Putnam
Tax
Exempt
Income Fund
SEMIANNUAL REPORT
March 31, 1996
[scale logo]
B O S T O N (bullet) L O N D O N (bullet) T O K Y O
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Fund highlights
(dagger) "[I]n the months ahead, municipal bond funds may begin to provide
investors fewer bumps and better returns, many bond analysts say.
. . . Investors are becoming skittish about the sky-high returns on
equity funds and are beginning to seek some less-risky tax-free
income; yields on municipal bonds hover around an attractive 6
percent range and investors in some high-tax states can do better on
an after-tax basis investing in municipals than in Treasuries."
-- The New York Times, April 7, 1996
(dagger) "Putnam Tax Exempt Income Fund champions not one but two causes.
. . . While income is management's main focus, co-managers Dave
Eurkus and Triet Nguyen are still keen on total return. In their
quest for appreciation, the duo seeks out individual issues or
sectors that are downtrodden, in hopes of eventual recovery."*
-- Morningstar Mutual Fund Analysis, December 22, 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
25 Financial statements
*During the semiannual period ended 3/31/96, Triet Nguyen assumed full
responsibility for management of the fund as David Eurkus was assigned to
management of other fixed-income portfolios.
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From the Chairman
[photo of George Putnam]
(c) Karsh, Ottawa
Dear Shareholder:
For most of the first half of Putnam Tax Exempt Income Fund's current fiscal
year, the six months ended March 31, 1996, tax-free bonds rose in the updraft
of one of the most vibrant bond markets in recent memory. Concern over the
possible negative effects of a flat tax on municipal bonds, however, dampened
performance relative to other fixed-income investments.
On the other hand, when the bond market turned abruptly downward toward the
end of the period, flat-tax fears were abating. This improved outlook for
municipal bonds tended to cushion their decline.
The bond market was reacting this time to concern over a pickup in inflation
resulting from economic overheating. Putnam Management believes this new
worry is premature and expects the rest of 1996 will bring steady but
manageable growth.
Fund Manager Triet Nguyen provides a full discussion of your fund's
performance and outlook in the report that follows.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
May 15, 1996
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Report from the Fund Manager
Triet M. Nguyen
Total-return figures are a snapshot of fund performance at a particular point
in time, but often they provide only a slight indication of the long-term
effectiveness of a fund's strategy. Putnam Tax Exempt Income Fund's returns
for the six months ended March 31, 1996, are an excellent example. The
admirable performance demonstrated by your fund during the greater part of
this period was recently marred by a rise in interest rates that shook the
fixed-income markets in March. Thus, at the end of its semiannual period,
your fund's total return was 3.23% for class A shares, 3.01% for class B
shares, and 3.06% for class M shares, all at net asset value. (Results at
public offering price or contingent deferred sales charge, as applicable,
were -1.72%, -1.99%, and -0.25%, respectively. For additional performance
details, see page 9.)
While these results compare favorably with returns for the Lehman Brothers
Municipal Bond Index over the same period -- 2.87% -- they reflect the
increased volatility we have seen in the municipal bond market in recent
months and, consequently, do not demonstrate the strength of previous
periods.
(dagger) MARKET SLIDE MAY BE OVERDONE
Although the momentum of calendar 1995's bond market performance continued
into February 1996, the tide quickly turned in March. Evidence of rapid
employment growth fueled fears of inflation and a possible end to the Federal
Reserve Board's policy of lowering short-term interest rates, bringing the
rally to an abrupt halt.
In our opinion, investor anxieties concerning an overheating economy are
premature. We anticipate the remainder of 1996 to be marked by steady but
manageable economic growth and foresee only limited risk of a sharp increase
in inflationary pressures. Such an environment, in contrast with last year's
slowing economy, is unlikely to lead to falling interest rates and price
appreciation in the bond market. Rather, we believe coupon income will
provide most of the total return for fixed-income investors for the remainder
of calendar 1996.
4
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Although we expect discussion of broader tax reform to reappear this fall as
the presidential election nears, our current assessment is that the flat tax
is no longer a hot topic and that any radical changes to the tax code appear
less likely than they did a few months ago. We believe this development,
along with the recent market correction, may offer investors who have shied
away from municipals an ideal opportunity to retest the waters.
(dagger) INSURANCE COMPANIES SEEK VALUE IN MUNICIPALS
Since last summer, insurance companies have been the mainstay of the
municipal market, providing much-needed price support at a time when retail
investors remained skittish. These infrequent buyers often enter the market
when yields on municipals, particularly intermediate maturities, reach
bargain levels compared with alternative taxable investments. Their main
objective is not necessarily to earn tax-exempt income but to capture
potential capital gains as municipals eventually revert to a more normal
relationship vis-a-vis taxable bonds.
In order to allow your fund to benefit from insurance companies' increasing
appetite for intermediate-term municipals, we recently restructured the
maturity distribution of the portfolio, reducing the fund's exposure to
securities maturing in 5 years or less and in 30 years or more. At the same
time, we built up holdings of bonds in the 10- to 15-year maturity range.
This increased emphasis on intermediate-term bonds provides
[pie chart]
CREDIT QUALITY OVERVIEW
49.9% AAA
10.6% AA
8.0% A
28.4% BBB
3.1% BB and below
Based on portfolio holdings as of 3/31/96. Allocations will vary over time. A
bond rated BBB or higher is considered investment grade. All ratings reflect
Standard & Poor's(R) descriptions, 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
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the added bonus of lessening the fund's overall price volatility while still
taking advantage of possible price gains that could occur as a result of
insurance company demand.
(dagger) TRANSPORTATION AND HEALTHCARE SECTORS OFFER ATTRACTIVE OPPORTUNITIES
In an effort to adopt a more cautious posture, we modestly
increased your fund's holdings of higher-yielding bonds. Candidates for
purchase are subject to rigorous credit analysis and are primarily limited to
larger BBB-rated issues that enjoy wide distribution in the marketplace. The
transportation sector continues to offer many attractive financings.
Since our last report, we have added to the portfolio's position of Arapahoe
County Colorado Capital Improvement Trust Fund bonds. Proceeds are being used
for the construction of a beltway that will greatly enhance access between
Denver and its new airport. In addition to supporting a project important to
the long-term success of another of your fund's investments (Denver
International Airport), the bonds provide the fund with generous current
income.
Many municipal issuers, including Denver International Airport, are
prohibited by current tax law from refunding outstanding bonds with
lower-cost debt. However, issuers do have the ability to make tender offers,
giving bondholders the opportunity to sell securities back to them at an
agreed-upon price. Issuers generally must pay bondholders remarkably high
prices to persuade them to tender their higher-coupon securities.
At this time, the fund is contemplating the prospect of participating in one
such tender program, with potential capital gains for your fund. The value of
the Denver airport bonds, which remain a core income vehicle for the fund,
should continue to benefit from the airport's ongoing debt-retirement
program.
In addition to transportation bonds, the fund's investments in hospital and
health-care bonds contributed substantially to performance. One key hospital
holding benefited from prerefunding, a procedure used by state and local
governments to refinance municipal bonds to lower interest expenses. In a
prerefunding, the issuer sells new bonds with a lower yield and buys U.S.
6
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[bar chart]
TOP INDUSTRY SECTORS*
Hospitals 15.9%
Utilities 14.5%
Transportation 12.2%
Housing 8.3%
Education 5.9%
*Based on net assets as of 3/31/96. Holdings will vary over time.
Treasury securities with the proceeds, using the interest on the Treasuries
to make payments on the older bonds. Because of this collateral, prerefunding
generally raises a bond's credit rating, and thus, its value.
Despite the failed efforts of the federal government to reform these
industries, more fundamental reforms of both operations and strategy are well
underway, prompted by the increasing pressures of managed care. We believe
there is still opportunity in well-managed, well-positioned hospital names,
and many are available at attractive prices.
(dagger) OUTLOOK CAUTIOUS, BUT CONSTRUCTIVE
Municipal new-issue supply for 1996 is expected to remain even with last
year's pace, while insurance company interest is likely to stay firm,
although there can be no assurance.
A climate of steadier economic growth clearly requires a more cautious
approach to fixed-income investing. Greater emphasis will be placed on
interest income, stressing the importance of astute credit analysis. As more
weight is placed on enhancing the price stability and liquidity of the
portfolio, careful maturity selection and a focus toward larger, well-known
municipal names will play an increasingly vital role in your fund's strategy.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 3/31/96, there is no guarantee the fund will continue to hold
these securities in the future.
7
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Performance summary
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.
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 in the fund.
