Putnam
Pennsylvania
Tax Exempt
Income
Fund
ANNUAL REPORT
May 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* " [I]n the months ahead, municipal bond funds may begin to provide
investors fewer bumps and better returns, many bond analysts say . . . .
Investors are becoming skittish about the sky-high returns on equity
funds and are beginning to seek some less-risky tax-free income; yields
on municipal bonds hover around an attractive 6 percent range, and
investors in some tax-high states can do better on an after-tax basis
investing in municipals than in Treasuries."
--The New York Times, April 7, 1996
* "When the yield on the 30-year Treasury bond spiked to around 6.8% --
after ending last year at a two-year low of 5.9% -- bond investors had a
right to feel panicky. . . . Despite the frightening sell-off, this may
be a good time to hold or even increase your positions in bonds."
-- Kiplinger Personal Finance Magazine, May 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
15 Portfolio holdings
21 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
One of the fascinating things about market watching is that you can
never tell what's going to trigger a defining event. Often what seems
like a defining event one moment is history the next. Who would have
guessed, for example, that a flat-tax proposal would swirl out of the
presidential primary election campaign to douse the municipal bond
market, only to blow away just as the rest of the bond market was
stumbling on statistics suggesting that inflation might flare up?
These were some of the challenges facing Fund Manager Richard Wyke
during Putnam Pennsylvania Tax Exempt Income Fund's fiscal year, which
closed on May 31, 1996. Rick handled them with his usual aplomb as the
results on the following pages reveal.
Besides having the luxury of leaving the day-to-day details to Rick,
shareholders with a long-term investment perspective have the added
advantage of being able to let such events run their course without
undue concern.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Manager
Richard P. Wyke
A glance at interest rates at the beginning and end of Putnam
Pennsylvania Tax Exempt Income Fund's fiscal year, the 12 months ended
May 31, 1996, might suggest that very little had changed in the
financial markets over the course of the year. In fact, nothing could be
further from the truth. The first nine months of your fund's fiscal year
were characterized by falling interest rates, with the most pronounced
decline taking place in the last three months of 1995.
With interest rates approaching 6% in the closing days of December, the
result of two reductions in short-term interest rates by the Federal
Reserve Board, your fund finished calendar 1995 with a total return of
16.82% for class A shares at net asset value (11.25% at public offering
price). By early March, however, the suggestion of rapid employment
growth fueled fears of inflation and a possible end to the Fed's program
of lowering short-term interest rates.
These developments brought the 10-month bond market rally to a sudden
halt. The performance of the fund, like that of most other fixed-income
investments, suffered in the wake of ongoing signs of a stronger
economy. However, because of the significant headway made early in the
period, your fund's return for class A shares of 3.82% at net asset
value for the 12 months ended May 31, 1996, was close to the average
3.87% for the 63 Pennsylvania municipal bond funds tracked by Lipper
Analytical Services over this period. Class A shares returned -1.09% at
public offering price; returns for class B and class M shares, which can
be found on pages 9 and 10, show a similar pattern.
* MUNICIPALS SHOW FAVORABLE RELATIVE PERFORMANCE
During the final weeks of the fiscal year, bond prices had recovered
somewhat as further economic news indicated a more moderate growth pace.
The rally proved short-lived, however; comments from several Federal
Reserve officials hinting at the prospect of higher short-term interest
rates over the next few months unnerved the market shortly after
Memorial Day.
While this environment has been a difficult one for most fixed- income
securities, prices of tax-exempt bonds have fared better than taxables
since the beginning of this year. In fact, since last December,
municipal yields have fallen from approximately 89% of comparable
Treasury bonds to 83% as of late May.
The main reason for this outperformance is the apparent reduced
likelihood of a flat tax, which could jeopardize the tax advantages
enjoyed by municipals. Although we expect broader tax reform to become a
prominent campaign issue as the presidential election gets under way,
enactment of a flat tax appears to be off the table for the time being.
In our judgment, this development removes a large obstacle from the
municipal market, providing the potential for continued improvement
relative to taxable bonds.
Perhaps the brightest spot for municipals in the near term is the
possibility of a significant inflow of cash. In June and July, investors
are expected to receive over $60 billion from municipal bond calls,
maturities, and interest payments. Should even a portion of this cash
re-enter the municipal market, we suspect prices could react quite
favorably.
* SECTOR ALLOCATION HELD STEADY; BULLET STRATEGY SOFTENS IMPACT OF RATE
REVERSAL
The areas of the municipal bond market in which your fund invests have
changed very little since the beginning of the fiscal year. A lack of
change in sector allocation, however, should not be confused with a lack
of change in the bonds held in the portfolio. In the daily management of
the fund, we continually search for municipal bonds that offer the right
balance of credit quality, yield, and relative price stability. This
entails a constant re-evaluation of current portfolio holdings vis-a-vis
those offered in the marketplace. Under the right circumstances, we may
buy or sell bonds in order to take advantage of differences in such
factors as coupon rates, maturity, and marketability.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS*]
Health care 19.8%
Education 17.9%
Water and sewerage 14.1%
Transportation 6.0%
Utilities 5.4%
Footnote reads:
Based on net assets as of 5/31/96. Holdings will vary over time.
