Putnam
Tax Exempt
Income Fund
ANNUAL REPORT
September 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "What makes today's municipal bond market different from that of
six months ago is that yields there have recently become much
more attractive relative to Treasury yields."
-- William H. Reeves; manager
Putnam Tax Exempt Income Fund
* "[Municipal bond funds] are more liquid than actual munis. And you
get access to a manager who may be able to play the credit-rating
changes of a locality to your advantage."
-- Fortune, August 18, 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
23 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The municipal bond market maintained a demeanor of relative calm during the
first half of Putnam Tax Exempt Income Fund's fiscal year with investors still
willing to absorb virtually all of the new offerings presented to them. Even
so, a palpable undercurrent of concern persisted that the still-vibrant
economy would finally heat inflation to the flash point.
In deference to the market's mood, Fund Manager William Reeves maintained a
slightly defensive portfolio position, which he regarded as worthwhile
insurance against any real or imagined threat to the market's relative
stability. Even so, the fund was able to end the period with a total return
for class A shares that was well above the benchmark Lehman Brothers Municipal
Bond Index.
As he explains in the following report, Bill currently expects to keep his
strategy in place during the first half of fiscal 1998. He also discusses in
detail the fund's performance during the 1997 fiscal year.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 19, 1997
Report from the Fund Manager
William H. Reeves
Imagine an old-fashioned tug of war with strong economic growth pulling on one
end of the rope and low inflation tugging on the other. You'll have a pretty
good picture of what has been happening in the economy and influencing the
municipal bond market for most of the past year. As one side pulled harder,
rates inched higher; as the other side stood steadfast, rates declined.
Despite the subsequent narrow trading ranges for municipal bond prices, Putnam
Tax Exempt Income Fund produced a competitive return for the 12 months ended
September 30, 1997. Your fund's class A shares returned 9.89% at net asset
value and 4.63% at public offering price. For comparison, the Lehman Brothers
Municipal Bond Index posted a return of 9.03% for the same period. Please see
pages 8 and 9 for additional performance information.
What makes today's municipal bond market different from that of six months ago
is that yields there have recently become much more attractive relative to
Treasury yields. And municipal bond prices have not been this low since early
1996. In September, the market experienced a dramatic surge in supply from
refundings and new issues. This recent boost in supply, along with improved
demand, has made the municipal market especially attractive and we tried to
take full advantage of the resulting opportunity.
* DENVER INTERNATIONAL AIRPORT BOND REFUNDING BOOSTS PRICES
One way your fund's management team seeks to enhance returns is through
careful security selection and in-depth credit research. This is especially
important when reviewing higher-risk bond issuers. One example of higher-risk
credits whose potential to provide higher returns, in our opinion, justifies
its credit risk is our long-standing position in Denver International Airport
bonds.
The Denver Airport Authority recently prerefunded its outstanding bonds by
investing the proceeds of a new bond issue in U.S. government bonds that
mature at the same time as the outstanding municipal bonds. Because this
action translates into added security for the bonds and reduced credit risk,
an upgrade by rating agencies is likely to follow. This generally boosts the
bonds' prices and, in turn, your fund's performance.
* CALIFORNIA, WASHINGTON, DC, BONDS OUTPERFORM
The fund's investments in the California market offer another example of how
the economy influences the municipal bond market. Although the state has a
somewhat checkered recent fiscal past, its improving economy has generated
healthy tax revenues and reduced the need for new issuance. The result has
been relatively higher demand for California municipal bonds against a
decrease in supply. Consequently, these bonds have outperformed the municipal
market in general, and the fund's California position has served it well.
Positive news associated with our investment in Washington, DC, general
obligation bonds has also contributed to the fund's performance. The major
rating agencies have raised their outlook on the district's credit after many
years of reporting negative news. The market has taken its cue from this shift
in the form of higher prices for the District of Columbia's bonds. Its bonds
are typical of the quality spread compression that has taken place in the
municipal market -- there is only a minimal price difference between the
higher-rated and lower-rated bonds. Because of the strong economy,
lower-quality bonds have generally outperformed higher-quality bonds and
investors have been rewarded for taking on extra credit risk with higher bond
prices.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals and health care 14.8%
Transportation 14.3%
Utilities 13.3%
Education 5.2%
Housing 4.4%
Footnote reads:
*Based on net assets as of 9/30/97. Holdings will vary over time.
The fund has also experienced price appreciation from its zero-coupon bond
positions. Zeroes, or ETMs (escrow to maturity), can be quite volatile, but
when interest rates declined for part of the year, they appreciated in value.
* IMPROVING YIELD CURVE POSITIONING
The fund is gradually moving away from its previously more aggressive
management style and has already begun to place more emphasis on producing a
consistent level of income and risk management. Our goal of high tax-free
income remains the same, but we are trying to do so by taking less risk.
One strategy we employed over the year emphasized bonds with maturities of 10
to 20 years. These bonds offer attractive yield but also have the potential to
increase in value as they approach maturity and shift to the shorter end of
the yield curve in a phenomenon known as "rolling down the yield curve." We
believe that intermediate maturity bonds offer a big advantage because they
tend to experience this phenomenon more rapidly than longer-term issues.
* MORE CONSERVATIVE MANAGEMENT STRATEGIES IN PLACE
As time goes on, we believe there will be moderate upward pressure on interest
rates. Interest rates change in response to a number of things: Federal
Reserve Board policy, economic conditions, market psychology, and most
important for the municipal bond market, changes in expectations about
inflation. Because higher inflation reduces the future buying power of a fixed
level of dividends, fears of growing inflation tend to weaken bond prices.
We anticipate that the news on inflation will slowly deteriorate. With that in
mind, we believe that taking on excessive risk would not reward the fund and
we plan to maintain our defensive strategies. More specifically we will keep a
slightly shorter-than-market duration of 6 1/2 to 7 years with maturities
falling in the 10- to 20-year range. As we've stated before, shorter durations
can help preserve principal value if interest rates gradually move upward.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
VMGI 2.2%
Aaa 49.6%
Aa 12.4%
A 4.1%
Baa 22.8%
Ba 8.9%
Footnote reads:
*As a percentage of market value as of 9/30/97. A bond rated Baa or higher is
considered investment grade. All ratings reflect Moody's descriptions unless
noted otherwise; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
Fund management will also keep a vigilant eye on inflation and continue to
rely on its own in-depth research to evaluate new and existing holdings. When
the rope in the strong economy/low inflation tug of war begins to fray, we
believe that our more conservative management strategies will be rewarded.
