser. 7, 5-5/8s, 7/1/16 Baa 11,462,250
6,650,000 (Trans. Fac.), Ser. P, 5-3/4s, 7/1/15 Baa 6,275,938
4,850,000 Metro. Trans. Auth. Transit Fac. Rev. Bonds
Ser. F, 8-3/8s, 7/1/16 AAA 5,104,625
NY City, G.O. Bonds
5,000,000 Ser. F, 8.4s, 11/15/07 A 5,756,250
5,335,000 Ser. F, 8.4s, 11/15/06 AAA 6,141,919
5,500,000 Ser. F, 8.4s, 11/15/05 AAA 6,331,875
3,215,000 Ser. D, 8-1/4s, 8/1/13 AAA 3,848,431
30,000,000 Ser. D, Group B, 8-1/4s, 8/1/12 A 35,338,182
11,000,000 Ser. D, Group B, 8-1/4s, 8/1/11 Baa 12,526,250
5,000,000 Ser. B, 7-1/2s, 2/1/06 AAA 5,512,500
5,000,000 NY City, Hsg. Dev. Corp. Multi-Fam. Rev. Bonds
Ser. B, FHA, 5.7s, 11/1/13 AA 4,818,750
410,000 NY City, Hsg. Dev. Corp. VRDN (Carnegie Park
Project), Ser. A, 3.8s, 12/1/16 VMIGI 410,000
22
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
New York (continued)
- --------------------------------------------------------------------------------------
$10,000,000 NY City, Ind. Dev. Agcy. Special Fac. Rev.
Bonds (American Airlines Inc., Project),
6.9s, 8/1/24 Baa $ 10,375,000
4,200,000 NY City, Muni. Wtr. & Fin. Auth. Wtr. & Swr.
Syst. Rev. Bonds Ser. A, 5-1/2s, 6/15/20 A 3,895,500
NY State Dorm Auth. Rev. Bonds
7,000,000 (State U. Edl. Fac.), Ser. A, 7.7s, 5/15/12 Aaa 8,067,500
9,750,000 (City U. Syst.), Ser. 86B, 7-5/8s, 7/1/14 Baa 10,213,125
15,750,000 (City U. Syst.), Ser. A, 7-5/8s, 7/1/13 Baa 16,498,125
10,900,000 (Construction City U. Syst.), Ser. A, 6s,
7/1/20 Baa 10,682,000
4,060,000 (State U. Edl. Fac.), Ser. A, 5-7/8s, 5/15/17 Baa 3,943,275
12,485,000 (Construction City U. Syst.), Ser. A, 5-3/4s,
7/1/18 Baa 11,813,931
5,000,000 (Upstate Cmnty. Colleges), Ser. A, 5.7s,
7/1/21 Baa 4,668,750
23,100,000 (State U. Edl. Fac.), Ser. A, 5-1/2s, 5/15/19 BBB 21,309,750
4,060,000 Ser. A, 5-1/2s, 5/15/10 BBB 3,846,850
8,400,000 (State U. Edl. Fac.), Ser. A, 5-1/4s, 5/15/15 Baa 7,570,500
4,000,000 (City U.), Ser. F, 5s, 7/1/20 Baa 3,355,000
11,400,000 NY State Energy Research & Dev. Auth. Poll.
Control VRDN (NY State Elec. & Gas Co.),
Ser. C, 3.2s, 6/1/29 VMIGI 11,400,000
4,400,000 NY State Environmental Fac. Corp. Poll. Control
Rev. Bonds (State Wtr. Revolving Fund), Ser.
A, 7-1/2s, 6/15/12 Aa 4,966,500
16,000,000 NY State Local Govt. Assistance Corp. Rev.
