Putnam
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "[T]here is one type of staid, secure bond fund that has been overlooked
amid the global scramble for safety, and that is now emerging as the best
bargain in the bond market: municipal-bond funds."
-- The Wall Street Journal, October 5, 1998
* "Tax-free securities are in the midst of a renaissance.
Higher-than-expected tax revenues, largely the result of a strong economy,
and the healthy pace of credit upgrades at the state and city level are
fostering greater confidence in the nation's municipal bond market."
-- David Hamlin, manager
Putnam Tax Exempt Income Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
22 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Thanks in part to the rush of foreign investors to the safety of the U.S.
bond market, yields on long-term municipal bonds have moved remarkably
close to yields on taxable 30-year Treasury bonds. The increased demand
for tax-exempt bonds fed by this unusual environment has not been matched
by new supply; most issuers have already refinanced outstanding bonds at
lower rates and the flow of refundings has fallen off markedly.
One of the greatest challenges for Putnam Tax Exempt Income Fund's
management has thus become that of finding securities that meet Putnam's
strict selection criteria. You will find details of this and other aspects
of the fund's fiscal 1998 performance in the following report.
I am pleased to introduce David E. Hamlin as your fund's new manager.
David was appointed just before the close of the fiscal year, joining
Putnam from the Vanguard Group, where he had been a principal since 1986.
He has 16 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
November 18, 1998
Report from the Fund Manager
David E. Hamlin
With so much uncertainty in the world's financial markets, municipal bonds
are providing a welcome retreat from the day-to-day volatility in stocks
and taxable bonds. Putnam Tax Exempt Income Fund's performance
demonstrates this relative safety, with class A shares delivering a total
return of 7.22% at net asset value (2.17% at public offering price) for
the 12 months ended September 30, 1998. The fund's focus on intermediate
bonds and its barbelled credit structure helped boost returns. Performance
for other shares and over longer periods is detailed beginning on page 8.
* MUNICIPAL MARKET OVERVIEW
Throughout the dramatic market shifts of August and September 1998, the
municipal market has stood its ground and even rallied slightly. Treasury
yields fell more dramatically than municipal bonds over the past 12
months, bringing yields on taxable and tax-free securities remarkably
close. On September 30, 1998, the yields on the Lehman Brothers Treasury
Bond Index and the Bond Buyer Municipal Bond Index were 5.08% and 5.04%,
respectively. Factoring in the tax advantages of municipal bonds, the
tax-free yield translates to an after-tax yield of 7.00%, assuming the top
39.6% federal income tax rate.
The unusual market volatility was set off by an unprecedented string of
international events: the unabated financial chaos in the Pacific Rim,
currency devaluations and defaults in Russia, and most recently, plunging
stock markets in Latin America. As foreign investors panicked about
plummeting stock markets, they began a flight to quality, selling hedge
funds and emerging-markets funds in favor of the safety of U.S. Treasury
bonds. This buying drove up the prices of Treasuries and pushed down their
yields. Since foreign investors do not benefit from the tax advantages of
municipal bonds, prices in this market did not rise as much as Treasuries.
However, municipal yields remain quite high relative to Treasuries, making
them an exceptional investment choice for U.S. investors.
In addition, the supply of municipal bonds has moderated. Normally, when
interest rates fall, refundings boost the bond supply. But rates have been
low for some time, most issuers have already completed their refundings,
and the supply of new issues has slowed down. In addition, with Treasury
rates close to municipal bond rates, refinancings have become less
attractive for municipalities.
* INTERMEDIATE FOCUS AND CREDIT BARBELL PROVE ADVANTAGEOUS
Throughout the year, we found the greatest value to be in the intermediate
part of the yield curve, that is, bonds with maturities ranging from 8 to
15 years. Intermediate bonds have benefited from the steepening yield
curve, which is the result of falling interest rates on short-term
securities. The Federal Reserve Board's recent adjustments to the federal
funds rate have pushed rates even lower. Over the period, intermediate
bonds offered more attractive income and greater price stability than
would have been obtained from a combination of shorter- and
longer-maturity bonds.
With regard to credit quality, the fund employed a barbell structure,
concentrating holdings at both the higher-quality and higher-yielding ends
of the municipal market. Our goal is to tap the volatility-dampening
effects of certain issues while simultaneously taking advantage of the
income potential of others. More than half of portfolio holdings are
securities of the highest credit quality (Aaa), while almost 21% of the
holdings are invested in bonds rated Baa, Ba, and B. This translates to an
average quality rating of Aa.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Transportation 23.2%
Utilities 17.3%
Hospital/health care 16.9%
Housing 5.9%
Education 5.0%
Footnote reads:
*Based on net assets as of 9/30/98. Holdings will vary over time.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
B and under -- 10%
Ba -- 4.9%
Baa -- 14.8%
A -- 10.6%
Aa -- 6.7%
Aaa -- 53%
Footnote reads:
*As a percentage of market value as of 9/30/98. 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.
* SECTOR STRATEGY TAKES ADVANTAGE OF STRONG ECONOMY
Over the period, our emphasis on several key industry sectors contributed
to the fund's performance. The ongoing strength of the economy and weak
petroleum prices were boons for the transportation sector. Having priced
themselves effectively in their respective hub markets, airline-backed
industrial revenue bonds represented some of the best opportunities in the
lower-rated end of the municipal bond market. With increased passenger
capacity has come increased fees and cash flow from airport operations and
associated facilities such as restaurants, parking, hotels, and retail
outlets. The fund's current airline-related holdings involve carriers that
are diversified and operate outside the Pacific Rim.