TOTAL RETURN FOR PERIODS ENDED 3/31/96
<TABLE>
<CAPTION>
Class A Class B Class M
(inception date) (12/31/76) (1/4/93) (2/16/95)
NAV POP NAV CDSC NAV POP
- ------------------ ------- ------- ------ ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
6 months 3.23% -1.72% 3.01% -1.99% 3.06% -0.25%
- ------------------ ----- ----- ---- ----- ---- -------
1 year 6.62 1.61 5.94 0.94 6.31 2.89
- ------------------ ----- ----- ---- ----- ---- -------
5 years 45.99 39.02 -- -- -- --
Annual average 7.86 6.81 -- -- -- --
- ------------------ ----- ----- ---- ----- ---- -------
10 years 111.63 101.60 -- -- -- --
Annual average 7.78 7.26 -- -- -- --
- ------------------ ----- ----- ---- ----- ---- -------
Life of class B -- -- 16.79 13.87 -- --
Annual average -- -- 4.91 4.09 -- --
- ------------------ ----- ----- ---- ----- ---- -------
Life of class M -- -- -- -- 8.46 4.92
Annual average -- -- -- -- 7.50 4.37
- ------------------ ----- ----- ---- ----- ---- -------
</TABLE>
COMPARATIVE RETURNS FOR PERIODS ENDED 3/31/96
Lehman Bros. Consumer
Municipal Bond Price
Index Index
- ------------------ ---------------- --------
6 months 2.87% 1.63%
- ------------------ -------------- ------
1 year 8.38 2.84
- ------------------ -------------- ------
5 years 44.68 15.33
Annual average 7.66 2.89
- ------------------ -------------- ------
10 years 113.06 43.11
Annual average 7.86 3.65
- ------------------ -------------- ------
Life of class B 21.24 9.72
Annual average 6.11 2.91
- ------------------ -------------- ------
Life of class M 9.63 3.06
Annual average 8.83 2.73
- ------------------ -------------- ------
8
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PRICE AND DISTRIBUTION INFORMATION
6 MONTHS ENDED 3/31/96
Class A Class B Class M
------------------------- -------- -------- ----------
Distributions (number) 6 6 6
------------------------- ------ ------ --------
Income $0.244909 $0.215458 $0.230699
Capital gains(1) -- -- --
Total $0.244909 $0.215458 $0.230699
Share value: NAV POP NAV NAV POP
- --------------------------- ---- ---- ---- ---- ------
9/30/95 $8.74 $9.18 $8.73 $8.75 $9.04
3/31/96 8.78 9.22 8.78 8.79 9.09
Current return
- --------------------------- ---- ---- ---- ---- ------
End of period
Current dividend rate(2) 5.56% 5.30% 4.92% 5.23% 5.05%
Taxable equivalent(3) 9.21 8.77 8.14 8.65 8.37
Current 30-day SEC yield(4) 5.25 4.99 4.53 4.90 4.73
Taxable equivalent(3) 8.69 8.26 7.50 8.11 7.83
(1) Capital gains are taxable for federal and, in most cases, state tax
purposes. 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.
(2) Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
(3) Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.
(4) Based only on investment income, calculated using SEC guidelines.
Performance data represent past results, do not reflect future performance,
and will differ for each share class. They 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. Investment returns and net asset value will fluctuate so that
an investor's shares, when sold, may be worth more or less than their
original cost. POP assumes 4.75% maximum sales charge for class A shares and
3.25% for class M shares. CDSC for class B shares assumes the applicable
sales charge, with the maximum being 5%.
9
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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.
10
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Portfolio of investments owned
March 31, 1996 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investors Guaranty Insurance
COP -- Certificate of Participation
FGIC -- Federal Guaranty Insurance Corporation
FHA Insd. -- Federal Housing Administration Insured
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
GNMA Coll. -- Government National Mortgage Association Collateralized
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
TRAN -- Tax Revenue Anticipation Notes
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (100.5%)*
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Alabama (0.4%)
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$ 10,000,000 Jackson Cnty., Hlth. Care Auth. Hosp.
TRAN, 7-7/8s, 5/1/19 BB/P $ 10,600,000
Alaska (0.5%)
-------------------------------------------------------------------------------------
12,000,000 AK Hsg. Fin. Corp. Rev. Bonds, Ser. B,
7s, 12/1/27 AA 12,495,000
Arizona (0.7%)
-------------------------------------------------------------------------------------
6,510,000 AZ State Muni. Fin. Program COP, Ser.
34, BIGI, 7-1/4s, 8/1/09
Phoenix, G.O. Bonds AAA 7,673,663
4,945,000 5s, 7/1/19 AA 4,475,225
4,625,000 Ser. B, 5s, 7/1/18 AA 4,197,188
----------
16,346,076
California (9.1%)
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6,000,000 CA Poll. Control Fin. Auth. Rev. Bonds
(Atlantic Richfield Project), 5s,
4/1/08 A 5,767,500
CA State G.O. Bonds
2,500,000 7s, 10/1/10 A 2,893,750
11,700,000 6-1/2s, 2/1/08 A 13,001,625
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 3,095,625
8,000,000 CA State Variable Purpose Bonds,
AMBAC, 6-1/2s, 9/1/06 AAA 8,940,000
10,125,000 Calleguas-Las Virgines Pub. Fin. Auth.
Rev. Bonds (Calleguas Muni. Wtr. Dist.
Project), FGIC, 5-1/8s, 7/1/21 AAA 9,061,875
4,465,000 Contra Costa Trans. Auth. Sales Tax
Rev. Bonds, Ser. A, FGIC, 6s, 3/1/08 AAA 4,744,063
11,850,000 East Bay, Muni. Util. Dist. Wtr. Syst.
Rev. Bonds, MBIA, 5s, 6/1/21 AAA 10,487,250
8,250,000 Foothill/Eastern Trans. Corridor Agcy.
Rev. Bonds (CA Toll Roads), Ser. A,
6s, 1/1/34 BBB 7,693,125
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MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
California (continued)
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$10,380,000 Los Angeles Cnty., Metro. Trans. Auth.
Sales Tax
Rev. Bonds, 2nd Ser. A, AMBAC, 5s,
7/1/25 AAA $ 9,173,325
18,900,000 Los Angeles Cnty., Sanitation Dist.
Fin. Auth. Rev. Bonds (Capital
Projects),
Ser. A, MBIA, 5s, 10/1/23 AAA 16,655,625
Los Angeles, Regl. Arpt. Impt. Rev.
Bonds
7,000,000 (United Air Lines, Inc.), Ser. G,
8.8s,
11/15/21 Baa 7,918,750
2,100,000 4.4s, 12/1/25 A 2,100,000
15,000,000 Los Angeles, Convention & Exhib. Ctr.
Rev. Bonds, Ser. A, MBIA, 5-1/8s,
8/15/21 AAA 13,425,000
67,450,000 Modesto, Irrigation Dist. Fin. Auth.
Custodial Receipts (Purchased Rights),
(Geysers Pwr. Project), MBIA, 5.692s,
10/1/15 AAA 5,643,500
10,565,000 Sacramento, City Fin. Auth. Lease Rev.
Bonds, Ser. B, 5.4s, 11/1/20 Aa 9,931,100
5,000,000 San Bernardino Cnty., COP (Med. Ctr.
Fin. Project), MBIA, 5s, 8/1/28 AAA 4,368,750
11,285,000 San Diego Cnty., COP (Inmate Reception
Ctr. & Cooling), MBIA, 6-3/4s, 8/1/19# AAA 12,300,650
17,690,000 San Jose, Redev. Agcy. Tax Alloc. Rev.
Bonds (Merged Area Redev. Project),
MBIA, 5s, 8/1/20 AAA 15,788,325
4,680,000 San Pablo, Redev. Agcy. G.O. Bonds
(Tax Allocation Merged Area Project),
FGIC, 5-1/4s, 12/1/23 AAA 4,311,450
12,165,000 Southern CA Pub. Pwr. Auth. Rev. Bonds
(Palo Verde), Ser. A, AMBAC, 6s,
7/1/07 AAA 13,062,169
U. of CA Rev. Bonds
18,000,000 (USCD Med. Ctr. Satellite Med. Fac.),
7.9s, 12/1/19 Baa 19,800,000
5,000,000 (Multi-Purpose Projects), Ser. C,
AMBAC, 5-1/8s, 9/1/18 AAA 4,531,250
7,000,000 Ser. A, MBIA, 5s, 11/1/13 AAA 6,440,000
8,000,000 Vallejo, Sanitation & Flood Control
Dist. COP, FGIC, 5s, 7/1/19 AAA 7,250,000
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218,384,707
Colorado (5.5%)
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Arapahoe Cnty., Cap. Impt. Rev. Bonds
23,450,000 (470 Project), Ser. E, 7s, 8/31/26 Baa 24,857,000
5,000,000 (470 Project), Ser. E, 6.95s, 8/31/26 Baa 5,300,000
22,750,000 Ser. C, zero %, 8/31/15 Baa 5,915,000
Denver, City & Cnty. Arpt. Rev. Bonds
39,000,000 Ser. A, 8-3/4s, 11/15/23 Baa 46,410,000
5,000,000 (Arpt. & Marina Impt.), Ser. A, MBIA,
8-3/4s, 11/15/23 AAA 6,006,250
5,255,000 Ser. A, 8-1/2s, 11/15/23 Baa 6,082,663
3,005,000 Ser. A, MBIA, 8-1/2s, 11/15/23 AAA 3,500,825
8,090,000 Ser. A, 8s, 11/15/17 Baa 8,666,413
5,000,000 Ser. B, 7-1/4s, 11/15/23 Baa 5,381,250
18,475,000 Ser. D, 7s, 11/15/25 Baa 19,237,094
----------
131,356,495
12
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MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
District of Columbia (0.5%)
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$ 7,000,000 D.C., Georgetown IFB
9.545s, 4/25/22 A $ 7,551,250
5,000,000 D.C., Carnegie Endowment Rev. Bonds
5-3/4s, 11/15/26 AA 4,791,850
----------
12,343,100
Florida (4.6%)
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3,230,000 Broward Cnty., Resource Recvy. Rev.