Bonds Ser. C, 5s, 4/1/21 A 13,920,000
NY State Med. Care Fac. Fin. Agcy. Rev. Bonds
21,500,000 (Hosp. & Nursing Home Insd. Mtge.), Ser. A,
FHA Insd., 8s, 2/15/27 AAA 23,273,750
4,860,000 (Mental Hlth. Svcs. Fac.), Ser. A, 7.8s,
2/15/19 Baa 5,315,625
6,900,000 (Mental Hlth. Svcs. Fac.), Ser. A, 7.7s,
2/15/18 Baa 7,391,625
8,080,000 (Mental Hlth. Svcs. Fac.), Ser. B, 7-5/8s,
8/15/17 Baa 8,918,300
245,000 (Mental Hlth. Svcs. Fac.), Ser. D, 7.4s,
2/15/18 Baa 268,888
22,000,000 (Presbyterian Hosp.), MBIA, 5-3/8s,
2/15/25 AAA 20,405,000
18,575,000 (Mental Hlth. Svcs. Fac.), Ser. A, FGIC,
5-1/4s, 8/15/23 AAA 16,810,375
27,500,000 Ser. F, FGIC, 5-1/4s, 2/15/19 AAA 25,128,125
3,420,000 (Mental Health. Svcs,), Ser. F, MBIA, 5-1/4s,
2/15/19 AAA 3,137,850
5,000,000 NY State Mtge. Agcy. Rev. Bonds (Hometown
Mtge.), Ser. C-2, MBIA, 5.6s, 4/1/15 AAA 4,775,000
NY State Urban Dev. Corp. Rev. Bonds
2,000,000 (Correctional Fac.), Ser. 1, 7-3/4s, 1/1/14 Aaa 2,290,000
23
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
New York (continued)
- --------------------------------------------------------------------------------------
$ 6,410,000 (Correctional Fac.), Ser. A, 5-1/4s, 1/1/21 Baa $ 5,560,675
20,000,000 Triborough Bridge & Tunnel Auth. General
Purpose Rev. Bonds, Ser. Y, MBIA, 5-1/2s,
1/1/17 AAA 19,200,000
--------------
407,925,152
North Carolina (2.1%)
- --------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Pwr. Syst. Rev.
Bonds
3,155,000 Ser. A, 8s, 1/1/21 Aaa 3,462,613
395,000 Ser. A, 8s, 1/1/21 Aaa 433,513
19,700,000 FGIC, (acquired various dates from 12/28/93
to 4/12/95 cost $23,983,708) 7.318s,
1/1/25++ AAA 19,872,375
2,985,000 Ser. A, 7-1/4s, 1/1/21 A 3,085,744
10,000,000 Ser. B, 7s, 1/1/13 BBB 10,662,500
4,000,000 Ser. B, 7s, 1/1/08 A 4,280,000
10,000,000 AMBAC, 6s, 1/1/18 AAA 10,212,500
--------------
52,009,245
Ohio (2.7%)
- --------------------------------------------------------------------------------------
1,620,801 Lake Cnty., Ind. Dev. Rev. Bonds (Madison Inn
Hlth. Ctr. Project), FHA Insd., 12s, 5/1/14 BBB/P 1,770,725
83,385,000 Lucas Plaza Hsg. Dev. Corp. Mtge. Rev. Bonds
FHA Insd., zero %, 6/1/24 Aaa 13,341,600
8,950,000 Mount Vernon, Hosp. Rev. Bonds (Knox Cmnty.
Hosp.), 7-7/8s, 6/1/12 BBB/P 9,274,438
OH Hsg. Fin. Agcy. Single Fam. Mtge. IFB
7,350,000 Ser. G-2, GNMA Coll., 10.093s, 3/2/23 Aaa 8,424,938
6,023,000 Ser. A-2, GNMA Coll., 9.609s, 3/1/31 AAA 6,550,013
7,775,000 GNMA Coll., 9s, 9/1/18 AAA 5,685,469
20,275,000 GNMA Coll., 7.8s, 3/1/30 AAA 21,136,688
--------------
66,183,871
Oregon (0.2%)
- --------------------------------------------------------------------------------------
3,000,000 Oregon State Welfare Board VRDN
Ser. 73F, 4.7s, 12/1/17 VMIGI 3,000,000
1,000,000 Portland Poll. Control VRDN (Reynolds Metals),
4-3/4s, 12/1/09 VMIGI 1,000,000
--------------
4,000,000
Pennsylvania (3.9%)
- --------------------------------------------------------------------------------------
2,560,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Southside Hosp. Pittsburgh),
Ser. A, 8-3/4s, 6/1/10 BBB 2,665,600
6,000,000 Beaver Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds (Ohio Edison Project), Ser. A,
7-3/4s, 9/1/24 Baa 6,330,000
10,500,000 Bethlehem Wtr. Auth. Rev. Bonds MBIA, 5.2s,
11/15/21 AAA 9,463,125
24
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Pennsylvania (continued)
- --------------------------------------------------------------------------------------
$ 5,475,000 Clearfield Hosp. Auth. Rev. Bonds (Clearfield
Hosp. Project), 6-7/8s, 6/1/16 BBB/P $ 4,859,063
7,095,000 Geisinger, Auth. Hlth. Syst. Rev. Bonds Ser.
