Putnam
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
9-30-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
November 15, 2000
REPORT FROM FUND MANAGEMENT
David E. Hamlin
After months of positioning your fund for an eventual turnaround in the
fixed-income markets, we are pleased to report that this happy state of
events has come to pass. During the second half of Putnam Tax Exempt
Income Fund's fiscal year, municipal bond markets rallied as investors
sought the relative calm of fixed-income securities and the greater
diversification they afford following this spring's dramatic stock
market correction. With the increased demand for municipal securities
have come higher bond prices.
Total return for 12 months ended 9/30/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
-----------------------------------------------------------------------
4.94% -0.04% 4.26% -0.68% 3.98% 2.99% 4.63% 1.23%
-----------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* MUNICIPAL BONDS RALLY IN SPITE OF ONGOING INFLATION CONCERNS
This year investors have been reminded of one of the basic principles of
investing: When the financial markets turn around, they move so fast
that investors who are not already positioned in the recovering sector
are often too late to take advantage of the upswing. When the Nasdaq
plunged in March, setting off a long string of declines in other equity
markets, bonds were suddenly the place to be. Even as the Federal
Reserve Board was absorbed in its agenda of raising interest rates, the
municipal bond market began anticipating the beginning of a slowdown in
the economy and better performance.
Over the past six months, we have begun to see positive total returns as
increased investor demand drove up bond prices and interest rates in the
municipal market began to fall. The AAA sector of the municipal market
has benefited the most. Since AAA bonds represent the highest quality
and most liquid area of the municipal market, the most substantial
increase in demand -- along with the greatest price increase and rate
declines -- occurred in this sector. On September 30, 2000, your fund
held 54% of its total assets in AAA-rated or insured municipal bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 16.4%
Utilities 16.3%
Transportation 15.2%
Education 5.1%
Water and sewer 3.7%
Footnote reads:
*Based on net assets as of 9/30/00. Holdings will vary over time.
* FLIGHT TO QUALITY SPARKS WIDER CREDIT SPREADS
When a market has fallen out of favor, lower-credit quality securities
are often the first to be sold, and investors certainly favored equities
over bonds for much of the period. However, as demand for the
highest-quality municipal bonds increased during the period, the prices
of lower-rated bonds lagged behind, widening the credit spread between
higher-quality and lower-rated bonds. In the past, we have stated that
it has been our strategy to increase lower-rated holdings in many of our
tax-exempt portfolios. We still believe this is a valid strategy
because, in our opinion, the lag in lower-rated bond prices does not
indicate rising defaults or a looming recession but simply reflects
earlier changes in investor sentiment and resulting cash flows out of
municipal bond funds.
By increasing holdings in lower-rated sectors, the fund is buying future
appreciation potential at today's lower prices and will be earning high
interest rates while waiting for an improvement in performance. We
continue to believe that as long as lower-rated credit investments are
used in a broadly diversified manner across sectors and states,
investors will be rewarded for their patience.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa/AAA -- 54.8%
Aa/AA -- 5.4%
A -- 8.8%
Baa/BBB -- 18.6%
Ba/BB -- 9.3%
B -- 2.0%
D -- 1.0%
Other -- 0.1%
Footnote reads:
*As a percentage of market value as of 9/30/00. A bond rated BBB/Baa or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
Our analysts sift through many municipal bond issues, but not all of
these securities meet our investment criteria. Today we think the
health-care sector offers some of the most attractive opportunities for
income and credit upgrades. Since the advent of the Balanced Budget Act
and its mandate for lower Medicare reimbursements in 1996, the
health-care industry has experienced massive restructurings and
cost-cutting programs. While the widening of credit spreads has been
most dramatic for hospitals, our outlook for this sector is improving
since Congress recently increased Medicare reimbursements.
"In a flat to down year for stocks, it's the bond investors who've got
bragging rights."
-- Special to TheStreet.com, September 22, 2000
We took advantage of lower prices late this summer to purchase both
Louisiana Public Facility hospital revenue bonds for Lake Charles
Memorial Hospital and Colorado Springs Hospital bonds. We also added to
the fund's position in bonds issued by Oklahoma Health Care Facilities
for Hill Crest Healthcare Systems. While these holdings, along with
others discussed in this report, were viewed favorably at the end of the
period, all are subject to review and adjustment in accordance with the
fund's investment strategy and may vary in the future.
Elsewhere in the health-care sector, we purchased bonds issued by North
Carolina Medical Care Retirement Facility for United Methodist
Retirement Home, which is located in the Raleigh-Durham area. This
facility's proven management and close proximity to Duke University
make it an attractive destination for retirees. Furthermore, North
Carolina is a high-tax state with strong demand for tax-free securities.
In our continuing effort to diversify portfolio holdings by location and
industry, we also bought municipal bonds financing land development in
Florida, where changing demographics and a strong economy are creating a
strong demand for additional housing. The Oakstead Community Development
District bonds are financing various infrastructure improvements such as
the construction of roads and water and sewer lines.
* YIELD CURVE CHANGES PROMPTED SHIFTS IN MATURITIES BUT DURATION
REMAINED STABLE
The fund ended its fiscal year slightly less than its duration 12 months
earlier. (Duration is a measure of the portfolio's maturity structure
and reflects the price sensitivity of holdings to changes in interest
rates.) While it would appear that little had happened during the course
of the year, nothing could be further from the truth. In fact, market
conditions have been in constant flux, and we have been on our toes
steadily monitoring the day-to-day trends in the municipal bond market.
The changing shape of the yield curve helps tell the story. We started
the year with a modestly steep yield curve, but it had steepened further
by the end of 1999, when fears about the Y2K issue and higher interest
rates in response to a booming economy created great uncertainty. At
that time, we were buying longer-maturity bonds at especially attractive
prices and selling shorter-maturity bonds on our belief that heightened
concerns were unfounded.
As the new year dawned and investors realized that the Y2K fears were
overblown, interest rates fell. The yield curve flattened in response to
a more bullish sentiment. Consequently, we found more opportunities in
intermediate maturities. Following the stock market's spring correction,
which had a dampening effect on interest rates, the yield curve
continued to flatten until summer, when it again reversed course. The
yield curve steepened through September, providing another opportunity
to sell intermediate-maturity bonds at a profit.
The Fed did not raise interest rates in October, and the odds are good
that it will move to a neutral bias if the equity markets remain
volatile. As the negative cash flow out of municipal bond funds begins
to lessen, a consequence of improving performance, the investments in
your fund, especially the lower-rated bonds, are well positioned to reap
the benefits of a market that not only has turned around but has
outperformed many equity indexes so far this year.
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 9/30/00, 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 taxes, consistent with capital
preservation.