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 9/30/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 9/30/97
Class A Class B Class M
(inception date) (12/31/76) (1/4/93) (2/16/95)
NAV POP NAV CDSC NAV POP
- -------------------------------------------------------------------------
1 year 9.89% 4.63% 9.18% 4.18% 9.55% 6.05%
- -------------------------------------------------------------------------
5 years 37.64 31.16 32.90 30.90 35.44 31.03
Annual average 6.60 5.57 5.85 5.53 6.26 5.55
- -------------------------------------------------------------------------
10 years 136.54 125.30 118.77 118.77 127.07 119.68
Annual average 8.99 8.46 8.14 8.14 8.55 8.19
- -------------------------------------------------------------------------
Annual average,
life of fund 8.44 8.19 7.55 7.55 7.94 7.77
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/97
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- -------------------------------------------------------------------------
1 year 9.03% 2.15%
- -------------------------------------------------------------------------
5 years 41.44 14.08
Annual average 7.18 2.67
- -------------------------------------------------------------------------
10 years 131.87 40.17
Annual average 8.77 3.43
- -------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% for class A shares and 3.25% for class M shares.
One-, five-, and ten-year (when available) and life-of-fund returns for
class B shares reflect the applicable contingent deferred sales charges
(CDSC), which is 5% in the first year, declines to 1% in the sixth year,
and is eliminated thereafter. Returns shown for class B and class M shares
for periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the initial sales
charge or CDSC, if any, currently applicable to each class and, in the
case of class B and class M shares, the higher operating costs applicable
to such shares. All returns assume reinvestment of distributions at NAV
and represent past performance; they do not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
[GRAPHIC OMITTED: GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 9/30/87
Lehman Bros.
Municipal
Date/year Fund at POP Bond Index CPI
9/30/87 9525 10000 10000
9/30/88 11138 11298 10417
9/30/89 12243 12279 10869
9/30/90 12766 13114 11539
9/30/91 14543 14842 11930
9/30/92 16369 16393 12286
9/30/93 18706 18481 12617
9/30/94 17823 18034 12990
9/30/95 19353 20052 13320
9/30/96 20502 21263 13720
9/30/97 22530 23187 14017
Footnote reads:
Past performance is no assurance of future results. At the end
of the same time period, a $10,000 investment in the fund's class B
shares would have been valued at $21,877 and no contingent deferred
sales charges would apply; a $10,000 investment in the fund's
class M shares would have been valued at $22,707 ($21,968 at public
offering price). See first page of performance section for
performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/97
Class A Class B Class M
- -------------------------------------------------------------------------
Distributions (number) 12 12 12
- -------------------------------------------------------------------------
Income $0.484938 $0.426833 $0.459082
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Capital gains1 -- -- --
- -------------------------------------------------------------------------
Total $0. 484938 $0.426833 $0.459082
- -------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -------------------------------------------------------------------------
9/30/96 $8.76 $9.20 $8.76 $8.78 $9.07
- -------------------------------------------------------------------------
9/30/97 9.12 9.57 9.12 9.14 9.45
- -------------------------------------------------------------------------
Current return (end of period)
- -------------------------------------------------------------------------
Current dividend rate2 5.24% 4.99% 4.60% 4.94% 4.78%
- -------------------------------------------------------------------------
Taxable equivalent3 8.68 8.26 7.62 8.18 7.91
- -------------------------------------------------------------------------
Current 30-day SEC yield4 4.80 4.57 4.15 4.49 4.35
- -------------------------------------------------------------------------
Taxable equivalent3 7.95 7.57 6.87 7.43 7.20
- -------------------------------------------------------------------------
1 Capital gains, if any, 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.
TERMS AND DEFINITIONS
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.
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 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. Securities in the fund
do not match those in the indexes and performance of the fund will differ.
It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund *
International New Opportunities Fund
Investors Fund
New Opportunities Fund +
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund 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
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Total Return Fund
High Yield Trust +
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Overseas Growth Fund
+ Closed to new investors. Some exceptions may apply. Contact Putnam
for details.
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed
to maintain a price of $1.00 per share, although there is no
assurance that this price will be maintained in the future.
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.
Report of independent accountants
For the fiscal year ended September 30, 1997
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, 1997, and the related statement of operations for the year then
ended, the statements 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 plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of 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, 1997, 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, 1997, 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 11, 1997
Portfolio of investments owned
September 30, 1997
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
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 (101%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Alabama (0.9%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 8,500,000 Fairfield, Indl. Dev. Auth. Rev. Bonds (USX Corp.),
Ser. A, 6.7s, 12/1/24 Baa $ 9,148,125
10,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. TRAN,
7 7/8s, 5/1/19 BB/P 10,912,500
--------------
20,060,625
Arizona (1.2%)
- ------------------------------------------------------------------------------------------------------------
6,500,000 Apache Cnty., Ind. Dev. Auth. VRDN (Tucson Elec.),
Ser. 83A, 4.1s, 12/15/18 VMIG1 6,500,000
6,510,000 AZ State Muni. Fin. Program COP, Ser. 34,
7 1/4s, 8/1/09 Aaa 7,974,750
10,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 12,162,500
--------------
26,637,250
Arkansas (--%)
- ------------------------------------------------------------------------------------------------------------
950,000 U. of Arkansas VRDN (UAMS Campus), 3.5s, 12/1/19 VMIG1 950,000
California (8.0%)
- ------------------------------------------------------------------------------------------------------------
15,000,000 CA Edl. Fac. Auth. Rev Bonds (Stanford U.),
Ser. N, 5.2s, 12/1/27 Aaa 14,775,000
10,000,000 CA State G.O. Bonds, 6 1/2s, 2/1/08 A 11,525,000
10,890,000 Los Angeles Cnty., Dept. Wtr. & Elec. Pwr. Auth.
Rev. Bonds, Ser. A, 7 1/4s, 9/15/30 Aa 11,938,163
16,935,000 Los Angeles Cnty., Metro. Trans. Auth. Sales Tax
Rev. Bonds, Ser. A (2nd Ser.), AMBAC, 5s, 7/1/25 Aaa 16,067,081
12,070,000 Los Angeles Cnty., Pub. Wks. Rev. Bonds, Ser. A,
MBIA, 6s, 9/1/05 Aaa 13,307,175
18,900,000 Los Angeles Cnty., Sanitation Dist. Fin. Auth. Rev.