B, 6-1/2s, 7/1/07 AA 7,369,931
6,280,000 PA Hsg. Fin. Agcy. Rev. Bonds, Stepped- coupon,
4s, (6.1s, 4/1/04), 10/1/13+++ AA 5,330,150
PA State COP
5,000,000 Ser. A, AMBAC, 5-1/4s, 7/1/10 AAA 4,706,250
20,000,000 Ser. A, AMBAC, 5s, 7/1/15 AAA 17,725,000
PA State Econ. Dev. Fin. Auth. Res. Recvy.
Rev. Bonds
6,000,000 (Colver Project), Ser. D, 7.15s, 12/1/18 BBB 6,255,000
10,000,000 (Colver Project), Ser. D, 7-1/8s, 12/1/15 BBB 10,475,000
12,700,000 (Northampton Generating Project), Ser.
A, 6.4s, 1/1/09 BB/P 12,334,875
3,000,000 Philadelphia, Hosp. & Higher Edl. Fac. Auth.
Rev. Bonds (Children's Hosp. Project), Ser.
A, 8s, 7/1/18 AA 3,232,500
5,000,000 Scranton-Lackawanna, Hlth. & Welfare Auth.
Rev. Bonds (Moses Taylor Hosp. Project),
Ser. B, 8-1/2s, 7/1/20 BB 5,218,750
--------------
95,965,244
South Carolina (0.6%)
- --------------------------------------------------------------------------------------
13,500,000 Spartanburg Cnty. Hosp. Facs. IFB FSA, 6.416s,
4/13/22 AAA 13,921,875
South Dakota (0.3%)
- --------------------------------------------------------------------------------------
8,000,000 Heartland, Consumer Elec. Pwr. Dist. Rev. Bonds
FSA, 6s, 1/1/17 AAA 8,100,000
Tennessee (0.6%)
- --------------------------------------------------------------------------------------
93,729,086 Metro. Nashville & Davidson Cnty., Hlth. &
Edl. Fac. Board Rev. Bonds (Volunteer Hlth.
Care), zero %, 6/1/21 Aaa 16,051,106
Texas (6.4%)
- --------------------------------------------------------------------------------------
31,000,000 Alliance Arpt. Auth. Texas Special. Fac. Rev.
Bonds (American Airlines, Inc. Project),
7-1/2s, 12/1/29 Baa 32,782,500
5,000,000 CO River Texas Muni. Wtr. Dist. Rev. Bonds
AMBAC, 5.15s, 1/1/21 AAA 4,437,500
15,000,000 Dallas Cnty., G.O. Bonds Stepped-coupon (Flood
Control Dist. #1), zero %, (8-1/2s, 10/1/99)
4/1/16+++ BB/P 11,850,000
25,250,000 Gulf Coast, Waste Disposal Auth. Rev. Bonds
(Champion Intl. Corp.), 7.45s, 5/1/26 Baa 27,080,625
235,000 Harris Cnty., Single-Fam. Hsg. Fin. Corp. Rev.
Bonds Ser. 1983A, 10-3/8s, 7/15/14 BBB 235,294
25
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Texas (continued)
- --------------------------------------------------------------------------------------
$ 8,500,000 Harris Cnty., Toll Roads Rev. Bonds AMBAC,
zero%, 8/15/18 AAA $ 2,082,500
Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev.
Bonds
2,125,000 (Woodlands Med. Ctr. Project), 8.85s, 8/15/14 BBB/P 2,297,656
35,975,000 (Heritage Manor), FSA, zero%, 7/15/23 AAA 5,306,313
North Central Hlth. Fac. Dev. Corp. IFB
20,000,000 (Baylor U. Med. Ctr.), Ser. A, 9.639s, 5/15/16 AA 22,625,000
245,000 (U. Med. Ctr. Project), 8.2s, 4/1/19 BBB/P 256,331
3,475,000 (U. Med. Ctr. Project), 7-3/4s, 4/1/17 BBB/P 3,574,906
Southeast TX Hsg. Fin. Corp. Multi-Fam. Rev.
Bonds
12,000,000 (Bayou Pk. Village Project), Ser. A, 8s,
8/1/16 BB/P 12,075,000
10,000,000 (Promenade Place Apts. Project), Ser. A, 8s,
8/1/16 BB/P 10,062,500
TX Dept. of Hsg. & Cmnty. Affairs Home Mtge.