TOTAL RETURN FOR PERIODS ENDED 9/30/00
Class A Class B Class C Class M
(inception dates) (12/31/76) (1/4/93) (7/26/99) (2/16/95)
NAV POP NAV CDSC NAV CDSC NAV POP
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1 year 4.94% -0.04% 4.26% -0.68% 3.98% 2.99% 4.63% 1.23%
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5 years 28.23 22.07 24.26 22.30 22.70 22.70 26.43 22.38
Annual average 5.10 4.07 4.44 4.11 4.18 4.18 4.80 4.12
------------------------------------------------------------------------------
10 years 94.37 85.21 80.80 80.80 78.67 78.67 87.80 81.77
Annual average 6.87 6.36 6.10 6.10 5.98 5.98 6.51 6.16
------------------------------------------------------------------------------
Annual average
(life of fund) 7.77 7.55 6.91 6.91 6.89 6.89 7.30 7.15
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 9/30/00
Lehman Brothers Municipal Consumer
Bond Index price index
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1 year 6.18% 3.46%
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5 years 32.52 13.32
Annual average 5.79 2.53
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10 years 102.67 30.82
Annual average 7.32 2.72
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Annual average
(life of fund) --* 4.71
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*Index inception date was 12/31/79.
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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,
if 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. For class C
shares, returns for periods prior to their inception are derived from
the historical performance of class A shares, adjusted to reflect both
the CDSC currently applicable to class C shares, which is 1% for the
first year and is eliminated thereafter, and the higher operating
expenses applicable to class C 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.
[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 9/30/90
Lehman Bros.
Fund's class A Municipal Bond Consumer price
Date shares at POP Index index
9/30/90 9,425 10,000 10,000
9/30/91 10,868 11,318 10,339
9/30/92 12,232 12,501 10,648
9/30/93 13,890 14,095 10,934
9/30/94 13,304 13,754 11,258
9/30/95 14,445 15,293 11,545
9/30/96 15,303 16,217 11,891
9/30/97 16,828 17,682 12,155
9/30/98 18,032 19,223 12,329
9/30/99 17,649 19,087 12,645
9/30/00 $18,521 $20,267 $13,082
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 and class C
shares would have been valued at $18,080 and $17,867, respectively, and
no contingent deferred sales charges would apply; a $10,000 investment
in the fund's class M shares would have been valued at $18,780 ($18,177
at public offering price). See first page of performance section for
performance calculation methods.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 9/30/00
Class A Class B Class C Class M
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Distributions
(number) 12 12 12 12
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Income $0.496257 $0.441079 $0.428219 $0.471987
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Capital gains 1 -- -- -- --
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Total $0.496257 $0.441079 $0.428219 $0.471987
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Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
9/30/99 $8.62 $9.05 $8.62 $8.63 $8.64 $8.93
------------------------------------------------------------------------------
9/30/00 8.53 8.96 8.53 8.53 8.55 8.84
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Current return (end of period)
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Current
dividend
rate 2 5.69% 5.42% 5.03% 4.87% 5.39% 5.21%
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Taxable
equivalent 3 9.42 8.97 8.33 8.06 8.92 8.63
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Current
30-day SEC
yield 4 5.17 4.92 4.52 4.36 4.87 4.71
------------------------------------------------------------------------------
Taxable
equivalent 3 8.56 8.15 7.48 7.22 8.06 7.80
------------------------------------------------------------------------------
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 Most recent distribution, annualized and divided by NAV or POP at end
of period.
3 Assumes maximum 39.6% federal income 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 C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
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 or C shares and assumes redemption at the
end of the period. Your fund's class B 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. The CDSC for class C shares is 1% for one
year after purchase.
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 index 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.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Putnam Tax Exempt Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Tax Exempt Income Fund, including the fund's portfolio, as of
September 30, 2000, the related statement of operations for the year
then ended, statements of changes in net assets for each of the years in
the two-year period then ended and financial highlights for each of the
years or periods in the two-year period then ended. 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. The
financial highlights for each of the years in the three-year period ended
September 30, 1998 were audited by other auditors whose report dated
November 10, 1998 expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform our 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, 2000 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 as of September 30, 2000, the results of its
operations, changes in its net assets and financial highlights for each
of the years or periods described above, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Boston, Massachusetts
November 6, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
September 30, 2000
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investors Guarantee Insurance
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FHLMC -- Federal Home Loan Mortgage Corporation.
FNMA Coll. -- Federal National Mortgage Association Collateralized
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 (98.4%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C>
Alabama (1.3%)
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$ 8,500,000 Fairfield, Indl. Dev. Auth. Rev. Bonds (USX Corp.),
Ser. A, 6.7s, 12/1/24 Baa1 $ 8,712,500
9,770,000 Jackson Cnty., Hlth. Care Auth. Hosp. TRAN,
7 7/8s, 5/1/19 AAA/P 10,747,000
3,750,000 Jefferson Cnty., ALA Swr. Rev. Bond (Rites-PA),
Ser. 487 R, FGIC, 8.2s, 2/1/38 (acquired 3/23/99,
cost 4,272,343) (RES) Aaa 3,684,375
-------------
23,143,875
Arizona (1.5%)
-------------------------------------------------------------------------------------------------------------------
6,510,000 AZ State Muni. Fin. Program COP, BIGI, Ser. 34,
7 1/4s, 8/1/09 Aaa 7,657,388
7,220,000 Cochise Cnty., AZ Indl. Dev. Auth. Hosp
Rev. Bonds (Sierra Vista Regl. Hlth.), Ser. A,
6.2s, 12/1/21 BBB-/P 6,317,500
10,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 11,975,000
-------------
25,949,888
Arkansas (0.4%)
-------------------------------------------------------------------------------------------------------------------
3,900,000 AR State Dev. Fin. Auth. Hosp. Rev. Bonds,
(WA Regl. Med. Ctr.), 7 3/8s, 2/1/29 BBB- 3,846,375
3,175,000 Northwest Ark Regl. Arpt. Auth. Rev. Bonds,
7 5/8s, 2/1/27 BB/P 3,325,813
-------------
7,172,188
California (7.1%)
-------------------------------------------------------------------------------------------------------------------
15,500,000 Alameda, Corridor Trans. Auth. CA. Rev. Bonds,
Ser. 99-A, MBIA, zero %, 10/1/31 AAA 2,557,500
2,000,000 Kings Cnty., CA. Multi-Fam. Hsg. Auth. VRDN
(Edgewater Isle Apts), Ser. A, 4.35s, 6/1/07 VMIG1 2,000,000
18,900,000 Los Angeles Cnty., Sanitation Dist. Fin. Auth.
Rev. Bonds, (Capital), MBIA, Ser. A, 5s, 10/1/23 Aaa 17,695,125
7,000,000 Los Angeles Regl., Arpt. Impt. Rev. Bonds,
(United Airlines, Inc.), Ser. G, 8.8s, 11/15/21 Baa2 7,322,980
10,150,000 Orange Cnty., Local Trans. Auth. IFB, FGIC, 7.46s,
2/14/11 (acquired 1/30/97, cost 10,393,516) (RES) Aaa 11,012,750
11,285,000 San Diego Cnty., COP (Inmate Reception
Ctr. & Cooling), MBIA, 6 3/4s, 8/1/19 Aaa 12,484,031
San Joaquin Hills, Trans. Corridor Agcy. Toll
Rd. Rev. Bonds.