Bonds (Waste-Energy LP North Project),
7.95s, 12/1/08 A 3,581,263
10,775,000 FL State Board Ed. Cap. Outlay Pub.
Ed. Rev. Bonds, Ser. A, 6s, 1/1/06 AA 11,637,000
14,000,000 FL State Rev. Bonds (Dade Cnty.
Roads), 5-1/8s, 7/1/17 AA 12,880,000
18,500,000 Hernando Cnty., Rev. Bonds (Criminal
Justice Complex Fin. Project), FGIC,
7.65s, 7/1/16# AAA 23,194,396
3,945,000 Hillsborough Cnty., Indl. Dev. Auth.
Poll. Control Rev. Bonds (Tampa Elec.
Co. Project), MBIA, 6-1/4s, 12/1/34 AAA 4,107,731
10,000,000 Lee Cnty., Hosp. Board of Directors
Rev. Bonds (Lee Memorial Hosp.), MBIA,
6.35s, 3/26/20 AAA 10,450,000
15,000,000 Martin Cnty., Indl. Dev. Auth. Rev.
Bonds (Indiantown Cogen. Project),
Ser. A, 7-7/8s, 12/15/25 Baa 16,837,500
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 14,414,531
13,000,000 Port Everglades Auth. Port Impt. Rev.
Bonds, Ser. A, 5s, 9/1/16 BBB 11,066,250
----------
108,168,671
Georgia (2.5%)
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13,015,000 Colquitt Cnty., Dev. Auth. Rev. Bonds,
zero %, 12/1/21 Aaa 2,375,238
12,000,000 De Kalb Cnty., Muni. Hsg. Auth. Rev.
Bonds (Briarcliff Park Apts. Project),
Ser. A, 7-1/2s, 4/1/17 BBB/P 12,210,000
GA State G.O. Bonds
10,460,000 Ser. D, 6.8s, 8/1/11 AA 11,989,775
21,790,000 Ser. B, 6-1/4s, 4/1/09 AAA 23,832,813
10,000,000 Richmond Cnty., Dev. Auth. Rev. Bonds,
Ser. A, zero %, 12/1/21 Aaa 1,800,000
27,595,000 Washington Cnty., Wilkes Payroll Dev.
Auth. Rev. Bonds, zero %, 12/1/21 Aaa 4,967,100
----------
57,174,926
Hawaii (1.0%)
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HI State G.O. Bonds
5,555,000 Ser. CL, 6s, 3/1/10 AA 5,867,469
8,250,000 Ser. CC, 5-1/8s, 2/1/08 AA 8,198,438
8,760,000 Honolulu City & Cnty. G.O. Bonds, Ser.
A, 5.8s, 1/1/07 AA 9,252,750
----------
23,318,657
13
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MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Illinois (2.3%)
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Chicago, O'Hare Intl. Arpt. Special
Fac. Rev. Bonds
$ 4,660,000 (United Air Lines, Inc.), Ser. C,
8.2s, 5/1/18 Baa $ 5,038,625
14,500,000 (American Airlines, Inc.), 8.2s,
12/1/24 Baa 16,711,250
5,000,000 Chicago, G.O. Bonds, AMBAC, 5-1/8s,
1/1/25 AAA 4,418,750
IL Dev. Fin. Auth. Rev. Bonds
5,590,000 (Community Rehab. Providers Fac.),
8-3/4s, 7/1/11 BB/P 5,967,325
3,000,000 (Marriott Retirement Project), Ser.
A, 7-3/4s, 8/1/10 A 3,116,250
3,670,000 (Marriott Retirement Project), Ser.
B, 7-3/4s, 8/1/09 A 3,936,075
IL Hlth. Fac. Auth. IFB
2,000,000 (Methodist Hlth. Project), AMBAC,
9.984s, 5/1/21 AAA 2,287,500
8,000,000 (St. Luke's Med. Ctr.), MBIA, 9.868s,
10/1/24 AAA 9,140,000
4,300,000 IL Hsg. Dev. Auth. IFB, 9.622s, 2/1/20
(acquired 4/8/92 cost $4,587,584)++ AA 4,703,125
----------
55,318,900
Indiana (0.9%)
-------------------------------------------------------------------------------------
6,000,000 Indianapolis, Arpt. Auth. Special Fac.
Rev. Bonds (Federal Express Corp.
Project), 7.1s, 1/15/17 BBB 6,381,840
3,500,000 Indianapolis, Gas Util. Rev. Bonds,
Ser. B, FGIC, 4s, 6/1/15 AAA 2,730,000
5,210,000 Indianapolis, Local Pub. Impt. Bank
Rev. Bonds, Ser. A, FSA, 6-1/2s,
1/1/08 AAA 5,711,463
4,755,000 Indianapolis, Local Pub. Rev. Bonds,
Ser. A, FSA, 6-1/2s, 1/1/09 AAA 5,218,613
1,500,000 Indianapolis, Multi-Fam. VRDN (Canal
Square Project), 3.3s, 12/1/15 VMIG1 1,500,000
----------
21,541,916
Kansas (1.3%)
-------------------------------------------------------------------------------------
18,200,000 Burlington, Poll. Control IFB (KS Gas
& Elec.), Ser. 91-4, MBIA, 10.005s,
6/1/31 (acquired various dates from
6/20/91 to 2/14/94 cost $20,181,360)++ AAA 21,385,000
9,790,000 Kansas City, Util. Syst. Rev. Bonds,
FGIC, 6-1/4s, 9/1/14 AAA 10,352,925
----------
31,737,925
Kentucky (0.9%)
-------------------------------------------------------------------------------------
11,065,000 Boone Cnty., Poll. Control Rev. Bonds
(Dayton Pwr. & Lt. Co.), Ser. A,
6-1/2s, 11/15/22 AA 11,645,913
10,200,000 Jefferson Cnty., Hosp. IFB (Alliant
Hlth. Syst. Project), MBIA, 6.436s,
10/23/14 AAA 10,722,750
----------
22,368,663
14
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Louisiana (2.3%)
-------------------------------------------------------------------------------------
De Soto Parish Poll. Control Rev.
Bonds
$ 7,000,000 (Southwestern Elec. Pwr. Co.
Project), 7.6s, 1/1/19 Aa $ 7,988,750
5,400,000 Ser. A, (Central LA Elec. Co.
Project), 3.3s, 7/1/18 AAA 5,400,000
21,000,000 Lake Charles, Harbor & Term. Dist.
Port Facs. Rev. Bonds (Trunkline Co.
Project), 7-3/4s, 8/15/22 Baa 23,441,250
W. Feliciana Parish, Poll. Control
Rev. Bonds (Gulf States Utils. Co.)
8,000,000 8s, 12/1/24 Ba 8,540,000
8,565,000 Ser. III, 7.7s, 12/1/14 Ba 9,228,788
----------
54,598,788
Maine (0.2%)
-------------------------------------------------------------------------------------
5,000,000 ME Fin. Auth. Solid Waste Recycling
Fac. Rev. Bonds (Great Northern Paper
Project), 7-3/4s, 10/1/22 Baa 5,406,250
Maryland (1.0%)
-------------------------------------------------------------------------------------
MD State Hlth. & Higher Edl. Fac.
Auth. Rev. Bonds
3,000,000 (Doctors' Cmnty. Hosp. Project),
5-3/4s, 7/1/13 Baa 2,707,500
18,000,000 (John Hopkins), 5s, 7/1/23 AA 15,907,500
6,250,000 Prince Georges Cnty., Poll. Control
Rev. Bonds (Potomac Elec.), 5-3/4s,
3/15/10 A 6,367,188
----------
24,982,188
Massachusetts (8.3%)
-------------------------------------------------------------------------------------
15,850,000 Boston, Rev. Bonds (Boston City
Hosp.), Ser. A, FHA Insd., 7-5/8s,
2/15/21 Aaa 18,049,188
MA Muni. Whsl. Elec. Co. Pwr. Supply
Syst. Rev. Bonds
9,800,000 MBIA, 6-1/2s, 7/1/05 AAA 10,755,500
4,835,000 Ser. B, MBIA, 4-3/4s, 7/1/11 AAA 4,405,894
MA State Cons. Loan G.O. Bonds
4,215,000 Ser. B, 7-1/2s, 4/1/09 Aaa 4,662,844
5,020,000 Ser. C, 7-1/2s, 12/1/07 Aaa 5,729,075
3,000,000 Ser. A, 7-1/2s, 6/1/04 A 3,532,500
MA State Hlth. & Edl. Fac. Auth. IFB
10,000,000 (St. Elizabeth Hosp.), Ser. E, FSA,
9.63s, 8/15/21 AAA 11,312,500
18,000,000 (Boston U.), Ser. L, MBIA, 9.507s,
10/1/31 AAA 20,340,000
7,510,000 (Melrose-Wakefield Hosp.), Ser. A,
8-5/8s, 7/1/18 AAA 7,751,747
5,000,000 (Beth Israel Hosp.), AMBAC, 8.624s,
7/1/25 AAA 5,043,750
8,000,000 (Waltham-Weston Hosp. & Med. Ctr.),
Ser. B, 8-3/8s, 7/1/15 Baa 8,610,000
4,000,000 (MA Eye & Ear Infirmary), Ser. A,
7-3/8s, 7/1/11 Baa 3,930,000
15
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Massachusetts (continued)
-------------------------------------------------------------------------------------
$ 3,270,000 (Charlton Memorial Hosp.), Ser. B,
7-1/4s, 7/1/13 A $ 3,466,200
MA State Hlth. & Edl. Fac. Auth. Rev.