At nearly 17% of total assets, health-care holdings performed well over
the period. Years of cost cutting, industry consolidation, and Medicare
reform are changing the landscape, and stringent credit research is
required to determine the likely winners. When evaluating performance
potential, the location, level, and quality of services offered by a
health-care facility are important. Abilene Health of Texas for Sears
Methodist Retirement with its attractive 5 7/8% coupon is a fund holding
that we believe will thrive in the future. While this holding, as well as
others discussed in this report, was viewed favorably during the period,
all holdings are subject to review in accordance with the fund's
investment strategy and may vary in the future.
State general obligation bonds (GOs) have also benefited from the stronger
economy. Many states around the nation have seen their credit ratings
improve as rising tax receipts, surplus state budgets, and favorable
credit fundamentals contributed to their fiscal health. In fact, just
after the close of the period, Moody's upgraded California GOs, and prices
rallied. We will be watching these and other GOs carefully to assess the
impact of a potential economic slowdown.
* OUTLOOK REMAINS CAUTIONARY
In this unusual bond market, the concern is more about what the equity
market will do than over what interest rates will do. We believe that the
bond market's positive performance depends upon stability in stocks and
global economies. New ground is being broken every day, and given the
uncertain environment, we have opted to maintain a conservative outlook.
Our emphasis has been providing the best tax-free return while minimizing
downside performance if bond prices should fall. Consequently, we have
given up some income potential to help protect the value of the fund's
portfolio, and in turn, your share price. In such an environment, we don't
believe that our shareholders want to take on the risk that a higher
income bias would add. We reiterate our belief that this is not a good
time to invest in bonds with longer maturities and higher risk. Rather, we
currently expect to continue our emphasis on intermediate maturities (8 to
15 years) with solid yields, which offer more protection in a volatile
market.
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 9/30/98, 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 9/30/98
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 7.22% 2.17% 6.52% 1.52% 6.89% 3.39%
- ------------------------------------------------------------------------------
5 years 29.15 23.04 25.08 23.15 27.26 23.07
Annual average 5.25 4.23 4.58 4.25 4.94 4.24
- ------------------------------------------------------------------------------
10 years 116.89 106.59 100.98 100.98 108.64 101.87
Annual average 8.05 7.53 7.23 7.23 7.63 7.28
- ------------------------------------------------------------------------------
Annual average
(Life of fund) 8.38 8.14 7.51 7.51 7.90 7.73
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/98
Lehman
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 8.72% 1.36%
- ------------------------------------------------------------------------------
5 years 36.38 12.61
Annual average 6.40 2.40
- ------------------------------------------------------------------------------
10 years 123.12 36.39
Annual average 8.36 3.15
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-, and
10-year (where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (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 expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. 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.
This performance information does not reflect any market volatility that
may have occurred since the date of the information. As a result, more
recent returns may be more or less than those shown.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
9/30/88
Fund's class A Lehman Bros. Municipal Consumer Price
Date shares at POP Bond Index Index
9/88 9,525 10,000 10,000
9/89 10,470 10,868 10,434
9/90 10,917 11,607 11,077
9/91 12,437 13,137 11,452
9/92 13,998 14,510 11,795
9/93 15,996 16,358 12,112
9/94 15,241 15,962 12,470
9/95 16,549 17,748 12,787
9/96 17,532 18,820 13,171
9/97 19,268 20,520 13,454
9/98 $20,659 $22,312 $13,639
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 $20,098 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $20,864 ($20,187 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 9/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.462848 $0.402823 $0.435972
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Total $0.462848 $0.402823 $0.435972
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
9/30/97 $9.12 $9.57 $9.12 $9.14 $9.45
- ------------------------------------------------------------------------------
9/30/98 9.30 9.76 9.30 9.32 9.63
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.75% 4.52% 4.10% 4.45% 4.25%
- ------------------------------------------------------------------------------
Taxable equivalent3 7.86 7.49 6.78 7.36 7.03
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 4.00 3.81 3.35 3.70 3.58
- ------------------------------------------------------------------------------
Taxable equivalent3 6.62 6.31 5.55 6.13 5.93
- ------------------------------------------------------------------------------
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 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 4.75% maximum 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.
Report of independent accountants
For the fiscal year ended September 30, 1998
To the Trustees and Shareholders of
Putnam Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings),
and the related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects, the
financial position of Putnam Tax Exempt Fund (the "fund") at September 30,
1998, and the results of its operations, the changes in its net assets and
the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at September
30, 1998 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 10, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
September 30, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FRB -- Floating Rate Bonds
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
MUNICIPAL BONDS AND NOTES (100.3%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) 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 Baa3 $ 9,339,375
10,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. TRAN,
7 7/8s, 5/1/19 BBB-/P 11,937,500
--------------
21,276,875
Arizona (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
6,510,000 AZ State Muni. Fin. Program COP, MBIA, Ser. 34,
7 1/4s, 8/1/09 Aaa 8,243,288
10,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 12,812,500
--------------
21,055,788
California (10.5%)
- --------------------------------------------------------------------------------------------------------------------------
10,000,000 CA Edl. Fac. Auth. Rev. Bonds (Stanford U.), Ser. N,
5.2s, 12/1/27 Aaa 10,312,500
CA State G.O. Bonds
10,000,000 6 1/2s, 2/1/08 A1 11,900,000
24,135,000 6s, 2/1/09 A1 27,875,925
20,000,000 5 3/4s, 10/1/09 A1 22,825,000
10,890,000 Los Angeles Cnty., Dept. Wtr. & Elec. Pwr. Auth.
Rev. Bonds, Ser. A, MBIA, 7 1/4s, 9/15/30 Aa3 11,802,038
16,935,000 Los Angeles Cnty., Metro. Trans. Auth. Sales Tax
Rev. Bonds, Ser. A (2nd Ser.), AMBAC, 5s, 7/1/25 Aaa 16,977,338
18,900,000 Los Angeles Cnty., Sanitation Dist. Fin. Auth. Rev.