21,000,000 zero %, Ser. A, MBIA, 1/15/36 AAA 2,677,500
53,760,000 zero %, 1/1/24 Aaa 14,448,000
39,225,000 zero %, 1/1/22 Aaa 11,816,531
27,400,000 zero %, 1/1/18 Aaa 10,549,000
17,690,000 San Jose, Redev. Agcy. Tax Alloc. Rev. Bonds
(Merged Area Redev.), MBIA, 5s, 8/1/20 Aaa 16,871,838
17,025,000 U. of CA Rev. Bonds (UCSD Med. Ctr.
Satellite Med. Fac.), 7.9s, 12/1/19 A-/P 17,072,159
-------------
126,507,414
Colorado (2.8%)
-------------------------------------------------------------------------------------------------------------------
3,750,000 CO Springs Hosp. Rev. Bonds, 6 3/8s, 12/15/30 A3 3,726,563
Denver, City & Cnty. Arpt. Rev. Bonds
28,660,000 Ser. A, 8 3/4s, 11/15/23 A2 30,236,300
10,340,000 Ser. A, 8 3/4s, 11/15/23 Prerefunded A2 10,999,175
3,980,000 Ser. B, 7 1/4s, 11/15/23 Aaa 4,149,150
1,020,000 Ser. B, 7 1/4s, 11/15/23 Prerefunded Aaa 1,091,400
-------------
50,202,588
Connecticut (1.3%)
-------------------------------------------------------------------------------------------------------------------
8,000,000 CT State Dev. Auth. Poll. Control Rev. Bonds
(Western MA), Ser. A, 5.85s, 9/1/28 Ba1 7,440,000
Mashantucket, Western Pequot Tribe 144A
Rev. Bonds. Ser. A.
7,565,000 6.4s, 9/1/11 (acquired 12/17/97,
cost 7,496,412 ) (RES) Baa2 7,848,688
7,435,000 6.4s, 9/1/11 (Prerefunded (acquired 12/17/97,
cost 7,367,591 ) (RES) Aaa 8,234,263
-------------
23,522,951
District of Columbia (5.0%)
-------------------------------------------------------------------------------------------------------------------
DC G.O. Bonds, Ser. A
39,250,000 6 3/8s, 6/1/26 AAA 42,831,563
38,175,000 6s, 6/1/26 Ba1 37,268,344
7,000,000 DC, Georgetown U. IFB, 8.78s, 4/25/22 A1 7,665,000
-------------
87,764,907
Florida (3.8%)
-------------------------------------------------------------------------------------------------------------------
11,010,000 FL State Gen. Svcs. Rev. Bonds, 8 1/4s, 7/1/17
(acquired 9/2/98, cost 14,162,544) (RES) AAA/P 12,978,038
5,530,000 Halifax, FLA Hosp. Med. Ctr. Rev. Bonds, Ser. A,
7 1/4s, 10/1/29 BB/P 5,301,888
18,500,000 Hernando Cnty. Rev. Bonds, (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 (SEG) Aaa 23,009,375
16,375,000 Martin Cnty., Indl. Dev. Auth. Rev. Bonds
(Indian Cogeneration), Ser. A, 7 7/8s, 12/15/25 Baa3 16,661,563
Oakstead Cmnty. Dev. Dist. FLA Cap. Impt.,
Rev. Bonds.
1,175,000 Ser. A, 7.2s, 5/1/32 BB/P 1,179,406
3,000,000 Ser. B, 6 1/2s, 5/1/07 BB/P 3,000,000
Tampa, FLA Util. Tax & Special Rev. Bonds, AMBAC
1,500,000 6s, 10/1/09 AAA/P 1,590,000
1,500,000 6s, 10/1/08 AAA/P 1,586,250
2,500,000 6s, 10/1/07 AAA/P 2,634,375
-------------
67,940,895
Georgia (3.8%)
-------------------------------------------------------------------------------------------------------------------
12,000,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds
(Briarcliff Park Apts.), Ser. A, 7 1/2s, 4/1/17 AAA/P 12,765,000
GA Muni. Elec. Pwr. Auth. Rev. Bonds
10,000,000 Ser. B, FGIC, 8 1/4s, 1/1/11 Aaa 12,587,500
21,700,000 Ser. Y, AMBAC, 6.4s, 1/1/13 Aaa 24,168,375
10,460,000 GA State G.O. Bonds, Ser. D, 6.8s, 8/1/11 Aaa 12,068,225
5,000,000 GA State Private Colleges & Univs. Auth.
Rev. Bonds (Emory U.), Ser. A, 5 1/2s, 11/1/31 AA 4,856,250
-------------
66,445,350
Illinois (2.2%)
-------------------------------------------------------------------------------------------------------------------
Chicago IL Board of Ed. G.O. Bonds, Ser A, FGIC.
5,400,000 zero %, 12/1/17 Aaa 2,011,500
7,750,000 zero %, 12/1/16 Aaa 3,080,625
14,500,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(American Airlines, Inc.), 8.2s, 12/1/24 Baa1 16,022,500
2,765,000 Huntley IL Special Srvs. Area No. 9 Special Tax
Rev. Bonds, Ser. A, 7 3/4s, 3/1/28 BB+/P 2,785,738
IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.).
3,060,000 8 3/4s, 7/1/11 B/P 3,202,045
1,565,000 8 3/4s, 7/1/11 Prerefunded AAA/P 1,631,184
IL Hlth Facs. Auth. IFB , MBIA
8,000,000 (Rush Med Ctr.) 9.01s, 10/1/24 Aaa 8,681,680
2,000,000 (Methodist Hlth.), AMBAC, 9.16s, 5/18/21 Aaa 2,134,120
-------------
39,549,392
Indiana (1.7%)
-------------------------------------------------------------------------------------------------------------------
9,000,000 Fort Wayne, Hosp. Auth. Rev. Bonds (Parkview
Hlth. Syst., Inc.), MBIA, 4 3/4s, 11/15/28 Aaa 7,425,000
4,150,000 IN State Dev. Fin. Auth. Rev. Bonds (USX Corp.),
5.6s, 12/1/32 Baa1 3,652,000
20,000,000 Indianapolis Indl. Arpt. Auth. Special Fac. Rev.
Bonds (United Airlines), Ser. A, 6 1/2s, 11/15/31 Baa3 19,200,000
-------------
30,277,000
Kansas (1.1%)
-------------------------------------------------------------------------------------------------------------------
18,200,000 Burlington, Poll. Control IFB (KS Gas & Electric),
Ser. 91-4, MBIA, 8.96s, 6/1/31 (acquired various dates
from 6/20/91 to 2/14/94, cost 20,181,360) (RES) AAA 19,426,316
Louisiana (2.1%)
-------------------------------------------------------------------------------------------------------------------
17,800,000 Lake Charles, Harbor & Term. Dist. Port Fac. Rev.