IFB
5,000,000 Ser. B-2, GNMA Coll., 10.271s, 7/18/23 AAA 5,337,500
5,900,000 Ser. A, GNMA Coll., 9.105s, 7/18/23 AAA 6,217,125
10,400,000 TX State Reg. IFB Ser. B-1 & B-2, 8.871s, 9/30/11 AA 11,908,000
--------------
158,128,750
Utah (0.5%)
-------------------------------------------------------------------------------------
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC Hosps.,
Inc.)
Ser. A, 8-1/8s, 5/15/15 AAA 6,100,000
7,000,000 Tooele Cnty. Hazardous Waste Disp. Rev. Bonds
(Laidlaw USPCI Incineration), Ser. A,
6-3/4s, 8/1/10 BBB 7,105,000
--------------
13,205,000
Vermont (0.5%)
- --------------------------------------------------------------------------------------
VT Edl. & Hlth. Bldgs. Fin. Agcy. IFB
4,950,000 (Brattleboro Memorial Hosp.), 7s, 3/1/24 BBB/P 4,714,875
7,600,000 (Hosp. Med. Ctr.), FGIC, 7s, 9/1/19 AAA 7,951,500
--------------
12,666,375
Virginia (4.6%)
- --------------------------------------------------------------------------------------
9,000,000 Alexandria Indl. Dev. Auth. Poll. Ctl. Rev.
Bonds (Potomac Elec. Project), MBIA, 5-3/8s,
2/15/24 AAA 8,178,750
5,000,000 Augusta Cnty. Svsc. Auth. Wtr. & Swr. Rev.
Bonds MBIA, 5s, 11/1/24 AAA 4,393,750
17,000,000 Henrico Cnty., Indl. Dev. Auth. IFB (Bon
Secours Hlth. Syst. Project), FSA, 5.929s,
8/15/27 AAA 17,191,250
26
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Virginia (continued)
- --------------------------------------------------------------------------------------
$ 6,750,000 Riverside Regional Jail Auth. Jail Fac. Rev.
Bonds MBIA, 6s, 7/1/25 AAA $ 6,741,563
73,800,000 Winchester Indl. Dev. Auth. Hosp. IFB 6.411s,
1/21/14 AAA 78,412,500
--------------
114,917,813
Washington (0.9%)
- --------------------------------------------------------------------------------------
5,200,000 Port of Moses Lake, Public Corp. Poll. Control
Rev. Bonds (Union Carbide Corp.), 7-1/2s,
8/1/04 Baa 5,336,500
WA State Hlth. Care Fac. Auth. Rev. Bonds
(Hutchinson Cancer Center)
Ser. D
8,400,000 7-3/8s, 1/1/18 Aa 8,998,500
7,700,000 7.3s, 1/1/12 Aa 8,239,000
--------------
22,574,000
West Virginia (0.1%)
- --------------------------------------------------------------------------------------
3,000,000 WV State COP (Morris Sq. Complex), 9-1/4s,
8/15/08 BB/P 2,970,000
Wisconsin (0.5%)
- --------------------------------------------------------------------------------------
8,705,000 WI Hsg. & Econ. Dev. Auth. IFB (Home Ownership
Dev. Program), 9.449s, 10/25/22 AA 9,325,231
3,400,000 WI Hsg. & Econ. Dev. Auth. Rev. Bonds Ser.
B, 7.05s, 11/1/22 A 3,527,500
--------------
12,852,731
- --------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $2,256,829,440) $2,386,000,122
- --------------------------------------------------------------------------------------
MUNICIPAL COMMERCIAL PAPER (0.6%)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------
$ 7,350,000 Burke Cnty. GA Dev. Poll. Crtl., 3.7s,
October 3, 1995 $ 7,379,803
8,760,000 Montgomery, PA 3.7s, October 3, 1995 8,795,520
- --------------------------------------------------------------------------------------
Total Municipal Commercial Paper
(cost $16,175,323) $ 16,175,323
- --------------------------------------------------------------------------------------
Total Investments (cost $2,273,004,763)*** $2,402,175,445
==============
</TABLE>
* Percentages indicated are based on net assets of $2,486,581,325, which
correspond to a net asset value per class A share, class B share and
class M share of $8.74, $8.73 and $8.75, respectively.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at September 30, 1995 for the securities
listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not necessarily
represent what the agencies would ascribe to these securities at
September 30, 1995. Securities rated by Putnam are indicated by "/P" and
are not publicly rated. Ratings are not covered by the Report of
independent accountants.
27
<PAGE>
*** The aggregate identified cost for federal income tax purposes is
$2,273,095,995, resulting in gross unrealized appreciation and
depreciation of $143,519,999 and $14,440,549, respectively, or net
unrealized appreciation of $129,079,450.