Bonds (Capital Projects), Ser. A, MBIA, 5s, 10/1/23 Aaa 17,836,875
7,000,000 Los Angeles, Regl. Arpt. Impt. Rev. Bonds
(United Airlines, Inc.), Ser. G, 8.8s, 11/15/21 Baa 7,918,750
20,300,000 Orange Cnty., Local Trans. Auth. Sales Tax Rev.
Bonds, FGIC, 6.1s, 2/14/11 Aaa 22,000,125
11,285,000 San Diego Cnty. COP (Inmate Reception
Ctr. & Cooling), MBIA, 6 3/4s, 8/1/19 Aaa 13,062,388
20,000,000 San Diego, Pub. Swr. Fac. Fin. Auth Rev. Bonds,
Ser. A, FGIC, 5 1/4s, 5/15/27 Aaa 19,525,000
17,690,000 San Jose, Redev. Agcy. Tax Alloc. Rev. Bonds
(Merged Area Redev.), MBIA, 5s, 8/1/20 Aaa 16,849,725
18,000,000 U. of CA Rev. Bonds (UCSD Med. Ctr.
Satellite Med. Fac.), 7.9s, 12/1/19 BBB/P 19,372,500
--------------
184,177,782
Colorado (5.6%)
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Arapahoe Cnty., Cap. Impt. Trust Fund
Hwy. Rev. Bonds
17,000,000 Ser. E-470, 7s, 8/31/26 Baa 20,145,000
5,000,000 Ser. E -470, 6.95s, 8/31/26 Baa 5,868,750
Denver, City & Cnty. Arpt. Rev. Bonds
5,000,000 (Airport & Marina Improvements), Ser. A,
MBIA, 8 3/4s, 11/15/23 Aaa 5,925,000
28,660,000 Ser. A, 8 3/4s, 11/15/23 Baa 33,711,325
10,340,000 Ser. A, 8 3/4s, 11/15/23 (Prerefunded) Baa 12,201,200
4,800,000 Ser. A, 8 1/2s, 11/15/23 Baa 5,406,000
455,000 Ser. A, 8 1/2s, 11/15/23 (Prerefunded) Baa 518,700
3,005,000 Ser. A, MBIA, 8 1/2s, 11/15/23 Aaa 3,433,213
11,090,000 Ser. A, 8s, 11/15/17 Baa 11,356,604
3,980,000 Ser. B, 7 1/4s, 11/15/23 Baa 4,427,750
1,020,000 Ser. B, 7 1/4s, 11/15/23 (Prerefunded) Baa 1,161,525
22,050,000 Ser. C, A, 7 1/4s, 11/15/25 AAA 25,329,938
--------------
129,485,005
Connecticut (0.7%)
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15,000,000 Mashantucket, Western Pequot Tribe
Rev. Bonds, Ser. A, 6.4s, 9/1/11 Baa 16,162,500
District of Columbia (3.8%)
- ------------------------------------------------------------------------------------------------------------
DC G.O. Bonds
39,250,000 Ser. A, 6 3/8s, 6/1/26 Ba 41,555,938
38,175,000 Ser. A, 6s, 6/1/26 Ba 39,081,656
7,000,000 DC, Georgetown U. IFB, 8.896s, 4/25/22 A 7,936,250
--------------
88,573,844
Florida (2.0%)
- ------------------------------------------------------------------------------------------------------------
18,500,000 Hernando Cnty. Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 # Aaa 24,489,375
16,375,000 Martin Cnty., Indl. Dev. Auth. Rev. Bonds (Indiantown
Co-generation), Ser. A, 7 7/8s, 12/15/25 Baa 18,872,188
2,200,000 Orange Cnty., Hsg. Fin. Auth. VRDN
(Sundown Assoc. II), Ser. B, 4.15s, 6/1/04 A 2,200,000
--------------
45,561,563
Georgia (5.0%)
- ------------------------------------------------------------------------------------------------------------
12,000,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds
(Briarcliff Park Apts.), Ser. A, 7 1/2s, 4/1/17 A 12,900,000
1,600,000 Fulton Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Holcombs Landing Apts), 4.2s, 8/1/26 A 1,600,000
16,700,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds
(Crossover Ser. Project One), AMBAC, 6.4s, 1/1/13 Aaa 19,038,000
10,000,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds, Ser. B,
FGIC, 8 1/4s, 1/1/11 Aaa 13,150,000
GA State G.O. Bonds
10,460,000 Ser. D, 6.8s, 8/1/11 Aaa 12,512,775
10,000,000 6 1/2s, 12/1/09 Aaa 11,662,500
15,840,000 Ser. A, 6 1/4s, 4/1/09 Aaa 18,018,000
21,790,000 Ser. B, 6 1/4s, 4/1/09 Aaa 24,786,125
1,500,000 Marietta, Hsg. Auth. Multi-Fam. VRDN
(Wood Pointe Apts.),4.2s, 10/1/07 A 1,500,000
--------------
115,167,400
Hawaii (1.0%)
- ------------------------------------------------------------------------------------------------------------
10,560,000 HI State G.O. Bonds, Ser. CO, FGIC, 6s, 3/1/08 Aaa 11,695,200
10,600,000 Honolulu, City & Cnty. G.O. Bonds, 5.45s, 9/11/08 Aa2 11,236,000
--------------
22,931,200
Illinois (1.9%)
- ------------------------------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
14,500,000 (American Airlines Inc.), 8.2s, 12/1/24 Baa 17,309,375
4,485,000 (United Air Lines, Inc.), Ser. C, 8.2s, 5/1/18 Baa 4,826,981
5,230,000 IL Dev. Fin. Auth. Rev. Bonds (Community Rehab.