Bonds (Trunkline Co.), 7 3/4s, 8/15/22 A3 18,979,250
8,500,000 Louisiana Pub. Facs. Auth. Hosp. Rev. Bonds (Lake
Charles Memorial Hosp. Project), 8 5/8s, 12/1/30 BB/P 8,351,250
8,565,000 W. Feliciana, Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.), Ser. III, 7.7s, 12/1/14 Ba1 8,950,425
-------------
36,280,925
Maine (0.7%)
-------------------------------------------------------------------------------------------------------------------
11,935,000 Bucksport Solid Waste Disp. Rev. Bonds
(Champion Intl. Corp.), 6 1/4s, 5/1/10 Baa1 12,069,269
Massachusetts (6.0%)
-------------------------------------------------------------------------------------------------------------------
11,595,000 MA State, G.O. Bonds, Ser. 25, 8.22s, 11/1/11
(acquired 8/13/98, cost 14,266,954) (RES) Aa3 13,638,619
20,000,000 MA State, Rev. Bonds (Grant Anticipation Notes),
Ser. A, MBIA, 5 1/2s, 6/15/13 Aaa 20,625,000
MA State Hlth & Ed. Fac. Auth. Rev. Bonds
7,000,000 AMBAC, 6.55s, 6/23/22 Aaa 7,393,750
6,000,000 (Caritas Christian Oblig. Group), Ser. A,
5 5/8s, 7/1/20 Baa2 5,047,500
5,370,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 AAA 5,685,488
MA State Hlth. & Edl. Fac. Auth. IFB
11,000,000 (St. Elizabeth Hosp.), FSA, Ser. E, 8.84s, 8/12/21 Aaa 11,738,980
18,000,000 (Boston Univ.), MBIA, 8.27s, 10/1/31 Aaa 19,194,480
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
4,400,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 4,638,128
6,900,000 Ser. A, 9s, 7/1/15 BB-/P 7,266,252
5,700,000 MA State Port Auth. Rev. Bonds Stepped-coupon,
zero %, (13s, 1/1/04), 7/1/13 (STP) Aaa 7,381,500
4,100,000 MA State Tpk. Auth. Met Hwy Sys. Rev. Bonds,
MBIA, Ser. A, 5s, 1/1/37 Aaa 3,577,250
-------------
106,186,947
Michigan (2.7%)
-------------------------------------------------------------------------------------------------------------------
4,400,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev.
Bonds, Ser. A, 5 1/2s, 5/1/21 A2 3,965,500
11,355,000 Greater Detroit, Res. Recvy. Auth. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 12/13/08 Aaa 12,362,756
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Sinai Hosp.),
6.7s, 1/1/26 A- 4,256,250
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 10,412,500
6,745,000 Pontiac, Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/13 Baa3 5,927,169
10,475,000 Wayne Charter Cnty., Special Arpt. Fac. Rev. Bonds
(Northwest Airlines Inc.), 6 3/4s, 12/1/15 BB+ 10,396,438
-------------
47,320,613
Minnesota (0.2%)
-------------------------------------------------------------------------------------------------------------------
4,010,000 Martin Cnty., Hosp. Rev Bonds (Fairmont
Cmnty. Hosp.), 6 5/8s, 9/1/22 BB+/P 3,523,788
Missouri (0.9%)
-------------------------------------------------------------------------------------------------------------------
14,400,000 MO State Hlth. & Edl. Fac. Auth. Rev. Bonds
(BJC Hlth. Syst.), Ser. A, 6 1/2s, 5/15/20 Aaa 15,534,000
Montana (1.1%)
-------------------------------------------------------------------------------------------------------------------
4,000,000 MT State Board Investment Exempt Fac. Rev.
Bonds (Still Water Mining Project), 8s, 7/1/20 BB 4,210,000
14,000,000 MT State Hlth. Fac. Auth. Hosp. IFB (Deaconess Med.
Ctr. Project B), AMBAC, Ser. B, 8.60s, 3/8/16 Aaa 14,670,740
-------------
18,880,740
Nebraska (1.0%)
-------------------------------------------------------------------------------------------------------------------
9,000,000 NE Investment Fin. Auth. IFB (Bishop Clarkson
Mem Hosp.), MBIA, 8.71s, 12/08/16 Aaa 9,697,500
NE Investment Fin. Auth. Single Fam. Mtge. Rev
Bond. IFB. GNMA Coll.
2,450,000 8.86s, 9/15/24 Aaa 2,606,188
5,800,000 Ser. B, Project B, 9.31s, 10/17/23 Aaa 6,145,158
-------------
18,448,846
Nevada (0.6%)
-------------------------------------------------------------------------------------------------------------------
Director St. Nev Dept. Business & Industry, Rev.
Bonds (Las Vegas Monorail), AMBAC
5,000,000 (2nd Tier), 7 3/8s, 1/1/40 BB-/P 4,818,750
7,000,000 (1st Tier), 5 3/8s, 1/1/40 AAA 6,492,500
-------------
11,311,250
New Hampshire (0.7%)
-------------------------------------------------------------------------------------------------------------------
10,500,000 NH State Tpk. Sys. IFB, FGIC, 8.97s, 11/1/17 Aaa 12,363,750
New Jersey (2.6%)
-------------------------------------------------------------------------------------------------------------------
8,000,000 NJ Econ. Dev. Auth. Special Fac. Rev. Bonds
(Continental Airlines, Inc.), 6 1/4s, 9/15/29 Ba2 7,470,000
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
5,000,000 (Trinitas Hosp. Oblig. Group), 7 1/2s, 7/1/30 BBB- 5,150,000
13,500,000 (Raritan Bay Med. Ctr.), 7 1/4s, 7/1/27 B/P 12,031,875
5,300,000 (Raritan Bay Med. Ctr.), 7 1/4s, 7/1/14 B/P 4,902,500
NJ State Trans. Trust Fund Auth. Rev. Bonds.
10,000,000 (Trans. Syst.), Ser. B, MBIA, 6 1/2s, 6/15/10 Aaa 11,225,000
5,000,000 Ser. A, 5 5/8s, 6/15/14 AA 5,193,750
-------------
45,973,125
New York (17.0%)
-------------------------------------------------------------------------------------------------------------------
12,500,000 Long Island, Pwr. Auth. NY Elec. Syst. IFB, 6.78s,
12/1/24 (acquired 5/19/98, cost 13,496,874) (RES) A-/P 12,187,500
Long Island, Pwr. Auth. NY Elec. Syst. Rev. Bonds,
Ser. A
10,000,000 FSA, 5 1/2s, 12/1/13 Aaa 10,400,000
14,750,000 FSA, 5 1/2s, 12/1/12 AAA 15,395,313
Nassau Cnty., Hlth. Care Corp. Rev. Bonds, FSA.