Bonds (Capital project), Ser. A, MBIA, 5s, 10/1/23 Aaa 18,923,625
7,000,000 Los Angeles, Regl. Arpt. Impt. Rev. Bonds
(United Airlines, Inc.), Ser. G, 8.8s, 11/15/21 Baa2 7,778,750
10,150,000 Orange Cnty., Local Trans. Auth. IFB, FGIC, 7.911s,
2/14/11 (acquired 1/3/97, cost $10,393,516) (RES) Aaa 12,027,750
6,010,000 Orange Cnty., Recvy. COP, Ser. A, MBIA, 6s, 7/1/08 Aaa 6,926,525
11,285,000 San Diego Cnty., COP (Inmate Reception Ctr.
& Cooling), MBIA, 6 3/4s, 8/1/19 Aaa 13,231,662
San Joaquin Hills, Trans. Corridor Agcy. Rev. Bonds
53,760,000 Zero %, 1/1/24 Aaa 15,859,200
39,225,000 Zero %, 1/1/22 Aaa 12,748,125
27,400,000 Zero %, 1/1/18 Aaa 10,857,250
17,690,000 San Jose, Redev. Agcy. Tax Alloc. Rev. Bonds
(Merged Area Redev.), MBIA, 5s, 8/1/20 Aaa 17,756,338
17,700,000 U. of CA Rev. Bonds (UCSD Med. Ctr. Satellite
Med. Fac.), 7.9s, 12/1/19 A-/P 18,695,625
--------------
236,497,651
Colorado (6.4%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Arapahoe Cnty., Cap. Impt. Trust Fund Hwy.
Rev. Bonds, Ser. E-470, 6.95s, 8/31/20 Aaa 6,031,250
17,000,000 Arapahoe Cnty., Cap. Impt. Trust Fund Hwy.
Rev. Bonds, Ser. E-470, 7s, 8/31/26 Aaa 20,548,750
Denver, City & Cnty. Arpt. Rev. Bonds
3,675,000 Airport & Marina Improvements), Ser. A,
MBIA, 8 3/4s, 11/15/23 Aaa 4,272,188
28,660,000 Ser. A, 8 3/4s, 11/15/23 Baa3 32,815,700
10,340,000 Ser. A, 8 3/4s, 11/15/23 (Prerefunded) Aaa 11,994,400
1,325,000 Ser. A, MBIA, 8 3/4s, 11/15/23 Aaa 1,537,000
4,800,000 Ser. A, 8 1/2s, 11/15/23 Baa2 5,292,000
455,000 Ser. A, 8 1/2s, 11/15/23 (Prerefunded) Aaa 506,756
2,745,000 Ser. A, MBIA, 8 1/2s, 11/15/23 Aaa 3,060,675
260,000 Ser. A, MBIA, 8 1/2s, 11/15/23 (Prerefunded) Aaa 289,575
22,050,000 Ser. A, 7 1/4s, 11/15/25 Baa1 25,329,938
3,980,000 Ser. B, 7 1/4s, 11/15/23 Baa1 4,432,725
1,020,000 Ser. B, 7 1/4s, 11/15/23 (Prerefunded) Aaa 1,165,350
20,000,000 Denver, City & Cnty. Arpt. Special Fac. Rev. Bonds
(United Air Lines, Inc.), Ser. A, 6 7/8s, 10/1/32 Baa3 21,750,000
5,000,000 Denver, City & Cnty. Single Family Mtg. Rev. Bonds
(Metro Mayors Conference), Ser. A, FHLMC,
FNMA Coll., GNMA Coll., 6s, 10/1/22 AAA 5,387,500
--------------
144,413,807
Connecticut (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
8,000,000 CT State Dev. Auth. Poll. Control Rev. Bonds
(Western MA), Ser. A, 5.85s, 9/1/28 Ba3 8,090,000
Mashantucket, Western Pequot Tribe 144A
Rev. Bonds, Ser. A.,
7,565,000 6.4s, 9/1/11 (acquired 12/17/97, cost $7,496,413) (RES) Baa2 8,510,625
7,435,000 6.4s, 9/1/11 (Prerefunded) (acquired 12/17/97,
cost $7,367,591) (RES) Aaa 8,689,655
--------------
25,290,280
District of Columbia (4.2%)
- --------------------------------------------------------------------------------------------------------------------------
DC G.O. Bonds, Ser. A
39,250,000 6 3/8s, 6/1/26 Ba1 45,333,750
38,175,000 6s, 6/1/26 BA1 40,370,062
7,000,000 DC, Georgetown U. IFB, 9.109s, 4/25/22 A1 8,207,500
--------------
93,911,312
Florida (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
11,010,000 FL State Gen. Svcs. FRB, FSA , 8 1/4s, 7/1/17
(acquired 9/2/98, cost $14,265,001) (RES) AAA/P 14,767,162
18,500,000 Hernando Cnty. Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 (SEG) Aaa 25,021,250
16,375,000 Martin Cnty., Indl. Dev. Auth. Rev. Bonds
(Indiantown Cogeneration), Ser. A, 7 7/8s,
12/15/25 Baa3 19,220,155
--------------
59,008,567
Georgia (4.6%)
- --------------------------------------------------------------------------------------------------------------------------
12,000,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds
(Briarcliff Park Apts.), Ser. A, 7 1/2s, 4/1/17 BBB+/P 13,035,000
GA Muni. Auth. Elec. Pwr. Rev. Bonds
10,000,000 Ser. B, FGIC, 8 1/4s, 1/1/11 Aaa 13,687,500
16,700,000 Ser. Y, AMBAC, 6.4s, 1/1/13 Aaa 19,893,875
GA State G.O. Bonds
10,460,000 Ser. D, 6.8s, 8/1/11 Aaa 13,088,075
15,840,000 Ser. A, 6 1/4s, 4/1/09 Aaa 18,750,600
21,790,000 Ser. B, 6 1/4s, 4/1/09 Aaa 25,793,912
--------------
104,248,962
Hawaii (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
10,560,000 HI State G.O. Bonds, Ser. CO, FGIC, 6s, 3/1/08 Aaa 12,012,000
10,600,000 Honolulu, City & Cnty. G.O. Bonds, MBIA, 5.45s,
9/11/08 AAA 11,633,500
--------------
23,645,500
Illinois (1.9%)
- --------------------------------------------------------------------------------------------------------------------------
Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
14,500,000 (American Airlines, Inc.), 8.2s, 12/1/24 Baa2 17,581,250
4,390,000 (United Air Lines, Inc.), Ser. C, 8.2s, 5/1/18 Baa2 4,611,212
IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.)