+++ The interest rate and date shown parenthetically represents the new
interest rate to be paid and the date the fund will begin receiving
interest at this rate.
# A portion of this security was pledged to cover margin requirements for
future contracts at September 30, 1995. The market value of segregated
securities with the custodian for transactions on future contracts is
$597,000 or 0.02% of net assets.
++ Restricted as to public resale. At the date of acquisition these
securities were valued at cost. There were no outstanding unrestricted
securities of the same class as those held. Total market value of
restricted securities owned at September 30, 1995 was $46,816,750 or 1.9%
of net assets.
The fund had the following insurance concentration greater than 10% of net
assets at September 30, 1995:
MBIA 18.6%
The fund had the following industry group concentrations greater than 10% of
net assets at September 30, 1995 :
Hospitals/ Health Care 18.7%
Transportation 13.1
Utilities 12.9
The rates shown on IFB, which are securities paying variable interest rates
that vary inversely to changes in the market interest rates, and VRDNs, are
the current interest rates at September 30, 1995, which are subject to change
based on the terms of the security.
<TABLE>
<CAPTION>
Futures Contracts Outstanding at September 30, 1995
Aggregate
Total Face Expiration Unrealized
Value Value Date Appreciation
- --------------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
UST Bond Futures
(Buy) $22,868,750 $22,397,500 December 95 $471,250
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Statement of assets and liabilities
September 30, 1995
<TABLE>
<CAPTION>
Assets
- ----------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (identified cost $2,273,004,763) (Note 1) $2,402,175,445
- ----------------------------------------------------------------------------------------------
Cash 409,017
- ----------------------------------------------------------------------------------------------
Interest receivable 35,897,073
- ----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 55,148,728
- ----------------------------------------------------------------------------------------------
Receivable for variation margin on future contracts 318,750
- ----------------------------------------------------------------------------------------------
Receivable for securities sold 12,814,550
- ----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 10,151
- ----------------------------------------------------------------------------------------------
Total assets 2,506,773,714
- ----------------------------------------------------------------------------------------------
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders $ 5,517,393
- ----------------------------------------------------------------------------------------------
Payable for securities purchased 8,282,639
- ----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,892,469
- ----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,925,166
- ----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 7,512
- ----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 2,562
- ----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 99,774
- ----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,293,673
- ----------------------------------------------------------------------------------------------
Other accrued expenses 171,201
- ----------------------------------------------------------------------------------------------
Total liabilities 20,192,389
- ----------------------------------------------------------------------------------------------
Net assets $2,486,581,325
- ----------------------------------------------------------------------------------------------
Represented by
- ----------------------------------------------------------------------------------------------
Paid-in capital (Note 4) 2,453,398,420
- ----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (382,275)
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (96,076,752)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and options 129,641,932
- ----------------------------------------------------------------------------------------------
Total--Representing net assets applicable to capital shares outstanding $2,486,581,325
- ----------------------------------------------------------------------------------------------
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($2,237,837,034 divided by 256,168,042 shares) $8.74
- ----------------------------------------------------------------------------------------------
Offering price per share (100/95.25 of $8.74)* $9.18
- ----------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($246,406,875 divided by 28,218,320 shares)+ $8.73
- ----------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($2,337,416 divided by 267,205 shares) $8.75
- ----------------------------------------------------------------------------------------------
Offering price per share (100/96.75 of $8.75)** $9.04
- ----------------------------------------------------------------------------------------------
</TABLE>
* On single retail sales of less than $25,000. On sales of $25,000 or more
and on group sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Statement of operations
For the year ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Tax exempt interest income $164,389,584
- ---------------------------------------------------------------------------
Expenses:
- ---------------------------------------------------------------------------
Compensation of Manager (Note 2) $ 11,532,857
- ---------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,763,606
- ---------------------------------------------------------------------------
Compensation of Trustees (Note 2) 59,920
- ---------------------------------------------------------------------------
Auditing 74,337
- ---------------------------------------------------------------------------
Legal 97,045
- ---------------------------------------------------------------------------
Postage 269,380
- ---------------------------------------------------------------------------
Reports to shareholders 174,922
- ---------------------------------------------------------------------------
Administrative services (Note 2) 28,202
- ---------------------------------------------------------------------------
Distribution fees--Class A (Note 2) 4,428,102
- ---------------------------------------------------------------------------