5,000,000 6s, 8/1/15 Aaa 5,281,250
4,410,000 6s, 8/1/14 Aaa 4,685,625
NY City, G.O. Bonds
4,600,000 Ser. F, 8.4s, 11/15/07 Aaa 4,864,500
4,855,000 Ser. F, 8.4s, 11/15/06 Aaa 5,134,163
4,635,000 Ser. F, 8.4s, 11/15/05 Aaa 4,901,513
29,335,000 (Group B), Ser. D, 8 1/4s, 8/1/12 Aaa 30,686,463
9,800,000 Ser. D, 8 1/4s, 8/1/11 Aaa 10,251,486
13,235,000 Ser. B, MBIA, 6 1/2s, 8/15/10 AAA 14,889,375
6,765,000 Ser. D, MBIA, 6 1/2s, 11/1/09 Aaa 7,559,888
10,000,000 Ser. G, 5s, 8/1/22 A 8,900,000
10,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds
(Visy Paper Inc.), 7.95s, 1/1/28 B/P 10,350,000
NY City, Muni. Wtr. & Swr. Syst. Fin. Auth.
Rev. Bonds, Ser. B.
3,000,000 AMBAC, 5 1/4s, 6/15/29 AAA 2,790,000
20,000,000 FGIC, 5 1/8s, 6/15/30 AAA 18,225,000
23,000,000 NY State Dorm. Auth. Cap. Appn. Rev. Bonds
(State U.), Ser. B, MBIA, zero %, 5/15/09 Aaa 14,921,250
2,800,000 NY State Dorm. Auth. Lease Rev. Bonds
(Court Facs.), 6s, 5/15/39 A 2,863,000
NY State Dorm. Auth. Rev. Bonds
10,900,000 (Construction City U. Syst.), Ser. A, 6s, 7/1/20 Baa1 11,445,000
7,500,000 (State U. Edl Facs.) MBIA, 6s, 5/15/16 AAA 7,959,375
7,000,000 (State U. Edl Facs.) MBIA, 6s, 5/15/15 AAA 7,455,000
12,485,000 (U. Syst. Construction), Ser. A, 5 3/4s, 7/1/18 Baa1 12,797,125
23,100,000 (State U. Edl. Fac.), Ser. A, 5 1/2s, 5/15/19 A 23,013,375
7,515,000 (North Shore U. Hosp.), MBIA, 5 1/2s, 11/1/11 AAA 7,815,600
NY State Med. Care Fac. Fin. Agcy. Rev. Bonds
(Mental Hlth. Svcs. Fac.), Ser. B.
2,480,000 7 5/8s, 8/15/17 A 2,583,391
5,450,000 7 5/8s, 8/15/17 Prerefunded A 5,706,695
6,000,000 NY State Metropolitan Trans. Auth. Dedicated
Tax Fd. Rev. Bonds, Ser. A, FGIC, 5 7/8s, 4/1/25 Aaa 6,112,500
7,000,000 NY State, Thruway Auth. Hwy. & Bridge Rev.
Bonds, Ser. B, FGIC, 5 1/2s, 4/1/10 AAA 7,323,750
Syracuse, G.O. Bonds (Pub. Impt.), Ser. A, FSA
1,200,000 6s, 4/15/13 AAA 1,278,000
1,150,000 6s, 4/15/12 AAA 1,231,938
1,075,000 6s, 4/15/11 AAA 1,158,313
1,025,000 6s, 4/15/10 AAA 1,110,844
20,000,000 NY State Urban Dev. Corp. Rev. Bonds, HUD
Sect. 236 Go. Of Corp., 5 1/2s, 7/1/16 Aaa 20,050,000
-------------
301,327,232
North Carolina (5.0%)
-------------------------------------------------------------------------------------------------------------------
19,700,000 NC Eastern Muni Pwr. Agcy. IFB, FGIC, 7.1s,
1/1/25 (acquired various dates from 12/28/93 to
4/12/95, cost 23,983,708) (RES) Aaa 21,522,250
NC Eastern Muni. Pwr. Agcy. Rev. Bonds
11,680,000 Ser. C, MBIA, 7s, 1/1/13 Aaa 13,548,800
5,000,000 Ser. D, 6 3/4s, 1/1/26 BBB 5,100,000
29,000,000 (No. 1 Catawba Elec.), Ser. B, 6 1/2s, 1/1/20 BBB+ 29,580,000
10,000,000 AMBAC, 6s, 1/1/18 AAA 10,550,000
5,000,000 Ser. A, 5 3/4s, 1/1/26 Baa3 4,556,250
3,000,000 NC Med. Care Comm. Retirement Fac. Rev. Bond
(United Methodist Homes), 7 1/8s, 10/1/23 BB/P 2,906,250
-------------
87,763,550
Ohio (1.6%)
-------------------------------------------------------------------------------------------------------------------
1,455,301 Lake Cnty. Indl. Dev. Rev. Bonds (Madison Inn
Hlth. Ctr.), FHA Insd., 12s, 5/1/14 A-/P 1,487,681
2,773,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. IFB, Ser. A-2,
GNMA Coll., 9.16s, 3/24/31 Aaa 2,925,515
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds.
7,775,000 9s, 9/1/18 (acquired various dates from
12/20/93 to 7/10/95, cost 6,383,994) (RES) AAA/P 7,564,531
7,775,000 Interest Only (IO), Ser. 4,GNMA Coll, 9s, 9/1/01 AAA/P 616,169
15,000,000 OH State, Tpk. Comm. Rev. Bonds, Ser. B, FGIC,
4 3/4s, 2/15/28 AAA 12,862,500
4,000,000 OH State Wtr. Dev. Auth. Pollution Ctl. Rev. Bonds
(Cleveland Elec.), Ser. A, 6.1s, 8/1/20 Baa3 3,785,000
-------------
29,241,396
Oklahoma (0.9%)
-------------------------------------------------------------------------------------------------------------------
15,000,000 OK Dev. Fin. Auth. Rev. Bonds (Hillcrest
Healthcare Sys.), Ser. A, 5 5/8s, 8/15/29 Ba1 10,425,000
6,000,000 OK ST. Inds. Dev. Auth. Rev. Bonds
(Hlth. Syst.-Oblig. Group), Ser. A, 5 3/4s, 8/15/29 AAA 5,872,500
-------------
16,297,500
Pennsylvania (4.4%)
-------------------------------------------------------------------------------------------------------------------
8,150,000 Allegheny Cnty., Arpt. Rev. Bonds (Pittsburgh
Intl. Arpt.), MBIA, Ser. A, 5 3/4s, 1/1/11 Baa 8,516,750
2,780,000 Canon-McMillan Sch. Dist. PA. G.O. Bonds, FGIC,
zero %, 12/1/20 AAA 865,275
8,250,000 Carbon Cnty., PA. Indl. Dev. Auth. Rev. Bonds
(Panther Creek Partners PJ), 6.65s, 5/1/10 BBB- 8,425,313
7,845,000 Clearfield Hosp. Auth. Rev. Bonds (Clearfield Hosp.),
6 7/8s, 6/1/16 BBB 7,776,356
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
6,000,000 Ser. D, 7.15s, 12/1/18 BBB- 6,187,500
10,000,000 (Colver), Ser. D, 7 1/8s, 12/1/15 BBB- 10,312,500
12,700,000 Ser. A, 6.4s, 1/1/09 (Northampton Generating) BBB- 12,430,125
20,000,000 PA State, Tpk. Comm. Oil Franchise Tax Rev. Bonds,
AMBAC, Ser. B, 4 3/4s, 12/1/27 Aaa 17,050,000
3,400,000 PA G.O. Bonds, FGIC, 4 3/4s, 5/15/20 Aaa 2,992,000
10,000,000 PA Hosp. & Higher Ed. Fac. Auth. Rev. Bonds
(Graduate Hlth. Syst. Oblig GP.), 7 1/4s, 7/1/10
(acquired 4/11/96, cost 10,062,500)
(In default) (NON) (RES) D 3,300,000
-------------
77,855,819
Puerto Rico (0.7%)
-------------------------------------------------------------------------------------------------------------------
PR Comnwlth. Hwy. & Trans. Auth. Rev. Bonds, MBIA.