3,335,000 8 3/4s, 7/1/11 BB/P 3,672,669
1,705,000 8 3/4s, 7/1/11 (Prerefunded) AAA/P 1,930,912
8,000,000 IL Dev. Fom. Auth. IFB (St. Luke's Med. Ctr.), MBIA,
9.818s, 10/1/24 Aaa 9,540,000
2,000,000 IL Hlth. Fac. Auth. IFB (Methodist Hlth.), AMBAC,
9.872s, 5/18/21 Aaa 2,355,000
3,000,000 IL Hsg. Dev. Auth. IFB, 10.349s, 2/1/20
(acquired 4/8/92, cost $3,354,527) (RES) Aa1 3,283,590
--------------
42,974,633
Indiana (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
30,000,000 Indianapolis Indl. Arpt. Auth. Special Fac. Rev. Bonds
(United Airlines), Ser. A, 6 1/2s, 11/15/31+F12 Baa2 32,700,000
10,480,000 Indianapolis, Local Pub. Impt. Rev. Bonds, Ser. A, 6s,
2/1/11 Aaa 12,248,500
--------------
44,948,500
Kansas (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
18,200,000 Burlington, Poll. Control IFB (KS Gas & Electric),
Ser. 91-4, MBIA, 9.678s, 6/1/31
(acquired various dates from 6/20/19 to 2/14/94,
cost $19,756,448) (RES) Aaa 21,658,000
9,790,000 Kansas City, Util. Syst. Rev. Bonds, FGIC, 6 1/4s,
9/1/14 Aaa 11,025,988
--------------
32,683,988
Kentucky (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
11,065,000 Boone Cnty. Poll. Control Rev. Bonds (Dayton Pwr.
& Lt. Co.), Ser. A, 6 1/2s, 11/15/22 Aa3 12,157,669
10,200,000 Jefferson Cnty., Hosp. Rev. Bonds (Alliant Hlth.
Syst.), MBIA, 6.436s, 10/23/14 Aaa 11,220,000
--------------
23,377,669
Louisiana (4.1%)
- --------------------------------------------------------------------------------------------------------------------------
7,000,000 De Soto Parish, Poll. Control Rev. Bonds
(Southwestern Elec. Pwr. Co.), 7.6s, 1/1/19 A1 8,058,750
56,900,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline Co.), 7 3/4s, 8/15/22 A3 65,150,500
W. Feliciana Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.)
8,000,000 8s, 12/1/24 Ba1 8,490,000
8,565,000 Ser. III, 7.7s, 12/1/14 Ba1 9,603,505
--------------
91,302,755
Maine (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
11,935,000 Bucksport Solid Waste Disp. Rev. Bonds
(Champion Intl. Corp.), 6 1/4s, 5/1/10 Baa1 12,680,938
Massachusetts (9.1%)
- --------------------------------------------------------------------------------------------------------------------------
15,850,000 Boston, Rev. Bonds (Boston City Hosp.), Ser. A,
FHA Insd., 7 5/8s, 2/15/21 Aaa 17,276,500
9,800,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst.
Rev. Bonds, MBIA, 6 1/2s, 7/1/05 Aaa 11,196,500
20,000,000 MA Sate Rev. Bonds (Grant Anticipation Notes),
Ser. A, MBIA, 5 1/2s, 6/15/13 Aaa 22,125,000
29,190,000 MA St. Tpk. Auth. Rev. Bonds, Ser. A, MBIA, 5s, 1/1/37 Aaa 29,080,538
5,020,000 MA State Cons. Loan G.O. Bonds, Ser. C, 7 1/2s,
12/1/07 Aaa 5,515,725
MA State G.O. Bonds
7,800,000 Ser. A, AMBAC, 5 3/4s, 8/1/09 Aaa 8,853,000
5,285,000 Ser. C, FGIC, 5 3/4s, 8/1/11 Aaa 6,018,294
5,425,000 Ser. C, AMBAC, 5 3/4s, 8/1/10 Aaa 6,184,500
11,595,000 MA State G. O. Bonds Ser. 25, 8.22s, 11/1/11
(acquired 8/13/98, cost $14,375,270) (RES) Aa3 15,392,362
MA State Hlth. & Edl. Fac. Auth. IFB
11,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.82s, 8/12/21 Aaa 13,076,250
18,000,000 (Beth Israel-Deaconess Hosp.), AMBAC, 9.436s,
10/1/31 Aaa 21,420,000
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
8,000,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 Baa3 8,780,000
5,370,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 Aaa 6,021,113
7,000,000 AMBAC, 6.55s, 6/23/22 Aaa 8,146,250
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
4,500,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 5,062,500
7,000,000 Ser. A, 9s, 7/1/15 BB-/P 7,857,500
MA State Port Auth. Rev Bonds
5,350,000 FGIC, 7 1/2s, 7/1/20 Aaa 5,764,625
1,650,000 Ser. A, FGIC, 7 1/2s, 7/1/20 Aaa 1,784,063
5,700,000 Stepped-coupon zero %, (13s, 1/1/04), 7/1/13 (STP) AAA/P 5,828,250
--------------
205,382,970
Michigan (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
7,000,000 Detroit, G.O. Bonds, Ser. B, AMBAC, 6 1/4s, 4/1/08 AAA 7,875,000
11,355,000 Greater Detroit, Res. Recvy. Auth. Rev. Bonds,
Ser. A, AMBAC, 6 1/4s, 12/13/08 Aaa 13,200,188
13,845,000 MI State Hosp. Fin. Auth. Rev. Bonds (Sinai Hosp.),
6.7s, 1/1/26 A3 15,610,238
10,000,000 MI State Strategic Fund Solid Waste Disp. Rev.