Distribution fees--Class B (Note 2) 1,929,582
- ---------------------------------------------------------------------------
Distribution fees--Class M (Note 2) 3,485
- ---------------------------------------------------------------------------
Registration fees 12,645
- ---------------------------------------------------------------------------
Amortization of organizational expenses (Note 1) 10,700
- ---------------------------------------------------------------------------
Other 59,323
- ---------------------------------------------------------------------------
Total expenses 20,444,106
- ---------------------------------------------------------------------------
Fees paid indirectly (Note 2) (1,740,377)
- ---------------------------------------------------------------------------
Net expenses 18,703,729
- ---------------------------------------------------------------------------
Net investment income 145,685,855
- ---------------------------------------------------------------------------
Net realized loss on investments (Note 3) (40,693,940)
- ---------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (23,420,368)
- ---------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (15,489,611)
- ---------------------------------------------------------------------------
Net unrealized appreciation of investments during the
period 140,109,371
- ---------------------------------------------------------------------------
Net gain on investment transactions 60,505,452
- ---------------------------------------------------------------------------
Net increase in net assets resulting from operations $206,191,307
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended September 30
----------------------------
1995 1994
---------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------
Net investment income $ 145,685,855 $ 150,843,351
- ----------------------------------------------------------------------------------
Net realized loss on investments transactions (79,603,919) (222,476)
- ----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments 140,109,371 (274,250,423)
- ----------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 206,191,307 $ (123,629,548)
- ----------------------------------------------------------------------------------
Distributions to shareholders from
- ----------------------------------------------------------------------------------
Net investment income:
- ----------------------------------------------------------------------------------
Class A (133,906,914) (141,107,300)
- ----------------------------------------------------------------------------------
Class B (12,184,294) (10,620,980)
- ----------------------------------------------------------------------------------
Class M (32,962) --
- ----------------------------------------------------------------------------------
In excess of net investment income
- ----------------------------------------------------------------------------------
Class A -- (31,397)
- ----------------------------------------------------------------------------------
Class B -- (2,363)
- ----------------------------------------------------------------------------------
Net realized gain on investments
- ----------------------------------------------------------------------------------
Class A -- (17,555,714)
- ----------------------------------------------------------------------------------
Class B -- (1,321,398)
- ----------------------------------------------------------------------------------
In excess of net realized gain on investments
- ----------------------------------------------------------------------------------
Class A -- (14,879,157)
- ----------------------------------------------------------------------------------
Class B -- (1,119,935)
- ----------------------------------------------------------------------------------
Increase (decrease) from capital share
transactions (Note 4) (19,775,667) 193,573,375
- ----------------------------------------------------------------------------------
Total increase (decrease) in net assets 40,291,470 (116,694,417)
Net assets
- ----------------------------------------------------------------------------------
Beginning of period 2,446,289,855 2,562,984,272
- ----------------------------------------------------------------------------------
End of period (including distributions in excess
of net investment income of $382,275 and $417,701
respectively) $2,486,581,325 $2,446,289,855
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period For the period
February 16, 1995 January 4, 1993
(commencement (commencement
of operations) to of operations) to
September 30 Year ended September 30 September 30
------------------- -------------------------- --------------------
1995 1995 1994 1993
------------------- --------------- ------- --------------------
Class M Class B
------------------- --------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 8.61 $ 8.53 $ 9.66 $ 9.02
--------------------------------------------------------------------------------------------------------------------
Investment operations
--------------------------------------------------------------------------------------------------------------------
Net investment income .31 .46 .47 .34
--------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments .13 .20 (.98) .64
--------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .66 (.51) .98
--------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------------------------
From net investment income (.30) (.46) (.49) (.34)
--------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- --
--------------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- -- (.07) --
--------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- -- (.06) --
--------------------------------------------------------------------------------------------------------------------
Total distributions (.30) (.46) (.62) (.34)
--------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.75 $ 8.73 $ 8.53 $ 9.66
--------------------------------------------------------------------------------------------------------------------
Total investment return at net asset
value (%) (a) 5.23(b) 8.01 (5.51) 11.10(b)
--------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,337 $246,407 $213,679 $137,323
--------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
(%) (c) .67(b) 1.43 1.41 1.04(b)
--------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net asset (%) 3.04(b) 5.34 5.31 3.66(b)
--------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 68.23 68.23 59.27 43.77