6,700,000 6 1/4s, 7/1/12 Aaa 7,554,250
5,000,000 Ser. B, 5 7/8s, 7/1/35 AAA 5,168,750
-------------
12,723,000
South Carolina (0.2%)
-------------------------------------------------------------------------------------------------------------------
4,150,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds (Stone
Container Corp.), 7 3/8s, 2/1/07 B/P 4,181,125
Tennessee (1.5%)
-------------------------------------------------------------------------------------------------------------------
40,000,000 Metro. Govt Nashville & Davidson Cnty. TN Hlth. &
Ed. Fac. Board Rev. Bonds (Volunteer Hlth. Care),
zero %, 6/1/21 Aaa 10,600,000
TN Hlth. & Edl. Facs. Board Rev. Bonds (Ref-1st
Mtg-Mtn. States Hlth.)
3,000,000 Elizabethton Ser. B, 8s, 7/1/33 AAA 3,138,750
7,000,000 Johnson City, Ser. A, 7 1/2s, 7/1/33 AAA 7,017,500
5,000,000 Johnson City, Ser. A, 7 1/2s, 7/1/25 AAA 5,037,500
-------------
25,793,750
Texas (10.3%)
-------------------------------------------------------------------------------------------------------------------
4,250,000 Abilene, Hlth. Fac. Dev. Corp. Rev. Bonds
(Sears Methodist Retirement), Ser. A, 5 7/8s,
11/15/18 BB+/P 3,474,375
30,000,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa1 30,702,600
15,000,000 Dallas Cnty., G.O. Bonds, (Flood Control Dist. (SEG)1),
4/1/16 (acquired 11/18/94, cost 10,059,000) (RES) D/P 13,500,000
8,000,000 Dallas-Fort Worth TX Intl. Arpt. Fac. Impt. Corp.
Rev. Bonds (American Airlines Inc.), GTY
AGMT, 6 3/8s, 5/1/35 Baa1 7,730,000
25,250,000 Gulf Coast, Waste Disposal Auth. Rev. Bonds
(Champion Intl. Corp.), 7.45s, 5/1/26 Baa1 26,260,000
12,555,000 Harris Cnty., Hlth. Facs. Dev. Corp. Rev. Bonds
(Christus Hlth.), Ser. A, 5 5/8s, 7/1/12 AAA 12,617,775
Houston, Arpt. Syst. Rev. Bonds (Continental)
10,880,000 Ser. B, 5.7s, 7/15/29 Ba1 8,894,400
8,000,000 Ser. C, 5.7s, 7/15/29 Ba1 6,540,000
10,700,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds (Memorial
Hlth. Syst.of East TX), 6 7/8s, 2/15/26 BBB- 10,004,500
20,000,000 North Central Hlth. Fac. Dev. Corp. IFB
(Baylor U. Med. Ctr.), Ser. A, 9.14s, 5/15/16 Aa2 21,377,200
1,150,000 TX State Dept. Hsg. & Cmnty. Affairs Home Mtge.
IFB, GNMA/FNMA/FHLMC Coll. Rev. Bond,
Ser. B-2 8.95s, 6/18/23 AAA 1,153,036
6,500,000 TX State Indl. Dev. Corp. Rev. Bonds
(Arco Pipeline Co.), 7 3/8s, 10/1/20 Aa2 7,743,125
20,800,000 TX State Rev. Bonds, 6.2s, 9/30/11 Aa2 22,854,000
10,000,000 TX State Tpk. Auth. Rev. Bonds, FGIC, 5 1/2s,
1/1/15 Aaa 10,062,500
-------------
182,913,511
Utah (1.5%)
-------------------------------------------------------------------------------------------------------------------
19,065,000 Intermountain Pwr. Agcy. Rev. Bonds, (UT State
Pwr. Supply), MBIA, Ser. B, 6 1/2s, 7/1/09 AAA/P 21,233,644
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC Hosps. Inc.),
Ser. A, 8 1/8s, 5/15/15 AAA 6,218,750
-------------
27,452,394
Vermont (0.4%)
-------------------------------------------------------------------------------------------------------------------
7,600,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds
(Reserved-4-Hosp. Med. Ctr.), FGIC, 6 1/4s, 9/1/19 AAA 7,951,500
Virginia (2.9%)
-------------------------------------------------------------------------------------------------------------------
10,500,000 Henrico Cnty., VA Indl. Dev. Auth. IFB (Bon Secours
Hlth. Syst.), FSA, 7.23s, 8/23/27 Aaa 11,235,000
7,500,000 Pocahontas Pkwy Assoc. VA Toll Rd. Rev. Bonds,
Ser. A, 5 1/2s, 8/15/28 Baa3 6,140,625
30,000,000 Winchester, VA Indl. Dev. Auth. IFB (Winchester
Med. Ctr.), AMBAC, 8.31s, 1/21/14 Aaa 34,012,489
--------------
51,388,114
Washington (1.2%)
-------------------------------------------------------------------------------------------------------------------
5,200,000 Port of Moses Lake, Pub. Corp. Poll. Control Rev.