Bonds (SD Warren Co.), Ser. C, 7 3/8s, 1/15/22 BB-/P 11,275,000
10,000,000 MI State Strategic Fund Ltd. Revenue Bonds
(Detroit Edison Co.), Ser. A, MBIA, 5.55s,
9/1/29 (FWC/WIS) Aaa 10,262,500
6,745,000 Pontiac, Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/13 Baa3 6,989,506
10,500,000 Wayne Charter Cnty., Special Arpt. Fac. Rev. Bonds
(Northwest Airlines Inc.), 6 3/4s, 12/1/15 BB+/P 11,602,500
--------------
76,814,932
Minnesota (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
15,750,000 MN State Hsg. Fin. Agcy. Single Fam. Rev. Bonds,
Ser. E, 6.85s, 1/1/24 Aa2 16,911,563
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 Aa2 16,542,000
Montana (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
14,000,000 MT State Hlth. Fac. Auth. Hosp. Hosp. IFB
(Deaconess Med. Ctr.), Ser. B, AMBAC, 9.246s,
3/8/16 Aaa 16,100,000
Nebraska (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
9,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA, 9.284s,
11/15/16 Aaa 10,743,750
NE Investment Fin. Auth. Single Fam. Mtge. IFB
3,450,000 GNMA Coll., 9.415s, 9/15/24 Aaa 3,928,688
7,800,000 Ser. B, GNMA Coll., 10.065s, 10/17/23 Aaa 8,619,000
--------------
23,291,438
New Hampshire (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
10,500,000 NH State Tpk. Sys. IFB, FGIC, 9.86s, 11/1/17 Aaa 14,555,625
New Jersey (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(Raritan Bay Med. Ctr.)
13,500,000 7 1/4s, 7/1/27 B-/P 14,394,375
6,300,000 7 1/4s, 7/1/14 B-/P 6,733,125
10,000,000 NJ State Trans. Trust Fund Auth. Rev. Bonds
(Trans. Syst.), Ser. B, MBIA, 6 1/2s, 6/15/10 Aaa 12,112,500
--------------
33,240,000
New York (11.3%)
- --------------------------------------------------------------------------------------------------------------------------
12,500,000 Long Island, Pwr. Auth. NY Elec. Syst. IFB, 7 1/4s,
12/1/24 (acquired 5/19/98, cost $13,565,566) (RES) A-/P 14,500,000
10,000,000 Long Island, Pwr. Auth. NY Elec. Syst. Rev. Bonds,
Ser. A, FSA, 5 1/2s, 12/1/13 Aaa 11,112,500
5,000,000 Long Island, Pwr. Auth. NY Elec. Syst. VRDN, Ser. A,
3 1/2s, 5/1/33 VMIG1 5,000,000
NY City, G.O. Bonds
4,600,000 Ser. F, 8.4s, 11/15/07 Aaa 5,290,000
4,855,000 Ser. F, 8.4s, 11/15/06 Aaa 5,583,250
4,635,000 Ser. F, 8.4s, 11/15/05 Aaa 5,330,250
29,335,000 (Group B), Ser. D, 8 1/4s, 8/1/12 Aaa 33,258,556
9,800,000 Ser. D, 8 1/4s, 8/1/11 Aaa 11,110,750
13,235,000 Ser. B, MBIA, 6 1/2s, 8/15/10 Aaa 15,882,000
6,765,000 Ser. D, MBIA, 6 1/2s, 11/1/09 Aaa 8,075,719
10,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds
(Visy Paper Inc.), 7.95s, 1/1/28 BB-/P 11,462,500
NY City, Indl. Dev. Agcy. Special Fac. Rev. Bonds
(American Airlines, Inc.)