Providers Fac.), 8 3/4s, 7/1/11 BB/P 5,870,675
8,000,000 IL Dev. Fom. Auth. IFB (St. Luke's Med. Ctr.),
MBIA, 9.645s, 10/1/24 Aaa 9,550,000
2,000,000 IL Hlth. Fac. Auth. IFB (Methodist Hlth.), AMBAC,
9.588s, 5/1/21 Aaa 2,370,000
3,200,000 IL Hsg. Dev. Auth. IFB, 9.882s, 2/1/20
(acquired 4/8/92, cost $3,354,527) [DBL. DAGGER] Aa 3,608,000
--------------
43,535,031
Indiana (0.4%)
- ------------------------------------------------------------------------------------------------------------
9,000,000 IN Muni. Pwr. Agcy. Rev. Bonds, Ser. B, MBIA,
5 1/2s, 1/1/16 Aaa 9,247,500
Kansas (1.4%)
- ------------------------------------------------------------------------------------------------------------
18,200,000 Burlington, Poll. Control IFB (KS Gas & Elec.),
Ser. 91-4, MBIA, 9.72s, 6/1/31(acquired
various dates from 6/20/91 to 2/14/94
cost $19,756,448) [DBL. DAGGER] Aaa 21,908,250
9,790,000 Kansas City, Util. Syst. Rev. Bonds, FGIC,
6 1/4s, 9/1/14 Aaa 10,683,338
--------------
32,591,588
Kentucky (1.2%)
- ------------------------------------------------------------------------------------------------------------
11,065,000 Boone Cnty. Poll. Control Rev. Bonds (Dayton Pwr. &
Lt. Co.), Ser. A, 6 1/2s, 11/15/22 Aa 12,047,019
10,200,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst.),
MBIA, 6.172s, 10/23/14 Aaa 10,901,250
5,900,000 Mason Cnty., Poll. Control VRDN
4.1s, 10/15/14 AA 5,900,000
--------------
28,848,269
Louisiana (2.2%)
- ------------------------------------------------------------------------------------------------------------
7,000,000 De Soto Parish, Poll. Control Rev. Bonds
(Southwestern Elec. Pwr. Co.), 7.6s, 1/1/19 Aa 8,050,000
21,000,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline Co.), 7 3/4s, 8/15/22 Baa 23,992,500
W. Feliciana Parish Poll. Control Rev. Bonds
(Gulf States Utils. Co.)
8,000,000 8s, 12/1/24 Ba 8,600,000
8,565,000 Ser. III, 7.7s, 12/1/14 Ba 9,582,094
--------------
50,224,594
Maine (0.5%)
- ------------------------------------------------------------------------------------------------------------
11,935,000 Bucksport Solid Waste Disp. Rev. Bonds
(Champion Intl. Corp.), 6 1/4s, 5/1/10 Baa 12,516,831
Massachusetts (9.1%)
- ------------------------------------------------------------------------------------------------------------
15,850,000 Boston, Rev. Bonds (Boston City Hosp.), Ser. A,
FHA Insd., 7 5/8s, 2/15/21 AAA 17,633,125
10,000,000 MA Bay Trans. Auth. Rev. Bonds, Ser. B, 7 7/8s, 3/1/21 Aaa 11,337,500
9,800,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst. Rev. Bonds,
MBIA, 6 1/2s, 7/1/05 Aaa 10,927,000
5,020,000 MA State Cons. Loan G.O. Bonds, Ser. C,
7 1/2s, 12/1/07 AAA 5,616,125
MA State Tpk. Auth. Rev. Bonds, Ser. A
15,700,000 MBIA, 5 1/8s, 1/1/23 Aaa 15,052,375
10,000,000 MBIA, 5s, 1/1/37 Aaa 9,225,000
MA State G.O. Bonds, Ser. A
23,190,000 6s, 11/1/11 A 25,509,000
7,800,000 AMBAC, 5 3/4s, 8/1/09 Aaa 8,472,750
7,000,000 MA State Hlth. & Edl. Fac. Auth. , AMBAC,
6.55s, 6/23/22 Aaa 7,691,250
MA State Hlth. & Edl. Fac. Auth. IFB
11,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.57s, 8/15/21 Aaa 12,911,250
18,000,000 (Boston U.), Ser. L, MBIA, 9.142s, 10/1/31 Aaa 21,307,500
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
8,000,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 Baa 8,700,000
5,370,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 AAA 6,014,400
6,015,000 MA State Hsg. Fin. Agcy. Hsg. Dev. Rev. Bonds,
Ser. A,, 9s, 12/1/18 BBB 6,152,443
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
4,500,000 (Southeastern MA), Ser. B, 9 1/4s, 7/1/15 BB-/P 5,124,375
7,000,000 (Southeastern MA), Ser. A, 9s, 7/1/15 BB-/P 7,945,000
5,000,000 MA State Indl. Fin. Agcy. Rev. Bonds
(Harvard Cmnty. Hlth.), Ser. B, 8 1/8s, 10/1/17 A 5,289,650
MA State Port Auth. Rev. Bonds
7,000,000 Ser. A, FGIC, 7 1/2s, 7/1/20 Aaa 7,621,250
5,700,000 Stepped-coupon zero % (13s, 1/1/04), 7/1/2013 ++ Aaa 5,415,000
MA State, G.O. Bonds, Ser. C
5,285,000 FGIC, 5 3/4s, 8/1/11 Aaa 5,707,800
5,425,000 AMBAC, 5 3/4s, 8/1/10 Aaa 5,892,906
--------------
209,545,699
Michigan (2.3%)
- ------------------------------------------------------------------------------------------------------------
7,000,000 Detroit, G.O. Bonds, Ser. B, AMBAC, 6 1/4s, 4/1/08 Aaa 7,717,500
11,355,000 Greater Detroit, Res. Recvy. Auth. Rev. Bonds,
Ser. A, 6 1/4s, 12/13/08 Aaa 12,902,119
13,845,000 MI State Hosp. Fin. Auth. Rev. Bonds (Sinai Hosp.),
6.7s, 1/1/26 Baa 14,866,069
10,000,000 MI State Stragetic Fund Solid Waste Disp. Rev.
Bonds (SD Warren Co.), Ser. C, 7 3/8s, 1/15/22 BB-/P 10,925,000
6,745,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/13 Baa 6,753,431
--------------
53,164,119
Minnesota (0.7%)
- ------------------------------------------------------------------------------------------------------------
15,750,000 MN State Hsg. Fin. Agcy. Single Fam. Rev. Bonds,
Ser. E, 6.85s, 1/1/24 Aa 16,852,500
Missouri (0.7%)
- ------------------------------------------------------------------------------------------------------------
14,400,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds
(BJC Hlth. Syst.), Ser. A, 6 1/2s, 5/15/20 Aa 16,074,000
Montana (0.7%)
- ------------------------------------------------------------------------------------------------------------
14,000,000 MT State Hlth. Fac. Auth. Hosp. (Deaconess Med. Ctr.),
Ser. B, AMBAC, 9.296s, 3/8/16 Aaa 16,082,500
Nebraska (1.1%)
- ------------------------------------------------------------------------------------------------------------
9,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA,
9.203s, 12/8/16 Aaa 10,698,750
NE Investment Fin. Auth. Single Fam. Mtge. IFB
3,900,000 GNMA Coll., 9.159s, 9/15/24 Aaa 4,387,500
9,100,000 Ser. B, GNMA Coll., 9.751s, 9/15/23 Aaa 9,975,875
--------------
25,062,125
New Hampshire (0.6%)
- ------------------------------------------------------------------------------------------------------------
10,500,000 NH State Tpk. Sys. IFB, FGIC, 9.632s, 11/1/17 Aaa 13,571,250
New Jersey (2.4%)
- ------------------------------------------------------------------------------------------------------------
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(Raritan Bay Med. Ctr.)