</TABLE>
(a) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the period ended
September 30, 1995 includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts. (See Note 2)
32
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30
- -----------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------
Class A
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
$8.55 $9.66 $9.11 $8.81 $8.29
- -----------------------------------------------------------------
- -----------------------------------------------------------------
.52 .53 .57 .59 .58
- -----------------------------------------------------------------
.19 (.97) .67 .47 .54
- -----------------------------------------------------------------
.71 (.44) 1.24 1.06 1.12
- -----------------------------------------------------------------
- -----------------------------------------------------------------
(.52) (.54) (.56) (.60) (.58)
- -----------------------------------------------------------------
-- -- (.01) -- --
- -----------------------------------------------------------------
-- (.07) (.12) (.16) (.02)
- -----------------------------------------------------------------
-- (.06) -- -- --
- -----------------------------------------------------------------
(.52) (.67) (.69) (.76) (.60)
- -----------------------------------------------------------------
$8.74 $8.55 $9.66 $9.11 $8.81
- -----------------------------------------------------------------
8.58 (4.72) 14.27 12.56 13.92
- -----------------------------------------------------------------
$2,237,837 $2,232,611 $2,425,661 $1,867,307 $1,513,029
- -----------------------------------------------------------------
.78 .77 .74 .66 .59
- -----------------------------------------------------------------
6.03 5.97 6.81 6.65 6.75
- -----------------------------------------------------------------
68.23 59.27 43.77 58.14 78.04
- -----------------------------------------------------------------
</TABLE>
33
<PAGE>
Notes to financial statements
September 30, 1995
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The fund seeks as
high a level of current income exempt from federal income tax as is
consistent with preservation of capital by investing primarily in a
diversified portfolio of longer-term tax exempt securities.
The fund offers class A, class B and class M shares. The fund commenced its
operations of Class M shares on February 16, 1995. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than class
A shares and are subject to a contingent deferred sales charge, if those
shares are redeemed within six years of purchase. Class M shares are sold
with a maximum front end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares. Expenses of the fund are borne pro-rata by the holders of each class
of shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class votes
as a class only with respect to its own distribution plan or other matters on
which a class vote is required by law or determined by the Trustees. Shares
of each class would receive their pro- rata share of the net assets of the
fund, if the fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value. The fair value of
restricted securities is determined by the Manager following procedures
approved by the Trustees, and such valuations and procedures are reviewed
periodically by the Trustees.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an
34
<PAGE>
illiquid secondary market for the contracts, or if the counterparty to the
contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options are
valued at the last sale price, or if no sales are reported, the last bid
price for purchased options and the last ask price for written options.
Options traded over-the-counter are valued using prices supplied by dealers.
D) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held and excise tax on
income and capital gains.
At September 30, 1995, the fund had a capital loss carryover of approximately
$25,580,000 available to offset future net capital gain, if any, which will
expire on September 30, 2003.
E) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gain distributions if any, are
recorded on the ex-dividend date and paid annually. The amount and character
of income and gains to be distributed are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences include treatment of post-October loss
deferral, realized gains and losses on certain futures, and market discount.
Reclassifications are made to the fund's capital accounts to reflect income
and gains available for distribution (or available capital loss carryovers)
under income tax regulations.
For the year ended September 30, 1995, the fund reclassified $473,741 to
decrease distributions in excess of net investment income and $473,741, an
increase to accumulated net realized loss. The calculation of net investment
income per share in the financial highlights table excludes these
adjustments.
F) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities is amortized using the effective
yield method for bonds issued after September 27, 1985 and on a straight-line
basis for bonds issued prior thereto. The premium in excess of the call
price, if any, is amortized to the call date; thereafter, the remaining
excess premium is amortized to maturity. Discount on zero-coupon bonds,
original issue discount bonds and stepped coupon bonds is accreted according
to the effective yield method.
G) Unamortized organization expenses Expenses incurred by the fund in
connection with its class B shares organization aggregated $34,737. These
expenses are being amortized on a straight-line basis over a five-year
period.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, Inc., the fund's Manager, a
wholly-owned subsidiary of Putnam Investments, Inc., for management and
investment advisory services is paid quarterly based on the average net
assets of the fund for the quarter. Such fee is based on the following annual
rates: 0.60% of the first $500 million of average net assets, 0.50% of the
next $500 million, 0.45% of the next $500 million and 0.40% of any
35
<PAGE>
amount over $1.5 billion, subject, under current law, to reduction, in any
year to the extent that expenses (exclusive of brokerage, interest and taxes)
of the fund exceed 2.5% of the first $30 million of average net assets, 2.0%
of the next $70 million and 1.5% of any amount over $100 million and by the
amount of certain brokerage commissions and fees (less expenses) received by
affiliates of the Manager on the fund's portfolio transactions.