5,675,000 8s, 7/1/20 Baa2 5,834,524
15,000,000 6.9s, 8/1/24 Baa2 16,818,750
NY State Dorm. Auth. Rev. Bonds
13,100,000 (State U. Edl. Fac.), Ser. A, 7.7s, 5/15/12 Aaa 14,180,750
10,900,000 (Construction City U. Syst.), Ser. A, 6s, 7/1/20 Baa1 12,575,875
12,485,000 (Construction City U. Syst.), Ser. A, 5 3/4s, 7/1/18 Baa1 13,873,956
23,100,000 (State U. Edl. Fac.), Ser. A, 5 1/2s, 5/15/19 A3 25,063,500
7,515,000 (North Shore U. Hosp.), MBIA, 5 1/2s, 11/1/11 Aaa 8,369,831
7,500,000 (Columbia U.), 5s, 7/1/22 Aaa 7,584,375
4,400,000 NY State Env. Fac. Corp. Poll. Control Rev. Bonds
(State Wtr. Revolving Fund), Ser. A, 7 1/2s, 6/15/12 Aa2 4,763,000
NY State Med. Care Fac.Fin. Agcy. Rev. Bonds
(Mental Hlth. Svcs. Fac.), Ser. B
5,450,000 7 5/8s, 8/15/17 (Prerefunded) A- 6,117,625
2,480,000 7 5/8s, 8/15/17 A3 2,752,800
10,000,000 NY State Thruway Auth. Rev. Bonds, 6s, 4/1/12 Baa1 11,087,500
--------------
255,628,011
North Carolina (5.6%)
- --------------------------------------------------------------------------------------------------------------------------
Intermountain Pwr. Agcy Rev. Bonds
10,000,000 MBIA, 6s, 1/1/18 Aaa 11,637,500
19,065,000 (UT State Pwr. Supply), Ser. B, MBIA, 6 1/2s, 7/1/09 Aaa 22,878,000
19,700,000 NC Eastern Muni. Pwr. Agcy. Syst. IFB, FGIC, 7.872s,
1/1/25 (acquired various dates from 12/28/93
to 4/12/95, cost $23,486,208) (RES) Aaa 27,186,000
11,680,000 NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds, Ser. C,
MBIA, 7s, 1/1/13 Aaa 14,731,400
41,000,000 NC Muni. Pwr. Agcy. Rev. Bonds (No. 1,
Catawba Elec.), AMBAC, 8s, 1/1/06 Aaa 50,788,750
--------------
127,221,650
Ohio (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,533,999 Lake Cnty. Indl. Dev. Rev. Bonds (Madison Inn
Hlth. Ctr.), FHA Insd., 12s, 5/1/14 A-/P 1,608,429
8,330,000 Mount Vernon, Hosp. Rev. Bonds
(Knox Cmnty. Hosp.), 7 7/8s, 6/1/12 BBB+/P 8,513,593
4,523,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. IFB, Ser. A-2,
GNMA Coll., 9.796s, 3/24/31 Aaa 5,133,605
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
7,775,000 Interest Only (IO) Ser. 4, GNMA Coll., 9s, 9/1/01 AAA/P 4,558,094
10,940,000 GNMA Coll., 7.8s, 3/1/30 AAA 11,473,325
7,775,000 GNMA Coll., stepped-coupon zero %
(9s, 9/1/01) 9/1/18 (STP) (acquired various dates
from 10/20/93 to 7/10/95, cost $5,675,782) (RES) AAA/P 6,832,281
20,000,000 OH State, Tpk. Comm. Rev. Bonds, Ser. B, FGIC,
4 3/4s, 2/15/28 Aaa 19,425,000
--------------
57,544,327
Oklahoma (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
9,160,000 Tulsa Muni. Arpt. Trust Rev. Bonds
(American Airlines, Inc.), 7 3/8s, 12/1/20 Baa2 9,869,900
Pennsylvania (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
8,150,000 Allegheny Cnty., Arpt. Rev. Bonds (Pittsburgh
Intl. Arpt.), Ser. A, MBIA, 5 3/4s, 1/1/11 Aaa 9,077,063
5,750,000 Beaver Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds (Ohio Edison), Ser. A, 7 3/4s, 9/1/24 Baa3 6,031,462
8,360,000 Clearfield Hosp. Auth. Rev. Bonds (Clearfield Hosp.),
6 7/8s, 6/1/16 BBB 9,007,900
300,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. VRDN,
3.85s, 7/1/25 VMIG1 300,000
PA Econ. Dev. Fin. Auth. Res. Recvy. Rev. Bonds
12,700,000 Ser. A, 6.4s, 1/1/09 (Northampton Generating) BBB- 13,525,500
10,000,000 Ser. D, 7 1/8s, 12/1/15 BBB- 11,150,000
6,000,000 Ser. D, 7.15s, 12/1/18 BBB- 6,697,500
20,000,000 PA State, Tpk. Comm. Oil Franchise Tax Rev. Bonds,
Ser. B, AMBAC, 4 3/4s, 12/1/27 Aaa 19,600,000
10,000,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Rev.
Bonds (Graduate Hlth. Syst.), 7 1/4s, 7/1/10
(acquired 4/11/96, cost $10,062,500) (RES) (NON) Caa3 5,000,000
--------------
80,389,425
Puerto Rico (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
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 26,537,118
3,000,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA,
3 1/8s, 12/1/15 VMIG1 3,000,000
6,700,000 PR, Hwy. & Trans. Auth. Rev. Bonds, MBIA, 6 1/4s,
7/1/12 Aaa 7,981,375
--------------
37,518,493
South Carolina (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,190,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 B+/P 5,637,638
13,500,000 Spartanburg Cnty. Hosp. Fac. Rev. Bonds, FSA,
6.416s, 4/13/22 Aaa 14,900,625
--------------
20,538,263
Tennessee (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
40,000,000 Metro. Nashville & Davidson Cnty. Hlth. & Ed. Fac.
Board Rev. Bonds (Volunteer Hlth. Care),
zero %, 6/1/21 Aaa 11,850,000
Texas (8.1%)
- --------------------------------------------------------------------------------------------------------------------------
4,250,000 Abilene, Hlth. Fac.Dev. Corp. Rev. Bonds (Sears
Methodist Retirement), Ser. A, 5 7/8s, 11/15/18 BB+/P 4,244,688
35,000,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa2 37,756,250
9,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds,
MBIA, 5 1/4s, 11/15/31 Aaa 9,202,500
15,000,000 Dallas Cnty., G.O. Bonds (Flood Control Dist. (SEG)1),
stepped-coupon zero % (8.5s, 10/1/99), 4/1/16 (STP) BB-/P 16,818,750
25,250,000 Gulf Coast, Waste Disposal Auth. Rev. Bonds
(Champion Intl. Corp.), 7.45s, 5/1/26 BBB 27,901,250
10,905,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds (Memorial
Hlth. Syst.of East TX), 6 7/8s, 2/15/26 BBB- 12,050,025
1,970,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Woodlands Med. Ctr.), 8.85s, 8/15/14 A-/P 2,087,470
20,000,000 North Central Hlth. Fac. Dev. Corp. IFB (Baylor U.