13,500,000 7 1/4s, 7/1/27 BB/P 14,512,500
6,800,000 7 1/4s, 7/1/14 BB/P 7,352,500
19,755,000 NJ State G.O. Bonds, Ser. E 6s, 7/15/05 Aa 21,779,888
10,000,000 NJ State Trans. Trust Fund Auth. Rev. Bonds
(Trans. Syst.), Ser. B, MBIA, 6 1/2s, 6/15/10 Aaa 11,700,000
--------------
55,344,888
New York (18.0%)
- ------------------------------------------------------------------------------------------------------------
Metropolitan Trans. Auth. Rev. Bonds
11,125,000 Ser. A, MBIA, 5 1/4s, 4/1/26 Aaa 10,805,156
7,900,000 Ser. A, MBIA, 5 1/4s, 4/1/21 Aaa 7,742,000
1,600,000 Monroe Cnty., Indl. Dev. Auth. VRDN (Canal Ponds),
Ser. D, 3.4s, 6/15/16 A 1,600,000
11,000,000 Muni. Assistance Corp. Rev. Bonds, Ser. G,
5 1/2s, 7/1/04 Aa 11,660,000
7,500,000 NY & NJ Port Auth. Special Oblig. Rev. Bonds,
6s, 12/1/05 Aaa 8,165,625
NY City, G.O. Bonds
4,600,000 Ser. F, 8.4s, 11/15/07 Aaa 5,387,750
4,855,000 Ser. F, 8.4s, 11/15/06 Aaa 5,686,419
4,635,000 Ser. F, 8.4s, 11/15/05 Aaa 5,428,744
9,800,000 Ser. D, 8 1/4s, 8/1/11 Aaa 11,331,250
29,335,000 Ser. D, (Group B), 8 1/4s, 8/1/12 Aaa 33,918,594
15,000,000 Ser. L, 8s, 8/1/03 Baa 17,512,500
20,000,000 Ser. B, 7 1/2s, 2/1/02 Baa 22,225,000
13,235,000 Ser. B, MBIA, 6 1/2s, 8/15/10 Aaa 15,253,338
6,765,000 Ser. D, MBIA, 6 1/2s, 11/1/09 Aaa 7,779,750
10,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds (Visy Paper, Inc.),
7.95s, 1/1/28 BB-/P 11,412,500
NY City, Indl. Dev. Agcy. Special Fac. Rev. Bonds
(American Airlines, Inc.)
5,675,000 8s, 7/1/20 Baa 5,987,125
15,000,000 6.9s, 8/1/24 Baa 16,612,500
1,500,000 NY City, Indl. Dev. Agcy. VRDN (Stroheim &
Romann, Inc.), 3.95s, 12/1/15 Aa 1,500,000
NY City, Muni. Assistance Corp. Rev. Bonds
13,020,000 Ser. I, 6 1/4s, 7/1/07 Aa 14,680,050
14,795,000 Ser. I, 6 1/4s, 7/1/06 Aa 16,588,894
10,000,000 Ser. J, 5 3/4s, 7/1/03 Aa 10,675,000
12,500,000 Ser. J, 5 1/2s, 7/1/02 Aa 13,125,000
14,890,000 Ser. L, 6s, 7/1/05 Aa 16,323,163
NY State Dorm. Auth. Rev. Bonds
13,100,000 (State U. Edl. Fac.), Ser. A, 7.7s, 5/15/12 Aaa 14,524,625
10,900,000 (Construction City U. Syst.), Ser. A, 6s, 7/1/20 Baa 11,567,625
12,485,000 (Construction City U. Syst.), Ser. A, 5 3/4s, 7/1/18 Baa 13,140,463
23,100,000 (State U. Edl. Fac.), Ser. A, 5 1/2s, 5/15/19 Baa 23,186,625
8,400,000 (State U. Edl. Fac.), Ser. A, 5 1/4s, 5/15/15 A 8,368,500
4,400,000 NY State Env. Fac. Corp. Poll. Control Rev. Bonds
(State Wtr. Revolving Fund), Ser. A, 7 1/2s, 6/15/12 Aa 4,829,000
NY State Local Govt. Assistance Corp. Rev. Bonds
10,000,000 Ser. C, 7s, 4/1/21 Aaa 11,087,500
11,585,000 Ser. A, 7s, 4/1/16 Aaa 12,844,869
3,000,000 NY State Local Assistance Corp. Rev. Bonds,
Ser. A, VRDN, 3.95s, 4/1/22 VMIG1 3,000,000
NY State Med. Care Fac. Fin. Agcy. Rev. Bonds
8,865,000 (Hosp. & Nursing Home Insd. Mtge.), Ser. A,
FHA Insd., 8s, 2/15/27 Aa 9,064,463
3,670,000 (Mental Hlth. Svcs. Fac.), Ser. A, 7.7s, 2/15/18 Aaa 3,795,000
3,230,000 (Mental Hlth. Svcs. Fac.), Ser. A, 7.7s, 2/15/18 A 3,334,038
2,480,000 (Mental Hlth. Svc. Fac.), Ser. B, 7 5/8s, 8/15/17 A 2,765,200
5,450,000 (Mental Hlth. Svc. Fac.), Ser. B, Prerefunded,
7 5/8s, 8/15/17 BBB 6,199,375
10,000,000 NY State Thruway Auth. Rev. Bonds, 6s, 4/1/12 Baa 10,662,500
6,500,000 Triborough Bridge & Tunnel Auth. Special
Obligation VRDN, FGIC, 4.05s, 1/1/24 VMIG1 6,500,000
--------------
416,270,141
North Carolina (5.0%)
- ------------------------------------------------------------------------------------------------------------
19,700,000 NC Eastern Muni. Pwr. Agcy. Svcs. IFB, FGIC,
7.7s, 1/1/25 (acquired various dates from
12/28/93 to 4/12/95, cost $23,486,208) [DBL. DAGGER] Aaa 23,443,000
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
3,155,000 Ser. A, 8s, 1/1/21 Aaa 3,249,808
11,680,000 Ser. C MBIA, 7s, 1/1/13 AAA 14,059,800
10,000,000 AMBAC, 6s, 1/1/18 Aaa 10,950,000
NC Muni. Pwr. Agcy. Rev. Bonds (#1 Catawba Elec.)