The fund also reimburses the Manager for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $3,950 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
During the year ended September 30, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of
all or a portion of Trustees fees payable on or after July 1, 1995. The
deferred fees remain in the fund and are invested in the fund or in other
Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1995, fund expenses were reduced by
$1,740,377 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the offset arrangements in an income-producing asset if it
had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to its
class A shares, class B and class M shares pursuant to Rule 12B-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds at an annual rate up to 0.35%, 1.00% and 1.00% of the average
net assets attributable to class A, class B, and class M shares,
respectively. The Trustees have approved payment by the fund at an annual
rate of 0.20%, 0.85% and 0.50% of the average net assets attributable to
class A, class B and class M shares, respectively.
For the year ended September 30, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $183,259 and $1,013 from the sale of
class A and class M shares, respectively and received $590,898 in contingent
deferred sales charges from redemptions of class B shares. A deferred sales
charge of up to 1% is assessed on certain redemptions of class A shares. For
the year ended September 30, 1995, Putnam Mutual Funds Corp., acting as
underwriter received $17,377 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1995, purchases and sales of investment
securities other than short-term investments aggregated
36
<PAGE>
$2,905,460,036 and $2,983,335,650, respectively. Purchases and sales of
short-term municipal obligations aggregated $16,110,000 and $16,110,000,
respectively. In determining the net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
<TABLE>
<CAPTION>
Contract Premiums
Amounts Received
----------------------------------------------------------------------------
<S> <C> <C>
Contracts outstanding at beginning of year $ -- $ --
---------------------------------------------------------------------------
Options opened 1,372,900,622 26,590,801
Options expired -- --
Options closed 1,372,900,622 26,590,801
- ----------------------------------------------------------------------------
Written options outstanding at end of year $ -- $ --
- ----------------------------------------------------------------------------
</TABLE>
Note 4
Capital shares
At September 30, 1995, there was an unlimited number of shares of beneficial
interest authorized divided into three classes of shares, class A, class B
and class M capital stock. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year Ended September 30
--------------------------------------------------------------
1995 1994
----------------------------------------------------------------------------------
Class A Shares Amount Shares Amount
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 152,618,601 $ 1,306,234,641 98,892,293 $ 889,947,250
Shares issued in
connection with
acquisition of
Texas Tax Exempt
Income Fund -- -- 1,886,097 16,314,742
- -----------------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,008,081 76,964,617 11,764,103 107,161,522
- -----------------------------------------------------------------------------------
161,626,682 1,383,199,258 112,542,493 1,013,423,514
- -----------------------------------------------------------------------------------
Shares repurchased (166,654,699) (1,432,393,643) (102,548,532) (919,634,771)
- -----------------------------------------------------------------------------------
Net increase
(decrease) (5,028,017) $ (49,194,385) 9,993,961 $ 93,788,743
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30
---------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------
Class B Shares Amount Shares Amount
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 13,000,881 $111,156,375 16,392,070 $149,153,403
Shares issued in
connection with
reinvestment of
distributions 908,734 7,767,291 947,875 8,594,767
- ------------------------------------------------------------------------------
13,909,615 118,923,666 17,339,945 157,748,170
- ------------------------------------------------------------------------------
Shares repurchased (10,729,890) (91,840,442) (6,518,200) (57,963,538)
- ------------------------------------------------------------------------------
Net increase 3,179,725 $ 27,083,224 10,821,745 $ 99,784,632
- ------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
For the period
February 16, 1995
(commencement of
operations) to
September 30
----------------------
1995
- -------------------------------------------------------------
Class M Shares Amount
- -------------------------------------------------------------
<S> <C> <C>
Shares sold 282,768 $2,473,005
Shares issued in connection with
reinvestment of distributions 2,400 20,942
- -------------------------------------------------------------
285,168 2,493,947
- -------------------------------------------------------------
Shares repurchased (17,963) (158,453)
- -------------------------------------------------------------
Net increase 267,205 $2,335,494
- -------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------
Federal tax information
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1996 will show the tax status of all
distributions paid to your account in calendar 1995.
38
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Blake E. Anderson
Vice President
David J. Eurkus
Vice President and Fund Manager
Triet M Nguyen
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax Exempt
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most
recent copy of Putnam's Quarterly Performance Summary. For more information,
or to request a prospectus, call toll free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board or any other
agency, and involve risk, including the possible loss of principal amount
invested.
39
<PAGE>
Bulk Rate
U.S. Postage
PAID
Boston, MA
Permit No. 53749
20978-011/322/472 11/95
(logo) PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
.....................................
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM)