Med. Ctr.), Ser. A, 9.979s, 5/15/16 Aa2 24,025,000
6,500,000 Texas State Indl. Dev. Corp. Rev. Bonds
(Arco Pipeline Co.), 7 3/8s, 10/1/20 A2 8,685,625
TX State Dept. of Hsg. & Cmnty. Affairs
Home Mtge. IFB
600,000 Ser. A-2, GNMA Coll., 9.663s, 7/18/23 AAA 616,500
5,000,000 Ser. B-2, GNMA Coll., 9.663s, 6/18/23 AAA 5,537,500
9,500,000 TX State (Nat'l. Research Lab. Communication
Superconductor), G.O. Bonds, 7 1/8s, 4/1/20 Aaa 10,165,000
20,800,000 TX State Rev. Bonds, 6.2s, 9/30/11 Aa2 24,778,000
--------------
183,868,558
Utah (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC Hosps. Inc.),
Ser. A, 8 1/8s, 5/15/15 AAA 6,531,250
Vermont (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
7,600,000 VT Edl. & Hlth. Bldgs. Fin. Agcy. Rev. Bonds
(Hosp. Med. Ctr.), FGIC, 7s, 9/1/19 AAA 8,293,500
Virginia (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
10,500,000 Henrico Cnty., Indl. Dev. Auth. IFB (Bon Secours
Hlth. Syst.), FSA, 7.924s, 8/23/27 Aaa 14,608,125
5,000,000 Norfolk, Cnth., Wtr. Rev. Bonds, MBIA, 5.9s, 11/1/25 Aaa 5,450,000
30,000,000 Winchester, Indl. Dev. Auth. IFB (Winchester
Med. Ctr.), AMBAC, 9.296s, 1/21/14 Aaa 39,037,500
--------------
59,095,625
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 Baa2 5,207,956
WA State Hlth. Care Fac. Auth. Rev. Bonds
(Hutchinson Cancer Ctr.), Ser. D
8,400,000 7 3/8s, 1/1/18 Aa2 8,946,000
7,700,000 7.3s, 1/1/12 Aa2 8,200,500
--------------
22,354,456
Wisconsin (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
4,315,000 WI Hsg. & Econ. Dev. Auth. IFB (Home
Ownership Dev.), 10.108s, 10/25/22 Aa3 4,886,738
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,046,140,797) (b) $2,265,745,949
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of 2,258,118,137.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
September 30, 1998 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, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of
independent accountants.
(b) The aggregate identified cost on a tax basis is $2,046,192,178, resulting in gross unrealized appreciation and
depreciation of $226,158,567 and $6,604,796, respectively, or net unrealized appreciation of $219,553,771.
(NON) Non income producing security.
(STP) 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.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at September 30, 1998 was $137,847,425 or 6.1% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at September 30, 1998.
(FWC/WIS) When-issued security (Note 1)
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, 1998.
The fund had the following industry group concentrations greater than 10% at September 30, 1998 (as a
percentage of net assets):
Transportation 23.2%
Utilities 17.3
Hospital/Health care 16.9
The fund had the following insurance concentrations greater than 10% at September 30, 1998 (as a percentage of
net assets):
MBIA 15.6%
AMBAC 11.4
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 1998
Unrealized
Total Aggregate Expiration Appreciation/
Value Face Value Date (Depreciation)
- -------------------------------------------------------------------------------
Muni Index
Future (Long) $ 12,837,500 $ 12,600,551 Dec. 98 $ 236,949
US Treasury Bonds
Future (Short) 190,761,156 183,072,982 Dec. 98 (7,688,174)
- -------------------------------------------------------------------------------
$(7,451,225)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
September 30, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,046,140,797) (Note 1) $2,265,745,949
- -----------------------------------------------------------------------------------------------
Interest and other receivables 33,525,176
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 831,016
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 7,420,988
- -----------------------------------------------------------------------------------------------
Total assets 2,307,523,129
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 384,470
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 4,054,702
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 37,328,733
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,366,124
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,705,633
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 246,168
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 41,840
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,758
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,188,613
- -----------------------------------------------------------------------------------------------
Payable for variation margin 1,940,469
- -----------------------------------------------------------------------------------------------
Other accrued expenses 143,482
- -----------------------------------------------------------------------------------------------
Total liabilities 49,404,992
- -----------------------------------------------------------------------------------------------
Net assets $2,258,118,137
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,073,489,075
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (1,215,384)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (26,309,481)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 212,153,927
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $2,258,118,137
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,998,386,715 divided by 214,844,758 shares) $9.30
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.30)* $9.76
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($249,540,559 divided by 26,834,998 shares)*** $9.30
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($10,190,863 divided by 1,093,261 shares) $9.32
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.32)** $9.63
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sale of $25,000 or more and on group
sales the offering price is reduced.