11,995,000 MBIA, 5 1/4s, 1/1/06 Aaa 12,534,775
41,000,000 AMBAC, 8s, 1/1/06 Aaa 50,481,250
--------------
114,718,633
Ohio (2.6%)
- ------------------------------------------------------------------------------------------------------------
1,565,448 Lake Cnty. Indl. Dev. Rev. Bonds (Madison Inn
Ctr.), FHA Insd., 12s, 5/1/14 BBB/P 1,676,987
78,585,000 Lucas Plaza, Hsg. Dev. Corp. Mtge. Rev. Bonds,
zero %, FHA Insd., 6/1/24 Aaa 17,976,319
8,655,000 Mount Vernon, Hosp. Rev. Bonds (Knox Cmnty. Hosp.),
7 7/8s, 6/1/12 BBB+/P 8,883,752
OH Hsg. Fin. Agcy. Single Fam. Mtge. IFB
5,273,000 Ser. A-2, GNMA Coll., 9.679s, 3/24/31 Aaa 5,991,446
14,225,000 GNMA Coll., 7.8s, 3/1/30 AAA 15,114,063
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
7,775,000 Ser. 4, GNMA Coll., 9s, 9/1/01 AAA/P 3,868,063
7,775,000 GNMA Coll. stepped-coupon zero %
(9s, 9/1/01), 9/1/18 ++ AAA/P 6,356,063
--------------
59,866,693
Oklahoma (0.5%)
- ------------------------------------------------------------------------------------------------------------
500,000 Cushing, Correctional Fac. VRDN, 4.15s, 11/1/17 Aa 500,000
9,160,000 Tulsa Muni. Arpt. Trust Rev. Bonds (American
Airlines, Inc.), 7 3/8s, 12/1/20 Baa 9,950,050
--------------
10,450,050
Pennsylvania (2.8%)
- ------------------------------------------------------------------------------------------------------------
8,150,000 Allegheny Cnty., Arpt. Rev. Bonds (Pittsburgh
Intl. Arpt.), Ser. A, MBIA, 5 3/4s, 1/1/11 Aaa 8,679,750
5,750,000 Beaver Cnty., Indl. Dev. Auth. Poll. Control Rev.
Bonds (Ohio Edison), Ser. A, 7 3/4s, 9/1/24 Baa 6,095,000
8,360,000 Clearfield Hosp. Auth. Rev. Bonds (Clearfield Hosp.),
6 7/8s, 6/1/16 BBB 8,913,850
PA Econ. Dev. Fin. Auth. Res. Recvy. Rev. Bonds
(Clover), Ser. D
10,000,000 7 1/8s, 12/1/15 BBB 10,925,000
6,000,000 7.15s, 12/1/18 BBB 6,547,500
12,700,000 (Northampton Generating), Ser. A, 6.4s, 1/1/09 BB+/P 13,112,750
10,000,000 Philadelphia, Hosp. & Higher Edl. Fac. Auth.
Rev. Bonds (Graduate Hlth. Syst.), 7 1/4s, 7/1/10 Baa 10,887,500
--------------
65,161,350
Puerto Rico (1.4%)
- ------------------------------------------------------------------------------------------------------------
6,700,000 PR, Hwy. & Trans. Auth. Rev. Bonds, MBIA,
6 1/4s, 7/1/12 Aaa 7,679,875
23,355,000 Cmnwlth of PR Pub. Bldg. Auth. Gtd. Ed. & Hlth.
Fac. Rev. Bonds, Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 25,544,531
--------------
33,224,406
Rhode Island (0.7%)
- ------------------------------------------------------------------------------------------------------------
16,685,000 RI State Health & Edl. Bldg. Corp. Rev. Bonds
(Lifespan Oblig. Group), MBIA, 5 1/4s, 5/15/26 Aaa 16,288,731
South Carolina (0.9%)
- ------------------------------------------------------------------------------------------------------------
5,675,000 Florence Cnty. Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 BB+/P 6,036,781
13,500,000 Spartanburg Cnty. Hosp. Fac. IFB, FSA, 6.416s, 4/13/22 Aaa 14,765,625
--------------
20,802,406
Tennessee (0.9%)
- ------------------------------------------------------------------------------------------------------------
78,729,086 Metro. Nashville & Davidson Cnty. Hlth. & Ed. Fac.
Board Rev. Bonds (Volunteer Hlth. Care),
zero %, 6/1/21 Aaa 21,256,853
Texas (8.8%)
- ------------------------------------------------------------------------------------------------------------
31,000,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa 33,751,250
15,000,000 Dallas Cnty., G.O. Bonds (Flood Control Dist. #1),
stepped-coupon zero % (8.5s, 10/1/99), 4/1/16 ++ BB+/P 15,487,500
30,000,000 Dallas, Wtr. & Swr. Rev. Bonds, Ser. S, 7 3/4s, 4/1/03 Aa 34,912,500
3,000,000 El Paso, Indl. Dev. Auth. VRDN (Camden Wire),
4.3s, 3/1/16 VMIG1 3,000,000
25,250,000 Gulf Coast, Waste Disposal Auth. Rev. Bonds
(Champion Intl. Corp.), 7.45s, 5/1/26 Baa 27,775,000
11,000,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds
(Memorial Hlth. Syst.of East TX), 6 7/8s, 2/15/26 BBB 11,852,500
2,025,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
Med. Ctr.), 8.85s, 8/15/14 A-/P 2,217,375
20,000,000 North Central Hlth. Fac. Dev. Corp. IFB
(Baylor U. Med. Ctr.), Ser. A, 7.766s, 5/15/16 Aa 24,250,000
6,500,000 TX State Indl. Dev. Corp. Rev. Bonds
(Arco Pipeline Co.), 7 3/8s, 10/1/20 A 8,344,375
TX State Dept. of Hsg. & Cmnty. Affairs
Home Mtge. IFB
2,400,000 Ser. A-2, GNMA Coll., 9.622s, 7/18/23 AAA 2,472,000
5,000,000 Ser. B-2, GNMA Coll., 9.622s, 7/18/23 AAA 5,550,000
9,500,000 TX State (Nat'l. Research Lab. Communication
Superconductor), G.O. Bonds 7 1/8s, 4/1/20 Aaa 10,355,000
20,800,000 TX State, Spl. Linked G.O. Bonds, Ser. B,
6.058s, 9/30/11 VMIG1 23,530,000
--------------
203,497,500
Utah (1.2%)
- ------------------------------------------------------------------------------------------------------------
18,565,000 Intermountain Pwr. Agcy. (UT State Pwr. Supply)
Rev. Bonds, Ser. B, MBIA, 6 1/2s, 7/1/09 Aaa 21,488,988
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC Hosps. Inc.),
Ser. A, 8 1/8s, 5/15/15 AAA 6,156,250
--------------
27,645,238
Vermont (0.4%)
- ------------------------------------------------------------------------------------------------------------
7,600,000 VT Edl. & Hlth. Bldgs. Fin. Agcy. Rev. Bonds
(Hosp. Med. Ctr.), FGIC, 6 1/4s, 9/1/19 Aaa 8,160,500
Virginia (3.1%)