Bonds (Union Carbide Corp.), 7 1/2s, 8/1/04 Baa2 5,208,788
WA State Hlth. Care Fac. Auth. Rev. Bonds
(Hutchinson Cancer Ctr.), Ser. D
8,400,000 7 3/8s, 1/1/18 Aa3 8,617,560
7,700,000 7.3s, 1/1/12 Aa1 7,898,275
--------------
21,724,623
Wisconsin (0.2%)
-------------------------------------------------------------------------------------------------------------------
2,665,000 WI Hsg. & Econ. Dev. Auth. IFB (Home
Ownership Dev.) 9.45s, 10/25/22 Aa3 2,747,562
--------------
Total Municipal Bonds and Notes
(cost $1,703,722,802) $1,745,157,093
<CAPTION>
PREFERRED STOCK (0.8) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
4,000,000 Charter Mac Equity 6.625% pfd. (acquired 6/11/99,
cost $4,000,000) (RES) $ 3,870,000
6,000,000 MuniMae Tax Exempt Bond Subsidiary,
LLC 144A, 6.875%, cum.pfd. (acquired 5/7/99,
cost $6,000,000) (RES) 5,902,500
4,000,000 MuniMae Tax Exempt Bond Subsidiary, Ser. B,
7 3/4s, 11/1/10 4,010,000
--------------
Total Preferred Stock (cost $14,000,000) $ 13,782,500
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,717,722,802) (b) $1,758,939,593
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,772,705,287.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at September 30, 2000 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, 2000. 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 $1,717,904,433,
resulting in gross unrealized appreciation and depreciation of
$86,944,332 and $45,909,172, respectively, or net unrealized
appreciation of $41,035,160.
(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, 2000
was $144,669,830 or 8.2% of net assets.
(SEG) A portion of these securities was pledged and segregated with the
custodian to cover margin requirements for futures contracts at
September 30, 2000.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on IFB 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, 2000.
The fund had the following industry group concentrations greater
than 10% at September 30, 2000 (as a percentage of net assets):
Hospital/Health care 16.4%
Utilities 16.3
Transportation 15.2
The fund had the following insurance concentration greater than
10% at September 30, 2000 (as a percentage of net assets):
MBIA 14.1%
------------------------------------------------------------------------------
Futures Contracts Outstanding at September 30, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
------------------------------------------------------------------------------
Muni Bond Index
(Short) $25,447,500 $25,739,310 Dec. 00 $291,810
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
<S> <C>
Assets
---------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $1,717,722,802) (Note 1) $1,758,939,593
---------------------------------------------------------------------------------------------
Interest and other receivables 29,181,600
---------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,384,651
---------------------------------------------------------------------------------------------
Receivable for securities sold 450,000
---------------------------------------------------------------------------------------------
Total assets 1,789,955,844
Liabilities
---------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 2,454,862
---------------------------------------------------------------------------------------------
Payable for variation margin 24,375
---------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,384,656
---------------------------------------------------------------------------------------------
Payable for securities purchased 5,869,215
---------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,037,772
---------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 2,247,554
---------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 170,003
---------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 49,543
---------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,108
---------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 936,895
---------------------------------------------------------------------------------------------
Other accrued expenses 71,574
---------------------------------------------------------------------------------------------
Total liabilities 17,250,557
---------------------------------------------------------------------------------------------
Net assets $1,772,705,287
Represented by
---------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,768,076,226
---------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (3,703,047)
---------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (33,176,493)
---------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 41,508,601
---------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,772,705,287
Computation of net asset value and offering price
---------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,577,486,763 divided by 184,835,928 shares) $8.53
---------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.53)* $8.96
---------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($184,032,612 divided by 21,568,837 shares)*** $8.53
---------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($1,783,370 divided by 208,956 shares)*** $8.53
---------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($9,402,542 divided by 1,099,127 shares) $8.55
---------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.55)** $8.84
---------------------------------------------------------------------------------------------
* 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, 2000
<S> <C>
Tax exempt interest income: $121,051,117
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,046,050
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,168,303
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 37,546
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 16,863
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 3,231,073
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,692,413
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 11,456
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 46,136
-------------------------------------------------------------------------------------------
Other 380,997
-------------------------------------------------------------------------------------------
Total expenses 15,630,837
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (344,168)
-------------------------------------------------------------------------------------------
Net expenses 15,286,669
-------------------------------------------------------------------------------------------
Net investment income 105,764,448
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (3,065,485)
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,194,941)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (17,956,554)
-------------------------------------------------------------------------------------------
Net loss on investments (22,216,980)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 83,547,468
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended September 30
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 105,764,448 $ 108,159,104
--------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (4,260,426) 67,244
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (17,956,554) (152,688,772)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 83,547,468 (44,462,424)
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (94,878,646) (96,670,820)
--------------------------------------------------------------------------------------------------
Class B (10,397,256) (10,680,703)
--------------------------------------------------------------------------------------------------
Class C (57,658) (2,378)
--------------------------------------------------------------------------------------------------
Class M (516,686) (475,838)
--------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (2,118,523)
--------------------------------------------------------------------------------------------------
Class B -- (267,654)
--------------------------------------------------------------------------------------------------
Class M -- (11,143)
--------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
Class A -- (3,778,117)
--------------------------------------------------------------------------------------------------
Class B -- (477,326)
--------------------------------------------------------------------------------------------------
Class M -- (19,873)
--------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (172,448,571) (131,696,702)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (194,751,349) (290,661,501)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 1,967,456,636 2,258,118,137
--------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $3,703,047 and
$4,176,192 respectively) $1,772,705,287 $1,967,456,636
--------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.62 $9.30 $9.12 $8.76 $8.74
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .50 .47 .45 .48 .49
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) (.66) .19 .36 .02
-----------------------------------------------------------------------------------------------------
Total from
investment operations .41 (.19) .64 .84 .51
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.50) (.46) (.46) (.48) (.49)
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.01) -- -- --
-----------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.50) (.49) (.46) (.48) (.49)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.53 $8.62 $9.30 $9.12 $8.76
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.94 (2.12) 7.22 9.89 5.94
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,577,487 $1,737,755 $1,998,387 $2,054,537 $2,117,684
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .78 .81 .81 .78 .78
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.88 5.14 4.92 5.40 5.58
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.25 11.02 29.61 52.33 92.99
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestments and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with
PFTC (Note 2).
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.62 $9.30 $9.12 $8.76 $8.73
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .44 .41 .39 .43 .43
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) (.66) .19 .36 .03
-----------------------------------------------------------------------------------------------------
Total from
investment operations .35 (.25) .58 .79 .46
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.44) (.40) (.40) (.43) (.43)
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.01) -- -- --
-----------------------------------------------------------------------------------------------------
In excess of net realized gains
on investments -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.44) (.43) (.40) (.43) (.43)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.53 $8.62 $9.30 $9.12 $8.76
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.26 (2.76) 6.52 9.18 5.38
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $184,033 $219,300 $249,541 $245,759 $250,990
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.43 1.46 1.46 1.43 1.43
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.23 4.49 4.28 4.75 4.92
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.25 11.02 29.61 52.33 92.99
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestments and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with
PFTC (Note 2).