Bonds
1,500,000 (Central MA Med. Ctr.), Ser. A,
AMBAC, 7s, 7/1/12 AAA 1,665,000
5,370,000 (Worcester Polytech Inst.), 6-5/8s,
9/1/17 A 5,604,938
7,000,000 AMBAC, 6.55s, 6/23/22 AAA 7,420,000
5,000,000 (Metro West Hlth. Inc.), Ser. C,
6.4s,
11/15/11 Baa 4,887,500
2,850,000 (Ctr. for New England Hlth. Syst.),
Ser. A, 6-1/8s, 8/1/13 Baa 2,536,500
6,015,000 MA State Hsg. Fin. Agcy. Dev. Rev.
Bonds, Ser. A, MBIA, 9s, 12/1/18 A 6,263,119
4,985,000 MA State Hsg. Fin. Agcy. Rental Hsg.
Rev. Bonds, Ser. A, AMBAC, 7.35s,
1/1/35 AAA 5,408,725
MA State Indl. Fin. Agcy. Resource
Recvy. Rev. Bonds (Southeastern MA
Project)
4,500,000 Ser. B, 9-1/4s, 7/1/15 BB/P 5,028,750
7,000,000 Ser. A, 9s, 7/1/15 BB/P 7,796,250
5,000,000 MA State Indl. Fin. Agcy. Rev. Bonds
(Harvard Cmnty. Hlth.), Ser. B,
8-1/8s, 10/1/17 A 5,368,750
MA State Port Auth. Rev. Bonds
7,000,000 Ser. A, FGIC, 7-1/2s, 7/1/20 AAA 7,778,750
5,700,000 zero %, 7/1/13 AAA/P 4,788,000
MA State Wtr. Resource Auth. Rev.
Bonds
5,000,000 Ser. A, 6-1/2s, 7/15/19 A 5,431,250
4,250,000 Ser. C, MBIA, 5-1/4s, 12/1/15 AAA 4,010,938
12,105,000 Ser. B, MBIA, 5s, 3/1/22 AAA 10,728,056
U. of MA Bldg. Auth. Rev. Bonds, Ser.
A
3,000,000 7.2s, 5/1/04 A 3,435,000
2,500,000 7.15s, 5/1/03 A 2,840,625
----------
198,581,349
Michigan (4.0%)
-------------------------------------------------------------------------------------
7,000,000 Detroit, G.O. Bonds, Ser. B, 6-1/4s,
4/1/08 BBB 7,140,000
1,300,000 Grand Rapids, Wtr. Supply Syst. VRDN,
FGIC, 2.1s, 1/1/20 VMIG1 1,300,000
8,355,000 Greater Detroit, Resource Recvy. Auth.
Rev. Bonds, Ser. A, 6-1/4s, 12/13/08 AAA 8,918,963
25,000,000 MI Pub. Pwr. Agcy. Rev. Bonds (Belle
River Project), MBIA, 5-1/4s, 1/1/18 AAA 23,031,250
9,095,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Sinai Hosp.), 6.7s, 1/1/26 Baa 8,981,313
10,000,000 MI State Strategic Fund Ltd. Oblig.
Rev. Bonds (Detroit Edison Co.), MBIA,
6.4s, 9/1/25 AAA 10,450,000
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
18,000,000 (Genesee Pwr. Station Project),
7-1/2s, 1/1/21 BB/P 18,157,500
10,000,000 (SD Warren Co. Project), Ser. C,
7-3/8s, 1/15/22 BB/P 10,225,000
16
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Michigan (continued)
-------------------------------------------------------------------------------------
$ 4,900,000 MI State Underground Storage Tank Fin.
Assur. Auth. VRDN, Ser. I, 3.3s,
12/1/04 VMIG1 $ 4,900,000
----------
93,104,026
Minnesota (--%)
-------------------------------------------------------------------------------------
1,100,000 Duluth, Tax Increment Rev. Bonds (Lake
Superior Paper), 4-3/4s, 9/1/10 A 1,100,000
Mississippi (0.4%)
-------------------------------------------------------------------------------------
5,600,000 Jackson Cnty., Poll. Control Rev.
Bonds (Chevron USA Project), 3.45s,
6/1/23 Aa 5,600,000
3,000,000 MS River Bridge Auth. Rev. Bonds,
6-3/4s, 11/1/12 A 3,228,750
----------
8,828,750
Missouri (1.2%)
-------------------------------------------------------------------------------------
10,000 Greene Cnty., Single Fam. Mtge. Rev.
Bonds, Ser. A, zero %, 7/1/14 A 1,650
1,375,000 MO State Environ. Impt. & Energy
Resources Auth. Poll. Control Rev.
Bonds, Ser. 1984G, 8-1/4s, 11/15/14 AA 1,424,926
MO State Hlth. & Edl. Fac. Auth. Rev.
Bonds
14,400,000 (BJC Hlth. Syst.), Ser. A, 6-1/2s,
5/15/20 AA 15,426,000
9,150,000 (Jefferson Memorial Hosp. Assn.
Project), 6s, 8/15/23 Baa 7,983,375
2,000,000 Sikeston, Elec. Rev. Bonds, MBIA, 6s,
6/1/16 AAA 2,087,500
----------
26,923,451
Montana (0.6%)
-------------------------------------------------------------------------------------
14,000,000 MT State Hlth. Fac. Auth. Hosp. IFB,
(Deaconess Med. Ctr. Project), Ser. B,
AMBAC, 9.205s, 3/8/16 AAA 15,382,500
Nebraska (1.6%)
-------------------------------------------------------------------------------------
9,000,000 NE Investment Fin. Auth. Hosp. IFB,
MBIA, 9.385s, 12/8/16 AAA 10,203,750
NE Investment Fin. Auth. Single Fam.
Mtge. IFB
10,100,000 GNMA Coll., Ser. B, 10.186s, 9/15/23 AAA 10,945,875
4,550,000 GNMA Coll., 9.475s, 9/15/24 AAA 4,652,375
11,520,000 Ser. A, 6.7s, 9/1/26 AAA 11,764,800
----------
37,566,800
New Hampshire (1.7%)
-------------------------------------------------------------------------------------
NH State Tpk. Syst. IFB
10,500,000 FGIC, 9.819s, 11/1/17 AAA 12,363,750
31,200,000 5.244s, 2/1/24 A 28,158,000
----------
40,521,750
17
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
New Jersey (3.5%)
-------------------------------------------------------------------------------------
$ 5,000,000 NJ Econ. Dev. Auth. Elec. Energy Fac.
Rev. Bonds (Vineland Cogen. L.P.
Project), 7-7/8s, 6/1/19 BB $ 5,368,750
NJ Hlth. Care Fac. Fin. Auth. Rev.
Bonds (Raritan Bay Med. Ctr.)
12,000,000 7-1/4s, 7/1/27 BB/P 12,195,000
6,800,000 7-1/4s, 7/1/14 BB/P 6,961,500
14,400,000 NJ State Tpk. Auth. VRDN, Ser. D,
FGIC, 3.05s, 1/1/18 AAA 14,400,000
NJ State Trans. Trust Fund Auth. Rev.
Bonds (Transportation System)
10,000,000 Ser. B, MBIA, 6-1/2s, 6/15/10 AAA 11,225,000
22,500,000 Ser. A, MBIA, 5-1/2s, 6/15/13 AAA 22,162,500
10,000,000 Ser. B, MBIA, 5.4s, 6/15/08 AAA 10,125,000
----------
82,437,750
New York (13.9%)
-------------------------------------------------------------------------------------
7,815,000 Battery Park, City Auth. Rev. Bonds,
Ser. A, 5-1/4s, 11/1/17 AA 7,004,194
4,850,000 Metro. Trans. Auth. Transit Fac. Rev.