- ------------------------------------------------------------------------------------------------------------
21,000,000 Henrico Cnty., Indl. Dev. Auth. Rev. Bonds
(Bon Secours Hlth. Syst.), FSA, 5.929s, 8/23/27 Aaa 22,811,250
7,000,000 Henrico Cnty., Indl. Dev. Auth. VRDN, 3.95s, 5/1/24 VMIG1 7,000,000
5,000,000 Norfolk, Cnth., Wtr. Rev. Bonds, MBIA, 5.9s, 11/1/25 Aaa 5,181,250
30,000,000 Winchester, Indl. Dev. Auth. IFB (Winchester
Med. Ctr.), AMBAC, 9.045s, 1/1/14 AAA 36,712,500
--------------
71,705,000
Washington (1.0%)
- ------------------------------------------------------------------------------------------------------------
5,200,000 Port of Moses Lake, Pub. Corp. Poll. Control
Rev. Bonds (Union Carbide Corp.), 7 1/2s, 8/1/04 Baa 5,249,036
WA State Hlth. Care Fac. Auth. Rev. Bonds
(Hutchinson Cancer Ctr.) Ser. D
8,400,000 7 3/8s, 1/1/18 Aa 8,935,500
7,700,000 7.3s, 1/1/12 Aa 8,171,625
--------------
22,356,161
Wisconsin (0.3%)
- ------------------------------------------------------------------------------------------------------------
6,380,000 WI Hsg. & Econ. Dev. Auth. IFB (Home
Ownership Dev.), 9.895s, 10/25/22 Aa 7,113,691
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,152,472,795) *** 2,330,885,416
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,308,575,644.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings
available at September 30, 1997, 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, 1997. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the Report of independent accountants.
*** The aggregate identified cost on a tax basis is $2,152,524,229, resulting in gross unrealized
appreciation and depreciation of $180,732,204 and $2,371,017, respectively, or net unrealized
appreciation of $178,361,187.
++ The interest rate and date shown parenthetically represent the new interest rate to be paid and
the date the fund will begin receiving interest at this rate.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value
of restricted securities held at September 30, 1997 was $48,959,250 or 2.1% of
net assets.
# A portion of this security was pledged and segregated with the custodian to cover margin
requirements for futures contracts at September 30, 1997.
The rates shown on IFB, which are securities paying interest rates that vary inversely to changes
in the market interest rates, and VRDN's are the current interest rates at September 30, 1997.
The fund had the following industry group concentrations greater than 10% at September 30, 1997
(as a percentage of net assets):
Hospitals/Health Care 14.8%
Transportation 14.3
Utilities 13.3
The fund had the following insurance concentration greater than
10% at September 30, 1997 (as a percentage of net assets):
MBIA 14.6%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1997
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury Bonds
Futures (short) $153,554,625 $150,287,781 Dec-97 $(3,266,844)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,152,472,795) (Note 1) $2,330,885,416
- ---------------------------------------------------------------------------------------------------
Cash 3,495,911
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 36,443,064
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 681,017
- ---------------------------------------------------------------------------------------------------
Receivable for variation margin 457,875
- ---------------------------------------------------------------------------------------------------
Total assets 2,371,963,283
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 4,864,984
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 32,918,791
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 21,223,340
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,797,145
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 219,695
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 40,191
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,269
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,231,562
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 86,662
- ---------------------------------------------------------------------------------------------------
Total liabilities 63,387,639
- ---------------------------------------------------------------------------------------------------
Net assets $2,308,575,644
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,169,152,868
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,197,087
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (36,920,088)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 175,145,777
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $2,308,575,644
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($2,054,537,174 divided by 225,313,784 shares) $9.12
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.12)* $9.57
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($245,758,656 divided by 26,957,682 shares)*** $9.12
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($8,279,814 divided by 906,006 shares) $9.14
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.14)** $9.45
- ---------------------------------------------------------------------------------------------------
* On single retail redemption less than $25,000. On sale of $25,000 or more and on group
sales the offering price is reduced.