</TABLE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
--------------------------------------------------------------
For the period
Per-share Year ended July 26, 1999+
operating performance Sept. 30 to Sept. 30
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
Net asset value,
beginning of period $8.63 $8.87
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment income .43 .07
--------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.10) (.24)
--------------------------------------------------------------
Total from
investment operations .33 (.17)
--------------------------------------------------------------
Less distributions:
--------------------------------------------------------------
From net
investment income (.43) (.07)
--------------------------------------------------------------
From net realized gain
on investments -- --
--------------------------------------------------------------
In excess of net
realized gain on investments -- --
--------------------------------------------------------------
Total distributions (.43) (.07)
--------------------------------------------------------------
Net asset value,
end of period $8.53 $8.63
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(a) 3.98 (1.85)*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $1,783 $637
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.58 .29*
--------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.06 .88*
--------------------------------------------------------------
Portfolio turnover (%) 19.25 11.02
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestments and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with
PFTC (Note 2).
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
-----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended September 30
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.64 $9.32 $9.14 $8.78 $8.75
-----------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------
Net investment income .47 .44 .43 .45 .46
-----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) (.65) .19 .37 .03
-----------------------------------------------------------------------------------------------------
Total from
investment operations .38 (.21) .62 .82 .49
-----------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------
From net
investment income (.47) (.44) (.44) (.46) (.46)
-----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.01) -- -- --
-----------------------------------------------------------------------------------------------------
In excess of net
realized gain on investments -- (.02) -- -- --
-----------------------------------------------------------------------------------------------------
Total distributions (.47) (.47) (.44) (.46) (.46)
-----------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.55 $8.64 $9.32 $9.14 $8.78
-----------------------------------------------------------------------------------------------------
Ratios and supplemental data
-----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 4.63 (2.40) 6.89 9.55 5.72
-----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $9,403 $9,764 $10,191 $8,280 $5,732
-----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.08 1.11 1.11 1.08 1.06
-----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.58 4.84 4.65 5.07 5.26
-----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.25 11.02 29.61 52.33 92.99
-----------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestments and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements with
PFTC (Note 2).
</TABLE>
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
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, class C 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 C shares are subject to the same fees and expenses as
class B shares, except that class C shares have a one-year 1.00%
contingent deferred sales charge and do not convert to class A shares.
Class M shares are sold with a maximum front end sales charge of 3.25%
and pay an ongoing distribution fee that is higher than class A shares
but lower than class B and class C 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 that 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 of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. 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.
Restricted securities are stated at fair value following procedures
approved by the Trustees. 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). Gains or losses on securities sold are determined
on the identified cost basis. Interest income is recorded on the accrual
basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
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, 2000, 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. At September 30, 2000, the fund had a capital loss
carryover of approximately $14,731,000 available to offset future net
capital gain, if any, which will expire on September 30, 2008.
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
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 sales transactions, post-October loss
deferrals, dividends payable, defaulted bond interest, unrealized gains
and losses on certain futures contracts, market discount, straddle loss
deferrals, book accretion/amortization adjustment and partnership
income. 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, 2000, the fund reclassified $558,943 to decrease
distribution in excess of net investment income and $1,662,314 to
decrease paid-in-capital, with a decrease to accumulated net realized
losses of $1,103,371. 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 in excess of maturity
value is amortized on a yield-to-maturity basis. 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, stepped-coupon bonds and payment
in kind 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 upon the lesser of (i) an annual rate of
0.50% of the average net asset value of the Fund or (ii) 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, 0.33% thereafter.
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.
Under 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, 2000, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
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, 2000, fund expenses were reduced by
$344,168 under expense offset arrangements with PFTC and brokerage
service arrangements (only if applicable to your fund). 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 $1,474
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. 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
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 a 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, class C 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 Retail Management, Inc., 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 Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.20%, 0.85%,
1.00% and 0.50% of the average net assets attributable to class A, class
B, class C and class M shares respectively.
For the year ended September 30, 2000, Putnam Retail Management, Inc.,
acting as underwriter received net commissions of $59,359 and $810 from
the sale of class A and class M shares, respectively, and received
$309,982 and $1,920 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended September 30, 2000, Putnam Retail Management,
Inc., acting as underwriter received $30,182 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended September 30, 2000, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $348,242,899 and $508,674,298, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At September 30, 2000, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended September 30, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 24,489,738 $ 206,538,186
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,862,785 57,864,624
---------------------------------------------------------------------------
31,352,523 264,402,810
Shares
repurchased (48,063,061) (405,097,542)
---------------------------------------------------------------------------
Net decrease (16,710,538) $(140,694,732)
---------------------------------------------------------------------------
Year ended September 30, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 16,432,211 $ 148,695,789
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,507,094 58,762,128
---------------------------------------------------------------------------
22,939,305 207,457,917
Shares
repurchased (36,237,597) (327,691,753)
---------------------------------------------------------------------------
Net decrease (13,298,292) $(120,233,836)
---------------------------------------------------------------------------
Year ended September 30, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 2,287,456 $ 19,551,502
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 759,710 6,147,561
---------------------------------------------------------------------------
3,047,166 25,699,063
Shares
repurchased (6,919,519) (58,347,192)
---------------------------------------------------------------------------
Net decrease (3,872,353) $(32,648,129)
---------------------------------------------------------------------------
Year ended September 30, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 2,470,027 $ 22,383,882
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 785,074 7,084,886
---------------------------------------------------------------------------
3,255,101 29,468,768
Shares
repurchased (4,648,909) (41,897,239)
---------------------------------------------------------------------------
Net decrease (1,393,808) $(12,428,471)
---------------------------------------------------------------------------
Year ended September 30, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 173,334 $1,463,872
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,068 34,377
---------------------------------------------------------------------------
177,402 1,498,249
Shares
repurchased (42,302) (355,350)
---------------------------------------------------------------------------
Net increase 135,100 $1,142,899
---------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations) to
September 30, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 76,151 $660,173
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 88 761
---------------------------------------------------------------------------
76,239 660,934
Shares
repurchased (2,383) (20,642)
---------------------------------------------------------------------------
Net increase 73,856 $640,292
---------------------------------------------------------------------------
Year ended September 30, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 239,544 $2,037,947
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 46,533 393,139
---------------------------------------------------------------------------
286,077 2,431,086
Shares
repurchased (316,555) (2,679,695)
---------------------------------------------------------------------------
Net decrease (30,478) $ (248,609)
---------------------------------------------------------------------------
Year ended September 30, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 362,835 $3,310,536
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 38,929 329,957
---------------------------------------------------------------------------
401,764 3,640,493
Shares
repurchased (365,420) (3,315,180)
---------------------------------------------------------------------------
Net increase 36,344 $ 325,313
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 99.98% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you received in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds.
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.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Technology Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Fund
Balanced Retirement Fund
Classic Equity 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
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
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
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
ASSET ALLOCATION 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 Growth and Income Fund II
[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 not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at
www.putnaminvestments.com.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
KPMG LLP
TRUSTEES
John A. Hill, 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
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
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
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
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 and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
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