Bonds, Ser. F, 8-3/8s, 7/1/16 AAA 5,004,424
NY City, G.O. Bonds
4,600,000 Prerefunded, Ser. F, 8.4s, 11/15/07 AAA 5,508,500
400,000 Ser. F, 8.4s, 11/15/07 BBB 465,500
4,855,000 Prerefunded, Ser. F, 8.4s, 11/15/06 AAA 5,813,863
480,000 8.4s, 11/15/06 BBB 557,400
4,635,000 Prerefunded, Ser. F, 8.4s, 11/15/05 AAA 5,550,413
865,000 Ser. F, 8.4s, 11/15/05 BBB 1,002,319
3,190,000 Prerefunded, Ser. D, 8-1/4s, 8/1/13 AAA 3,772,175
25,000 Ser. D, 8-1/4s, 8/1/13 Baa 28,813
28,680,000 Prerefunded, Ser. D, Group B, 8-1/4s,
8/1/12 AAA 33,914,100
1,320,000 Ser. D, Group B, 8-1/4s, 8/1/12 Baa 1,521,300
11,000,000 Ser. D, Group B, 8-1/4s, 8/1/11 Baa 12,677,500
5,000,000 Ser. B, 7-1/2s, 2/1/06 Baa 5,412,500
7,330,000 Ser. I, 5-7/8s, 3/15/11 BBB 7,036,800
1,300,000 NY City, Hsg. Dev. Corp. Special
Oblig. VRDN (East 96th St. Project),
Ser. A, 2.7s, 8/1/15 VMIG1 1,300,000
8,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds
(Paer Inc. Project), 7.95s, 1/1/28 BB 8,090,000
NY City, Indl. Dev. Agcy. Special Fac.
Rev. Bonds (American Airlines, Inc.
Project)
5,675,000 8s, 7/1/20 Baa 6,093,531
10,000,000 6.9s, 8/1/24 Baa 10,412,500
3,000,000 NY City, VRDN, FGIC, Ser. C, 3-1/2s,
10/1/22 VMIG1 3,000,000
NY State Dorm. Auth. Rev. Bonds
7,000,000 (State U. Edl. Fac.), Ser. A, 7.7s,
5/15/12 Aaa 7,980,000
9,750,000 (City U. Syst.), Ser. 86B, 7-5/8s,
7/1/14 Baa 10,042,890
15,750,000 (City U. Syst.), Ser. A, 7-5/8s,
7/1/13 AAA 16,223,130
10,900,000 (City U. Syst.), Ser. A, 6s, 7/1/20 Baa 10,791,000
4,060,000 (State U. Edl. Fac.), Ser. A, 5-7/8s,
5/15/17 Baa 3,994,025
12,485,000 (City U. Syst.), Ser. A, 5-3/4s,
7/1/18 Baa 11,985,600
23,100,000 (State U. Edl. Fac.), Ser. A, 5-1/2s,
5/15/19 BBB 21,569,625
18
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
New York (continued)
-------------------------------------------------------------------------------------
$ 8,400,000 (State U. Edl. Fac.), Ser. A, 5-1/4s,
5/15/15 Baa $ 7,665,000
19,300,000 NY State Energy Research & Dev. Auth.
Poll. Control VRDN (NY Elec. Gas),
Ser. D, 3.3s, 10/1/29 VMIG1 19,300,000
4,400,000 NY State Environ. Fac. Corp. Poll.
Control Rev. Bonds (State Wtr.
Revolving Fund), Ser. A, 7-1/2s,
6/15/12 Aa 4,878,500
NY State Local Govt. Assistance Corp.
VRDN
2,000,000 Ser. F, 3.15s, 4/1/25 VMIG1 2,000,000
1,600,000 Ser. B, 2.3s, 4/1/23 VMIG1 1,600,000
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 22,924,375
4,860,000 (Mental Hlth. Svcs. Fac.), Ser. A,
7.8s, 2/15/19 Baa 5,279,175
6,900,000 (Mental Hlth. Svcs. Fac.), Ser. A,
7.7s, 2/15/18 Baa 7,314,000
8,050,000 (Mental Hlth. Svcs. Fac.), Ser. B,
7-5/8s, 8/15/17 Baa 8,985,813
8,975,000 NY State Thruway Auth. Hwy. & Bridge
Trust Fund Rev. Bonds, Ser. B, MBIA,
5-1/8s, 4/1/15 AAA 8,313,094
NY State Urban Dev. Corp. Rev. Bonds
(Correctional Fac.)
2,000,000 Ser. 1, 7-3/4s, 1/1/14 Aaa 2,262,500
10,000,000 Ser. A, 5-1/4s, 1/1/21 Baa 8,775,000
Port Auth. NY & NJ, G.O. Bonds
6,235,000 1st Ser., AMBAC, 5s, 7/15/11 AAA 5,907,663
20,000,000 Triborough Bridge & Tunnel Auth. Gen.
Purpose Rev. Bonds, Ser. Y, MBIA,
5-1/2s, 1/1/17 AAA 19,350,000
----------
331,307,222
North Carolina (2.8%)
-------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Pwr. Syst.
Rev. Bonds
19,700,000 FGIC, 9.278s, 1/1/25 (acquired
various dates from 12/28/93 to
4/12/95 cost $23,983,708)++ AAA 20,758,875
3,550,000 Ser. A, 8s, 1/1/21 Aaa 3,847,312
2,985,000 Ser. A, 7-1/4s, 1/1/21 A 3,083,983
10,000,000 Ser. B, 7s, 1/1/13 BBB 10,900,000
4,000,000 Ser. B, 7s, 1/1/08 A 4,360,000
10,000,000 AMBAC, 6s, 1/1/18 AAA 10,287,500
NC Muni. Pwr. Agcy. Rev. Bonds
(Catawba Elec.)
5,000,000 AMBAC, 5-3/8s, 1/1/20 AAA 4,687,500
9,865,000 MBIA, 5s, 1/1/18 AAA 8,816,844
----------
66,742,014
Ohio (2.7%)
-------------------------------------------------------------------------------------
1,602,443 Lake Cnty., Indl. Dev. Rev. Bonds
(Madison Inn Hlth. Ctr. Project), FHA
Insd., 12s, 5/1/14 BBB/P 1,736,647
83,385,000 Lucas Plaza Hsg. Dev. Corp. Mtge. Rev.
Bonds, FHA Insd., zero %, 6/1/24 Aaa 13,966,988
19
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Ohio (continued)
-------------------------------------------------------------------------------------
$ 8,950,000 Mount Vernon, Hosp. Rev. Bonds (Knox
Cmnty. Hosp.), 7-7/8s, 6/1/12 BBB/P $ 9,005,938
OH Hsg. Fin. Agcy. Single Fam. Mtge.
IFB
7,050,000 Ser. G-2, GNMA Coll., 10.427s, 3/2/23 Aaa 7,746,188
5,923,000 Ser. A-2, GNMA Coll., 9.948s, 3/24/31 AAA 6,256,169
7,775,000 GNMA Coll., 9s, 9/1/18 AAA 5,899,281
18,800,000 GNMA Coll., 7.8s, 3/1/30 AAA 19,669,500
----------
64,280,711
Oklahoma (0.7%)
-------------------------------------------------------------------------------------
Tulsa, Muni. Arpt. Rev. Bonds
(American Airlines, Inc.)
9,160,000 7-3/8s, 12/1/20 Baa 9,709,600
8,000,000 6-1/4s, 6/1/20 BB 7,980,000
----------
17,689,600
Pennsylvania (3.2%)
-------------------------------------------------------------------------------------
2,560,000 Allegheny Cnty., Hosp. Dev. Auth. Rev.
Bonds (Southside Hosp. Pittsburgh),
Ser. A, 8-3/4s, 6/1/10 BBB 2,656,000
5,000,000 Beaver Cnty., Indl. Dev. Auth. Poll.
Control Rev. Bonds (Ohio Edison
Project),
Ser. A, 7-3/4s, 9/1/24 Baa 5,300,000
5,475,000 Clearfield, Hosp. Auth. Rev. Bonds
(Clearfield Hosp. Project), 6-7/8s,
6/1/16 BBB 5,420,250
7,095,000 Geisinger, Auth. Hlth. Syst. Rev.
Bonds,
Ser. B, 6-1/2s, 7/1/07 AA 7,316,719
PA State COP
20,000,000 Ser. A, AMBAC, 5s, 7/1/15 AAA 17,975,000
6,500,000 2nd Ser., AMBAC, 5s, 11/15/12 AAA 6,077,500
PA State Econ. Dev. Fin. Auth.
Resource Recvy. Rev. Bonds
6,000,000 (Colver Project), Ser. D, 7.15s,
12/1/18 BBB 6,285,000
10,000,000 (Colver Project), Ser. D, 7-1/8s,
12/1/15 BBB 10,500,000
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 3,191,250
----------
77,056,594
Puerto Rico (2.5%)
-------------------------------------------------------------------------------------
11,975,000 PR Elec. Pwr. Auth. Rev. Bonds,
5-1/4s, 7/1/21 A 10,777,500
PR Hwy. & Trans. Auth. Rev. Bonds
6,700,000 6-1/4s, 7/1/12 AAA 7,290,739
2,890,000 6-1/4s, 7/1/10 AAA 3,154,030
3,500,000 6-1/4s, 7/1/09 AAA 3,821,650
3,000,000 6-1/4s, 7/1/08 AAA 3,282,090
8,000,000 5-1/2s, 7/1/26 AAA 7,402,320
23,355,000 PR Pub. Bldgs. Auth. Hlth. Facs. Rev.