** On single retail redemption less than $50,000. On sale 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.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended September 30, 1997
<S> <C>
Tax exempt interest income: $143,688,607
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 11,094,948
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,888,774
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 71,894
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 21,368
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 4,161,720
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,101,939
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 34,027
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 4,362
- --------------------------------------------------------------------------------------------------
Reports to shareholders 62,366
- --------------------------------------------------------------------------------------------------
Auditing 74,756
- --------------------------------------------------------------------------------------------------
Legal 103,994
- --------------------------------------------------------------------------------------------------
Postage 161,788
- --------------------------------------------------------------------------------------------------
Other 109,550
- --------------------------------------------------------------------------------------------------
Total expenses 19,891,486
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (673,390)
- --------------------------------------------------------------------------------------------------
Net expenses 19,218,096
- --------------------------------------------------------------------------------------------------
Net investment income 124,470,511
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 25,534,159
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 620,510
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 68,453,413
- --------------------------------------------------------------------------------------------------
Net gain on investments 94,608,082
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 219,078,593
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
----------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 124,470,511 $134,910,742
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 26,154,669 37,140,092
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 68,453,413 (24,181,648)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 219,078,593 147,869,186
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (113,245,307) (121,847,440)
- ----------------------------------------------------------------------------------------------------------------------
Class B (11,842,967) (12,271,580)
- ----------------------------------------------------------------------------------------------------------------------
Class M (348,827) (203,144)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (159,470,685) (125,723,510)
- ----------------------------------------------------------------------------------------------------------------------
Total decrease in net assets (65,829,193) (112,176,488)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 2,374,404,837 2,486,581,325
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $1,197,087 and $1,781,474, respectively) $2,308,575,644 $2,374,404,837
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.76 $8.74 $8.55 $9.66 $9.11
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .48 .49 .52 .53 .57
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .36 .02 .19 (.97) .67
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .84 .51 .71 (.44) 1.24
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.48) (.49) (.52) (.54) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.07) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- (.06) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.49) (.52) (.67) (.69)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.12 $8.76 $8.74 $8.55 $9.66
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.89 5.94 8.58 (4.72) 14.27
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,054,537 $2,117,684 $2,237,837 $2,232,611 $2,425,661
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .78 .78 .78 .77 .74
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.40 5.58 6.03 5.97 6.81
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 52.33 92.99 68.23 59.27 43.77
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestments and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended September 30, 1995 and thereafter
includes amounts paid through expense offset arrangements with PFTC and brokerage service
arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Jan. 4, 1993+
operating performance Year ended September 30 to Sep. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.76 $8.73 $8.53 $9.66 $9.02
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .43 .46 .47 .34
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .36 .03 .20 (.98) .64
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .79 .46 .66 (.51) .98
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.43) (.46) (.49) (.34)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.07) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- (.06) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.43) (.46) (.62) (.34)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.12 $8.76 $8.73 $8.53 $9.66
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.18 5.38 8.01 (5.51) 11.10*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $245,759 $250,990 $246,407 $213,679 $137,323
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.43 1.43 1.43 1.41 1.04*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.75 4.92 5.34 5.31 3.66*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 52.33 92.99 68.23 59.27 43.77
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestments and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended September 30, 1995 and thereafter
includes amounts paid through expense offset arrangements with PFTC and brokerage service
arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Feb. 16, 1995+
operating performance Year ended September 30 to Sep. 30
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.78 $8.75 $8.61
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45 .46 .31
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .37 .03 .13
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .82 .49 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.46) (.46) (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.46) (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.14 $8.78 $8.75
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.55 5.72 5.23*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $8,280 $5,732 $2,337
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.08 1.06 .67*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.07 5.26 3.04*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 52.33 92.99 68.23
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestments and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended September 30, 1995 and thereafter
includes amounts paid through expense offset arrangements with PFTC and brokerage service
arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
September 30, 1997
Note 1
Significant accounting policies
Putnam Tax Exempt Income Fund (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 Putnam Investment Management, Inc.
("Putnam Management"), the fund's manager, a wholly-owned subsidiary of Putnam
Investments, Inc. 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
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) Line of Credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage of at least 300% and borrowings must not
exceed prospectus limitations. For the period ended September 30, 1997, the
fund had no borrowings against this line of credit.
E) 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, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At September 30, 1997, the fund had a capital loss carryover of approximately
$11,195,000 available to offset future capital gains, if any. The amount of
the carryover and expiration dates are:
Loss Carryover Expiration
- ----------------------------------------------
$7,128,000 September 30, 2003
4,067,000 September 30, 2004
F) 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 at least 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 temporary and permanent
differences of market discount, and realized gain and losses on certain future
contracts. 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, 1997, the fund reclassified $382,203 to increase undistributed net
investment income and $1,768,134 to increase paid-in-capital, with an increase
to accumulated net realized losses of $2,150,337. The calculation of net
investment income per share in the financial highlights table excludes these
adjustments.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase 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.
Discounts on zero coupon bonds, original issue discount and stepped-coupon
bonds are accreted according to the effective yield method.
H) Unamortized organization expenses Expenses incurred by the fund in
connection with its class B shares organization aggregated $34,737. These
expenses have been fully amortized over a five-year period as of September
30, 1997.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management 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 the next $5 billion, 0.375% of the next $5 billion,
0.355% of the next $5 billion, 0.34% of the next $5 billion, and 0.33% of any
amount thereafter. Prior to January 20, 1997, any amount over $1.5 billion was
based on 0.40%.
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.
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 year ended September 30, 1997, fund expenses were reduced by $673,390
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 a portion of
the assets utilized in connection with the expense offset arrangements in an
income producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $1,788 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 additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral 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 certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
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 currently limit payment by the fund to 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $119,320 and $2,038 from the sale of
class A and class M shares, respectively and $587,252 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, 1997, Putnam Mutual Funds Corp., acting as underwriter
received $6,660 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 1997, purchases and sales of investment
securities other than short-term investments aggregated $1,163,816,924 and
$1,205,758,759, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Capital shares
At September 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
September 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 95,011,917 $844,210,014
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,165,921 64,012,566
- ------------------------------------------------------------
102,177,838 908,222,580
Shares
repurchased (118,475,572) (1,054,864,364)
- ------------------------------------------------------------
Net decrease (16,297,734) $(146,641,784)
- ------------------------------------------------------------
Year ended
September 30, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 151,334,010 $1,335,594,408
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,830,370 69,225,300
- ------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam Intermediate
Tax Exempt Fund 4,415,668 38,151,371
- ------------------------------------------------------------
163,580,048 1,442,971,079
Shares
repurchased (178,136,572) (1,575,678,966)
- ------------------------------------------------------------
Net decrease (14,556,524) $(132,707,887)
- ------------------------------------------------------------
Year ended
September 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 8,110,616 $72,116,207
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 829,536 7,408,717
- ------------------------------------------------------------
8,940,152 79,524,924
Shares
repurchased (10,625,717) (94,628,696)
- ------------------------------------------------------------
Net decrease (1,685,565) $(15,103,772)
- ------------------------------------------------------------
Year ended
September 30, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 14,815,330 $130,495,282
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 881,235 7,784,707
- ------------------------------------------------------------
Shares issued in
connection with
the merger of
Putnam Intermediate
Tax Exempt Fund 729,932 6,306,616
- ------------------------------------------------------------
16,426,497 144,586,605
Shares
repurchased (16,001,570) (141,006,365)
- ------------------------------------------------------------
Net increase 424,927 $3,580,240
- ------------------------------------------------------------
Year ended
September 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 379,917 $3,399,547
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 29,348 262,886
- ------------------------------------------------------------
409,265 3,662,433
Shares
repurchased (155,806) (1,387,562)
- ------------------------------------------------------------
Net increase 253,459 2,274,871
- ------------------------------------------------------------
Year ended
September 30, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 561,785 4,957,876
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 16,450 144,865
- ------------------------------------------------------------
578,235 5,102,741
Shares
repurchased (192,893) (1,698,604)
- ------------------------------------------------------------
Net increase 385,342 3,404,137
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99% 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 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
William H. Reeves
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. You can also learn more at Putnam
Investments' website: http://www.putnaminv.com.
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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
AN041-36846 11/97