** On single retail sales of 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, 1998
<S> <C>
Tax exempt interest income: $130,299,437
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 10,858,518
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,481,596
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 37,686
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 19,090
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 4,036,095
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 2,120,511
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 48,086
- -----------------------------------------------------------------------------------------------
Reports to shareholders 60,345
- -----------------------------------------------------------------------------------------------
Auditing 74,733
- -----------------------------------------------------------------------------------------------
Legal 72,138
- -----------------------------------------------------------------------------------------------
Postage 155,763
- -----------------------------------------------------------------------------------------------
Other 168,315
- -----------------------------------------------------------------------------------------------
Total expenses 20,132,876
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (296,863)
- -----------------------------------------------------------------------------------------------
Net expenses 19,836,013
- -----------------------------------------------------------------------------------------------
Net investment income 110,463,424
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 24,105,578
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (13,461,184)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 37,008,150
- -----------------------------------------------------------------------------------------------
Net gain on investments 47,652,544
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $158,115,968
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended September 30
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 110,463,424 $ 124,470,511
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 10,644,394 26,154,669
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 37,008,150 68,453,413
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 158,115,968 219,078,593
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (101,505,109) (113,245,307)
- ---------------------------------------------------------------------------------------------------------------
Class B (10,917,992) (11,842,967)
- ---------------------------------------------------------------------------------------------------------------
Class M (452,794) (348,827)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (95,697,580) (159,470,685)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (50,457,507) (65,829,193)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 2,308,575,644 2,374,404,837
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net
investment income and undistributed net investment
income of $1,215,384 and $1,197,087 respectively) $2,258,118,137 $2,308,575,644
- ---------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.12 $8.76 $8.74 $8.55 $9.66
- -----------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income .45 .48 .49 .52 .53
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .19 .36 .02 .19 (.97)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .64 .84 .51 .71 (.44)
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.46) (.48) (.49) (.52) (.54)
- -----------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.07)
- -----------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- -- (.06)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.48) (.49) (.52) (.67)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.30 $9.12 $8.76 $8.74 $8.55
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.22 9.89 5.94 8.58 (4.72)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,998,387 $2,054,537 $2,117,684 $2,237,837 $2,232,611
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .81 .78 .78 .78 .77
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.92 5.40 5.58 6.03 5.97
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 29.61 52.33 92.99 68.23 59.27
- -----------------------------------------------------------------------------------------------------------------------------------
+ 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. Prior period ratios exclude these amounts (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.12 $8.76 $8.73 $8.53 $9.66
- -----------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income .39 .43 .43 .46 .47
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .19 .36 .03 .20 (.98)
- -----------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .58 .79 .46 .66 (.51)
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.43) (.43) (.46) (.49)
- -----------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.07)
- -----------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- -- (.06)
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.40) (.43) (.43) (.46) (.62)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.30 $9.12 $8.76 $8.73 $8.53
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.52 9.18 5.38 8.01 (5.51)
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $249,541 $245,759 $250,990 $246,407 $213,679
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.46 1.43 1.43 1.43 1.41
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.28 4.75 4.92 5.34 5.31
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 29.61 52.33 92.99 68.23 59.27
- -----------------------------------------------------------------------------------------------------------------------------------
+ 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. 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 Sept. 30
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $9.14 $8.78 $8.75 $8.61
- -----------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .45 .46 .31
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .19 .37 .03 .13
- -----------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .62 .82 .49 .44
- -----------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.46) (.46) (.30)
- -----------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.46) (.46) (.30)
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.32 $9.14 $8.78 $8.75
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.89 9.55 5.72 5.23*
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,191 $8,280 $5,732 $2,337
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.11 1.08 1.06 .67*
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.65 5.07 5.26 3.04*
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 29.61 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. Prior period ratios exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
September 30, 1998
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 Investment, 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.
Securities purchased or sold on a when-issued basis may be settled a month
or more after the trade date; interest income is accrued based on the
terms of the security. Losses may arise due to changes in the market value
of the underlying securities or if the counterparty does not perform under
the contract.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an 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 ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
September 30, 1998 the fund had no borrowings against the 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.
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 losses on wash sale transactions, dividends
payable, unrealized gains and losses on certain futures contracts and
straddle loss deferrals. 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, 1998, the fund reclassified $33,787 to increase
paid-in-capital, with an increase to accumulated net realized loss on
investments of $33,787. 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 of securities is amortized using the effective
yield method for bonds issued after September 27, 1985, and on a
straight-line basis for bonds issued prior thereto. The premium in excess
of the call price, if any, is amortized to the call date; thereafter, the
remaining excess premium is amortized to maturity. Discounts on zero
coupon bonds, original issue discount and stepped-coupon bonds are
accreted according to the yield-to-maturity basis.
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, 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% thereafter.
As part of the subcustodian contract between the subcustodian bank and
Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments,
Inc., the subcustodian bank has a lien on the securities of the fund to
the extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At September 30, 1998, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
The fund reimburses Putnam Management an allocated amount 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 PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended September 30, 1998, fund expenses were reduced by
$296,863 under expense offset arrangements with PFTC. Investor servicing
and custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $1,360
has been allocated to the fund, 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, 1998, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $123,040 and $1,951 from the
sale of class A and class M shares, respectively and $445,492 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, 1998, Putnam Mutual Funds
Corp., acting as underwriter received $12,061 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended September 30, 1998, purchases and sales of
investment securities other than short-term municipal investments
aggregated $664,936,922 and $743,625,284, 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, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended
September 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 18,804,997 $172,838,323
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,180,011 56,920,901
- -----------------------------------------------------------------------------
24,985,008 229,759,224
Shares
repurchased (35,454,034) (326,053,162)
- -----------------------------------------------------------------------------
Net decrease (10,469,026) $(96,293,938)
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,568,920 $42,013,565
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 730,503 6,728,105
- -----------------------------------------------------------------------------
5,299,423 48,741,670
Shares
repurchased (5,422,107) (49,873,672)
- -----------------------------------------------------------------------------
Net decrease (122,684) $(1,132,002)
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 330,633 $3,050,357
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,572 309,929
- -----------------------------------------------------------------------------
364,205 3,360,286
Shares
repurchased (176,950) (1,631,926)
- -----------------------------------------------------------------------------
Net increase 187,255 $1,728,360
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the Fund
hereby designates $3,688,165 as capital gain, for its taxable year ended
September 30, 1998.
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities 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 [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
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
Global Growth and Income Fund
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
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic 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
LIFESTAGE SM 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 Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[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.
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
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
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
David E. Hamlin
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
AN041 47013 011/322/422 11/98