Bonds, Ser. M, AMBAC, 5-3/4s, 7/1/10 AAA 24,405,975
----------
60,134,304
20
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
South Carolina (0.7%)
-------------------------------------------------------------------------------------
$ 3,000,000 Charleston Cnty., Indl. Dev. VRDN
(Massey Coal Corp.), 3.55s, 1/1/07 VMIG1 $ 3,000,000
13,500,000 Spartanburg Cnty., Hosp. Facs. IFB,
FSA, 6.416s, 4/13/22 AAA 14,208,750
----------
17,208,750
South Dakota (0.3%)
-------------------------------------------------------------------------------------
8,000,000 Heartland, Consumer Elec. Pwr. Dist.
Rev. Bonds, FSA, 6s, 1/1/17 AAA 8,300,000
Tennessee (0.9%)
-------------------------------------------------------------------------------------
93,729,086 Metro. Nashville & Davidson Cnty.,
Hlth. & Edl. Fac. Board Rev. Bonds
(Volunteer Hlth. Care), zero %, 6/1/21 Aaa 17,457,042
2,900,000 Metro. Nashville Arpt. Auth. Fac. VRDN
(American Airlines, Inc.), Ser. A,
3.8s, 10/1/12 VMIG1 2,900,000
----------
20,357,042
Texas (10.1%)
-------------------------------------------------------------------------------------
31,000,000 Alliance Arpt. Auth. Special Fac. Rev.
Bonds (American Airlines, Inc.),
7-1/2s, 12/1/29 Baa 33,015,000
5,000,000 CO River Muni. Wtr. Dist. Rev. Bonds,
AMBAC, 5.15s, 1/1/21 AAA 4,525,000
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 11,606,250
11,000,000 Dallas-Fort Worth Int'l. Arpt. Fac.
Impt. Corp. Rev. Bonds (United Parcel
Svc. Inc.), 6.6s, 5/1/32 AAA 11,508,750
8,805,000 Guadalupe-Blanco River Auth. Indl.
Dev. Corp. Poll. Control Rev. Bonds
(du Pont (E.I.) de Nemours & Co.,
Ltd.),
Ser. A, 6.35s, 7/1/22 AA 9,190,219
25,250,000 Gulf Coast, Waste Disp. Auth. Rev.
Bonds (Champion Intl. Corp.), 7.45s,
5/1/26 Baa 27,049,063
210,000 Harris Cnty., Single Fam. Hsg. Fin.
Corp. Rev. Bonds, Ser. 1983A, 10-3/8s,
7/15/14 BBB 209,885
8,500,000 Harris Cnty., Toll Roads Rev. Bonds,
AMBAC, zero %, 8/15/18 AAA 2,188,750
Montgomery Cnty., Hlth. Fac. Dev.
Corp. Rev. Bonds
2,125,000 (Woodlands Med. Ctr. Project), 8.85s,
8/15/14 BBB/P 2,292,344
37,075,000 (Heritage Manor), FSA, zero %,
7/15/23 AAA 5,978,344
North Central Hlth. Fac. Dev. Corp.
IFB
20,000,000 (Baylor U. Med. Ctr.), Ser. A,
9.892s,
5/15/16 AA 24,225,000
245,000 (U. Med. Ctr. Project), 8.2s, 4/1/19 BBB/P 254,903
3,475,000 (U. Med. Ctr. Project), 7-3/4s,
4/1/17 BBB/P 3,566,219
Southeast TX Hsg. Fin. Corp.
Multi-Fam. Rev. Bonds
12,000,000 (Bayou Pk. Village Project), Ser. A,
8s, 8/1/16 BBB/P 12,030,000
21
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Texas (continued)
-------------------------------------------------------------------------------------
$10,000,000 (Promenade Place Apts. Project), Ser.
A, 8s, 8/1/16 A/P $ 10,025,000
10,920,000 TX A & M U. Rev. Bonds, 5s, 5/15/11 AA 10,278,450
8,050,000 TX Dept. of Hsg. & Cmnty. Affairs Home
Mtge. IFB, Ser. A, GNMA Coll., 9.764s,
7/18/23 AAA 8,563,188
5,000,000 TX State Dept. of Hsg. & Cmnty.
Affairs Home Mtge. IFB, Ser. B-2, GNMA
Coll., 9.898s, 7/18/23 AAA 5,237,500
TX State Nat'l. Research Lab
Communication Superconductor G.O.
Bonds
10,400,000 Ser. B-1 & B-2, 8.093s, 9/30/11 AA 11,999,000
9,500,000 7-1/8s, 4/1/20 AAA 10,545,000
12,800,000 TX State Tpk. Auth. Rev. Bonds (George
Bush Tpk.), 5s, 1/1/16 A 11,824,000
TX State Wtr. Dev. Rev. Bonds, Ser. A
12,500,000 5-1/8s, 7/15/09 AAA 12,203,125
11,415,000 5-1/8s, 7/15/08 AAA 11,272,313
----------
239,587,303
Utah (1.3%)
-------------------------------------------------------------------------------------
16,840,000 Intermountain Pwr. Agcy. Rev. Bonds,
Ser. B, MBIA, 6-1/2s, 7/1/09 AAA 18,650,300
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC
Hosps., Inc.), Ser. A, 8-1/8s, 5/15/15 AAA 6,112,500
7,000,000 Tooele Cnty., Hazardous Waste Disp.
Rev. Bonds (Laidlaw USPCI
Incineration),
Ser. A, 6-3/4s, 8/1/10 BBB 7,113,750
----------
31,876,550
Vermont (1.1%)
-------------------------------------------------------------------------------------
2,750,000 Burlington, Elec. Rev. Bonds,
Ser. A, MBIA, 6-1/4s, 7/1/14 AAA 2,873,750
VT Edl. & Hlth. Bldgs. Fin. Agcy. IFB
4,895,000 (Brattleboro Memorial Hosp.), 7s,
3/1/24 BBB 4,907,238
7,600,000 (Hosp. Med. Ctr.), FGIC, 7s, 9/1/19 AAA 7,961,000
2,000,000 Ser. E, AMBAC, 3.3s, 12/1/25 A 2,000,000
9,000,000 VT Muni. Bond Bank G.O. Bonds,
Ser. 2, AMBAC, 5-1/2s, 12/1/22 AAA 8,538,750
----------
26,280,738
Virginia (3.4%)
-------------------------------------------------------------------------------------
17,000,000 Henrico Cnty., Indl. Dev. Auth. Rev.
Bonds (Bon Secours Hlth. Syst.
Project), FSA, 5.929s, 8/23/27 AAA 17,340,000
4,000,000 Loudoun Cnty., Sanitation Auth. Wtr. &
Swr. Rev. Bonds, FGIC, 6-1/4s, 1/1/16 AAA 4,205,000
6,200,000 Peninsula Port Auth. Rev. Bonds, Ser.
A, 3.55s, 12/1/05 AAA 6,200,000
6,750,000 Riverside Regl. Jail Auth. Rev. Bonds,
MBIA, 6s, 7/1/25 AAA 6,809,063
22
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Virginia (continued)
-------------------------------------------------------------------------------------
$11,065,000 VA State Pub. Bldg. Auth. Rev. Bonds,
Ser. A, 5s, 8/1/11 AA $ 10,442,594
32,000,000 Winchester, Indl. Dev. Auth. IFB
(Winchester Med. Ctr. Project), AMBAC,
8.947s, 1/16/14 AAA 35,960,000
----------
80,956,657
Washington (1.1%)
-------------------------------------------------------------------------------------
4,625,000 King & Snohomish Cntys., School Dist.
#417 Rev. Bonds, FGIC, 5.55s, 12/1/08 AAA 4,723,281
5,200,000 Port of Moses Lake, Pub. Corp. Poll.
Control Rev. Bonds (Union Carbide
Corp.), 7-1/2s, 8/1/04 Baa 5,288,868
WA State Hlth. Care Fac. Auth. Rev.
Bonds (Hutchinson Cancer Ctr.),
Ser. D
8,400,000 7-3/8s, 1/1/18 Aa 8,862,000
7,700,000 7.3s, 1/1/12 Aa 8,123,500
----------
26,997,649
West Virginia (0.1%)
-------------------------------------------------------------------------------------
3,000,000 WV State COP (Morris Sq. Complex),
9-1/4s, 8/15/08 BB/P 2,955,000
Wisconsin (0.7%)
-------------------------------------------------------------------------------------
4,000,000 WI Hlth. & Edl. Facs. Auth. Rev.
Bonds,
Ser. A, AMBAC, 5-1/4s, 8/15/12 AAA 3,760,000
8,535,000 WI Hsg. & Econ. Auth. IFB (Home
Ownership Dev. Program), 10.321s,
10/25/22 AA 9,111,113
3,400,000 WI Hsg. & Econ. Dev. Auth. Rev. Bonds,
Ser. B, 7.05s, 11/1/22 A 3,536,000
- ------------- -------------------------------------- ------- ----------
16,407,113
- ------------- -------------------------------------- ------- ----------
Total Investments
(cost $2,290,454,006)*** $2,398,725,885
- ------------- -------------------------------------- ------- ----------
</TABLE>
* Percentages indicated are based on net assets of $2,385,693,504.
** The Moody's or Standard & Poor's ratings indicated are believed to be
the most recent ratings available at March 31, 1996 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 March 31, 1996. Securities rated by Putnam are indicated
by "/P" and are not publicly rated.
*** The aggregate identified cost on a tax cost basis is $2,290,454,006,
resulting in gross unrealized appreciation and depreciation of
$130,935,053 and $22,663,174, respectively, or net unrealized
appreciation of $108,271,879.
# This security was pledged to cover margin requirements for future
contracts at March 31, 1996. The market value of segregated securities
with the custodian for transactions on future contracts is $35,495,046
or 1.5% of net assets.
++ Restricted excluding 144A securities as to public resale. Total market
value of restricted securities owned at March 31, 1996 was $46,847,000
or 2.0% of net assets.
++++ The interest rate and dividend date shown parenthetically represent the
new interest and dividend rate to be paid and the date the fund will
begin receiving interest and dividends at this rate.
23
<PAGE>
The fund had the following industry group concentrations greater than 10% of
net assets at March 31, 1996:
Hospitals/ Health Care 15.9%
Utilities 14.5
Transportation 12.2
The rates shown on IFBs, 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 March 31, 1996, which are subject to change
based on the terms of the security.
Futures Contracts Outstanding at March 31, 1996
Aggregate
Total Face Expiration Unrealized
Value Value Date Depreciation
- ------------------- ----------- ----------- -------- -------------
UST Bond Futures
(Sell) $78,028,125 $77,479,688 June 96 ($548,437)
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Statement of assets and liabilities
March 31, 1996 (Unaudited)
<TABLE>
<S> <C>
Assets
-------------------------------------------------------------------------------- -----------
Investments in securities, at value (identified cost $2,290,454,006) (Note 1) $2,398,725,885
-------------------------------------------------------------------------------- -----------
Cash 361,130
-------------------------------------------------------------------------------- -----------
Interest receivable 34,433,823
-------------------------------------------------------------------------------- -----------
Receivable for shares of the fund sold 9,124,528
-------------------------------------------------------------------------------- -----------
Receivable for securities sold 82,863,165
-------------------------------------------------------------------------------- -----------
Unamortized organization expenses (Note 1) 6,657
-------------------------------------------------------------------------------- -----------
Total assets 2,525,515,188
-------------------------------------------------------------------------------- -----------
Liabilities
-------------------------------------------------------------------------------- -----------
Payable for variation margin 525,000
-------------------------------------------------------------------------------- -----------
Distributions payable to shareholders 5,482,463
-------------------------------------------------------------------------------- -----------
Payable for securities purchased 127,373,705
-------------------------------------------------------------------------------- -----------
Payable for shares of the fund repurchased 1,989,666
-------------------------------------------------------------------------------- -----------
Payable for compensation of Manager (Note 2) 2,903,168
-------------------------------------------------------------------------------- -----------
Payable for investor servicing and custodian fees (Note 2) 118,260
-------------------------------------------------------------------------------- -----------
Payable for compensation of Trustees (Note 2) 1,527
-------------------------------------------------------------------------------- -----------
Payable for administrative services (Note 2) 10,052
-------------------------------------------------------------------------------- -----------
Payable for distribution fees (Note 2) 1,289,964
-------------------------------------------------------------------------------- -----------
Other accrued expenses 127,879
-------------------------------------------------------------------------------- -----------
Total liabilities 139,821,684
-------------------------------------------------------------------------------- -----------
Net assets $2,385,693,504
-------------------------------------------------------------------------------- -----------
Represented by
-------------------------------------------------------------------------------- -----------
Paid-in capital (Notes 1 and 4) 2,335,905,944
-------------------------------------------------------------------------------- -----------
Undistributed net investment income (Note 1) 359,823
-------------------------------------------------------------------------------- -----------
Accumulated net realized loss on investments (Note 1) (58,295,704)
-------------------------------------------------------------------------------- -----------
Net unrealized appreciation of investments 107,723,441
-------------------------------------------------------------------------------- -----------
Total-Representing net assets applicable to capital shares outstanding $2,385,693,504
-------------------------------------------------------------------------------- -----------
Computation of net asset value and offering price
-------------------------------------------------------------------------------- -----------
Net asset value and redemption price per class A share
($2,131,801,070 divided by 242,852,022 shares) $8.78
-------------------------------------------------------------------------------- -----------
Offering price per class A share (100/95.25 of $8.78)* $9.22
-------------------------------------------------------------------------------- -----------
Net asset value and offering price per class B share
($250,028,509 divided by 28,492,442 shares)+ $8.78
-------------------------------------------------------------------------------- -----------
Net asset value and redemption price per class M share
($3,863,925 divided by 439,375 shares) $8.79
-------------------------------------------------------------------------------- -----------
Offering price per class M share (100/96.75 of $8.79)** $9.09
-------------------------------------------------------------------------------- -----------
</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.
25
<PAGE>
Statement of operations
Six months ended March 31, 1996 (Unaudited)
<TABLE>
<S> <C>
Tax exempt interest income: $ 78,196,529
- ---------------------------------------------------------------------- -----------
Expenses:
- ---------------------------------------------------------------------- -----------
Compensation of Manager (Note 2) 5,905,182
- ---------------------------------------------------------------------- -----------
Investor servicing and custodian fees (Note 2) 950,111
- ---------------------------------------------------------------------- -----------
Compensation of Trustees (Note 2) 32,744
- ---------------------------------------------------------------------- -----------
Administrative services (Note 2) 19,623
- ---------------------------------------------------------------------- -----------
Distribution fees-Class A (Note 2) 2,262,322
- ---------------------------------------------------------------------- -----------
Distribution fees-Class B (Note 2) 1,076,971
- ---------------------------------------------------------------------- -----------
Distribution fees-Class M (Note 2) 6,245
- ---------------------------------------------------------------------- -----------
Amortization of organization expenses (Note 1) 3,494
- ---------------------------------------------------------------------- -----------
Other 161,898
- ---------------------------------------------------------------------- -----------
Total expenses 10,418,590
- ---------------------------------------------------------------------- -----------
Expense reduction (Note 2) (677,401)
- ---------------------------------------------------------------------- -----------
Net expenses 9,741,189
- ---------------------------------------------------------------------- -----------
Net investment income 68,455,340
- ---------------------------------------------------------------------- -----------
Net realized gain on investments (Notes 1 and 3) 36,845,759
- ---------------------------------------------------------------------- -----------
Net realized gain on futures contracts (Notes 1 and 3) 935,289
- ---------------------------------------------------------------------- -----------
Net unrealized depreciation of investments and futures during the
period (21,918,491)
- ---------------------------------------------------------------------- -----------
Net gain on investments 15,862,557
- ---------------------------------------------------------------------- -----------
Net increase in net assets resulting from operations $ 84,317,897
- ---------------------------------------------------------------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Six months ended Year ended
March 31 September 30
1996* 1995
- ------------------------------------------------------ ---------------- --------------
<S> <C> <C>
Increase (decrease) in net assets
- ------------------------------------------------------ -------------- ------------
Operations:
- ------------------------------------------------------ -------------- ------------
Net investment income $ 68,455,340 $ 145,685,855
- ------------------------------------------------------ -------------- ------------
Net realized gain (loss) on investment transactions 37,781,048 (79,603,919)
- ------------------------------------------------------ -------------- ------------
Net unrealized appreciation (depreciation) of
investment transactions (21,918,491) 140,109,371
- ------------------------------------------------------ -------------- ------------
Net increase in net assets resulting from operations 84,317,897 206,191,307
- ------------------------------------------------------ -------------- ------------
Distributions to shareholders:
- ------------------------------------------------------ -------------- ------------
From net investment income
- ------------------------------------------------------ -------------- ------------
Class A (61,571,413) (133,906,914)
- ------------------------------------------------------ -------------- ------------
Class B (6,067,727) (12,184,294)
- ------------------------------------------------------ -------------- ------------
Class M (74,102) (32,962)
- ------------------------------------------------------ -------------- ------------
Decrease from capital share transactions (Note 4) (117,492,476) (19,775,667)
- ------------------------------------------------------ -------------- ------------
Total increase (decrease) in net assets (100,887,821) 40,291,470
- ------------------------------------------------------ -------------- ------------
Net assets
- ------------------------------------------------------ -------------- ------------
Beginning of period 2,486,581,325 2,446,289,855
- ------------------------------------------------------ -------------- ------------
End of period (including undistributed net investment
income and distributions in excess of net investment
income of $359,823 and $382,275, respectively) $2,385,693,504 $2,486,581,325
- ------------------------------------------------------ -------------- ------------
</TABLE>
* Unaudited.
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Financial highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
Six February 16, 1995 Six
months (commencement months
ended of operations) to ended
March 31 September 30 March 31 Year ended September 30
--------- ----------------- --------- ------------------------
1996* 1995 1996* 1995 1994
--------- ----------------- --------- --------- -----------
Class M Class B
------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.75 $ 8.61 $ 8.73 $ 8.53 $ 9.66
----------------------------------------------------------------------------------------------------------------
Investment operations
----------------------------------------------------------------------------------------------------------------
Net investment income .24 .31 .22 .46 .47
----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments .03 .13 .05 .20 (.98)
----------------------------------------------------------------------------------------------------------------
Total from investment operations .27 .44 .27 .66 (.51)
----------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
----------------------------------------------------------------------------------------------------------------
From net investment income (.23) (.30) (.22) (.46) (.49)
----------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- --
----------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- -- -- -- (.07)
----------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- -- -- -- (.06)
----------------------------------------------------------------------------------------------------------------
Total distributions (.23) (.30) (.22) (.46) (.62)
----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.79 $ 8.75 $ 8.78 $ 8.73 $ 8.53
----------------------------------------------------------------------------------------------------------------
Total investment return at net asset
value (%) (a) 3.06(b) 5.23(b) 3.01(b) 8.01 (5.51)
----------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,864 $2,337 $250,029 $246,407 $213,679
----------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets
(%) (c) .47(b) .67(b) .68(b) 1.43 1.41
----------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 2.61(b) 3.04(b) 2.43(b) 5.34 5.31
----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 93.99(b) 68.23 93.99(b) 68.23 59.27
----------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
For the period
January 4, 1993
(commencement Six months
of operations) to ended
September 30 March 31 Year ended September 30
1993 1996* 1995 1994 1993 1992 1991
--------------------- ------------ ------------ ------------ ------------ ------------ --------------
Class B Class A
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
$ 9.02 $ 8.74 $ 8.55 $ 9.66 $ 9.11 $ 8.81 $ 8.29
- ----------------------------------------------------------------------------------------------------------------------
.34 .25 .52 .53 .57 .59 .58
- ----------------------------------------------------------------------------------------------------------------------
.64 .03 .19 (.97) .67 .47 .54
- ----------------------------------------------------------------------------------------------------------------------
.98 .28 .71 (.44) 1.24 1.06 1.12
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
(.34) (.24) (.52) (.54) (.56) (.60) (.58)
- ----------------------------------------------------------------------------------------------------------------------
-- -- -- -- (.01) -- --
- ----------------------------------------------------------------------------------------------------------------------
-- -- -- (.07) (.12) (.16) (.02)
- ----------------------------------------------------------------------------------------------------------------------
-- -- -- (.06) -- -- --
- ----------------------------------------------------------------------------------------------------------------------
(.34) (.24) (.52) (.67) (.69) (.76) (.60)
- ----------------------------------------------------------------------------------------------------------------------
$ 9.66 $ 8.78 $ 8.74 $ 8.55 $ 9.66 $ 9.11 $ 8.81
- ----------------------------------------------------------------------------------------------------------------------
11.10(b) 3.23(b) 8.58 (4.72) 14.27 12.56 13.92
- ----------------------------------------------------------------------------------------------------------------------
$137,323 $2,131,801 $2,237,837 $2,232,611 $2,425,661 $1,867,307 $1,513,029
- ----------------------------------------------------------------------------------------------------------------------
1.04(b) .35(b) .78 .77 .74 .66 .59
- ----------------------------------------------------------------------------------------------------------------------
3.66(b) 2.76(b) 6.03 5.97 6.81 6.65 6.75
- ----------------------------------------------------------------------------------------------------------------------
43.77 93.99(b) 68.23 59.27 43.77 58.14 78.04
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unaudited
(a) Total investment return assumes dividend and does not reflect the effect
of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the year ended September
30, 1995 and thereafter, includes amounts paid through brokerage service
and expense offset arrangements. Prior period ratios exclude these
amounts. (See Note 2)
29
<PAGE>
Notes to financial statements
March 31, 1996 (Unaudited)
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. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after approximately eight years, 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
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities.
Actual results could differ from those estimates.
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 invests 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
30
<PAGE>
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an 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 on securities held and for excise
tax on income and capital gains.
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. 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.
F) Amortization of bond premium and discounts Any premium resulting from the
purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis.
Discounts on zero coupon bonds, original issue, stepped-coupon bonds and
payment in kind bonds are 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 straight-line basis over a five-year period.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management, Inc., ("Putnam Management"),
the fund's Manager, a wholly-owned subsidiary of Putnam Invesments, Inc. for
management and investment advisory services is paid quarterly based on the
average net assets of the fund. 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 amount
over $1.5 billion and by the amount of certain brokerage commissions and fees
(less expenses) received by affiliates of Putnam Management on the fund's
portfolio transactions.
The fund reimburses Putnam Management 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 Trustees fee of $3,810 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of the
Trustees receive
31
<PAGE>
additional fees for attendance at certain committee meetings.
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 wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services,
a division of PFTC.
For the six months ended March 31, 1996, fund expenses were reduced by
$677,401 under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the Statement
of operations exclude these credits. The fund could have invested the assets
utilized in connection with the expense 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, 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 Corp. 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 six months ended March 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $92,694 and $1,348, from the sale
class A and class M shares, respectively, and received $278,714 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
purchased as part of an investment of $1 million or more. For the six months
ended March 31, 1996, Putnam Mutual Funds Corp., acting as underwriter
received $5,905 on class A redemptions.
During the six months ended March 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $1,027,106,554 and
$1,064,764,212, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the identified
cost basis.
At March 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
32
<PAGE>
<TABLE>
<CAPTION>
Six months Year ended
ended March 31 September 30
-------------------------- ------------------------------
1996 1995
-------------------------- ------------------------------
Class A Shares Amount Shares Amount
- --------------------------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 72,259,317 $ 648,578,972 152,618,601 $ 1,306,234,641
- --------------------------- ----------- ----------- ------------ --------------
Shares issued in
connecetion with
reinvestment of
distributions 3,849,678 34,618,926 9,008,081 76,964,617
- --------------------------- ----------- ----------- ------------ --------------
76,108,995 683,197,898 161,626,682 1,383,199,258
- --------------------------- ----------- ----------- ------------ --------------
Shares repurchased (89,425,015) (804,620,550) (166,654,699) (1,432,393,643)
- --------------------------- ----------- ----------- ------------ --------------
Net decrease (13,316,020) $(121,422,652) (5,028,017) $ (49,194,385)
- --------------------------- ----------- ----------- ------------ --------------
Six months Year ended
ended March 31 September 30
-------------------------- ------------------------------
1996 1995
-------------------------- ------------------------------
Class B Shares Amount Shares Amount
- --------------------------- ----------- ----------- ------------ --------------
Shares sold 7,228,088 $ 64,687,260 13,000,881 $ 111,156,375
- --------------------------- ----------- ----------- ------------ --------------
Shares issued in connection
with reinvestment of
distributions 426,200 3,830,408 908,734 7,767,291
- --------------------------- ----------- ----------- ------------ --------------
7,654,288 68,517,668 13,909,615 118,923,666
- --------------------------- ----------- ----------- ------------ --------------
Shares repurchased (7,380,166) (66,132,796) (10,729,890) (91,840,442)
- --------------------------- ----------- ----------- ------------ --------------
Net increase 274,122 $ 2,384,872 3,179,725 $ 27,083,224
- --------------------------- ----------- ----------- ------------ --------------
For the period
February 16, 1995
(commencement of
Six months operations) to
ended March 31 September 30
-------------------------- ------------------------------
1996 1995
-------------------------- ------------------------------
Class M Shares Amount Shares Amount
- --------------------------- ----------- ----------- ------------ --------------
Shares sold 235,607 $ 2,119,238 282,768 $ 2,473,005
- --------------------------- ----------- ----------- ------------ --------------
Shares issued in connection
with reinvestment of
distributions 5,385 48,459 2,400 20,942
- --------------------------- ----------- ----------- ------------ --------------
240,992 2,167,697 285,168 2,493,947
- --------------------------- ----------- ----------- ------------ --------------
Shares repurchased (68,822) (622,393) (17,963) (158,453)
- --------------------------- ----------- ----------- ------------ --------------
Net increase 172,170 $ 1,545,304 267,205 $ 2,335,494
- --------------------------- ----------- ----------- ------------ --------------
</TABLE>
33
<PAGE>
Our commitment to quality service
(dagger) CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for
the past six years. In 1995, over 146,000 tests of 56 shareholder service
components demonstrated that Putnam outperformed the industry standard in
every category.
(dagger) HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month from
a Putnam money market fund or from your checking or savings account.*
(dagger) SWITCH FUNDS EASILY
You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or
termination.)
(dagger) ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than the original
cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
* Regular investing, of course, does not guarantee a profit or protect
against a loss in a declining market.
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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
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
John D. Hughes
Senior Vice President and Treasurer
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
Triet M. Nguyen
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
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.
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[graphic]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
24530-011/322/472 5/96