Just after the fiscal midyear, for example, we reduced the fund's
position in prerefunded bonds. These bonds typically carry lower yields
and tend to have shorter maturities than other bonds farther out the
yield curve. Through their sale, we were able to shift approximately 10%
of the portfolio's assets into bonds that fell into the middle of the
yield curve. This represents a change from a more diversified portfolio
to what is known as a bulleted strategy.
Besides achieving an increase in yield, these intermediate bonds, which
have a 6- to 10-year maturity horizon, have historically provided
attractive income with greater relative price stability than long-term
bonds. The benefits of our bulleted strategy became apparent this
spring, when rates suddenly reversed direction. When the yield curve
steepened, the portfolio was able to retain more of its value than
otherwise would have been the case. That's because less volatile,
shorter-maturity bonds generally retain more of their value in a rising
interest rate market than more volatile, longer-maturity bonds.
* EFFECTIVE CREDIT RESEARCH YIELDS REWARDS
Health-care investments, which constituted 19.8% of the portfolio at the
fiscal year's end, made a particularly strong contribution to the fund's
performance during the period. This relatively heavy weighting stems
from our perception that on a credit-by-credit and market-by-market
basis, hospitals continue to offer some of the best values in today's
Keystone State municipal market.
In many instances, Putnam's diligence in research has meant discerning
value unperceived by others and exploiting inefficiencies in the bond
market to realize price appreciation. The benefits of our exhaustive
research are especially visible when a bond we have purchased is
prerefunded.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW*]
A 7.7%
Aa 4.4%
Aaa 58.2%
B 0.2%
Ba 5.2%
Baa 19.3%
VMIG1 5.0%
Footnote reads:
*As a percentage of market value as of 5/31/96. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions, unless noted otherwise. Ratings will vary over time.
Prerefunding takes place when an issuer floats a second bond in order to
raise funds to pay off an older bond, generally at the first call date.
The proceeds from the second bond issue are invested in top-quality
instruments, usually U.S. Treasury securities, that will mature close to
the time the original bond can be called. The added safety is often
perceived by the market as equal to a credit upgrade, and it can boost
the older bond's price. At the close of the fiscal year, we were
awaiting word on a possible prerefunding of Montgomery County United
Hospital bonds.
The fund's Dauphin County Northwest Hospital holdings also illustrate
the role of effective credit analysis. The bonds, which were unrated at
the time of purchase, received a Baa rating from an independent rating
agency during the course of the fiscal year. In effect, the bonds, which
were already noteworthy for their attractive income potential, enabled
the fund to lock in price appreciation through improving credit quality.
* GUARDED APPROACH NECESSARY
Crosscurrents in economic data have made it difficult to gauge the
underlying strength of the economy and the real risk of inflation. While
this is fostering uncertainty about the future direction of interest
rates, we believe the Federal Reserve will continue its present monetary
policy until there is compelling evidence to suggest the economy is
overheating.
There is no doubt, however, that the steadily growing economy presents a
challenging environment for fixed-income investing and clearly requires
a more cautious strategy. Careful attention to bond structure and
emphasis on larger well-known issuers will play an important role in
enhancing the price stability and liquidity of your fund as it moves
into its new fiscal period.
On a cheerier note, the summer months have historically been friendly to
municipal bonds, as cash from interest payments and bond calls is
frequently reinvested in the tax-exempt market. New-issue supply over
the next few months is not expected to keep pace with this year's
potential demand, creating the opportunity for a favorable supply/demand
imbalance.
Sustained interest from nontraditional buyers including banks and
insurance companies could provide further support. In addition, as the
risk of a flat tax diminishes, municipal returns could continue to
outpace those of taxables throughout the course of the 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 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Pennsylvania Tax Exempt Income Fund is designed for
investors seeking a high level of current income free from federal and
state income tax consistent with preservation of capital.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 5/31/96
Class A Class B Class M
(inception date) (7/21/89) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 3.82% -1.09% 3.14% -1.77% -- --
- ------------------------------------------------------------------------
5 years 44.84 38.02 -- -- -- --
Annual average 7.69 6.66 -- -- -- --
- ------------------------------------------------------------------------
Life of class 65.85 58.05 10.87 8.00 4.70% 1.24%
Annual average 7.65 6.90 3.65 2.71 -- --
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
1 year 4.57% 2.89%
- ------------------------------------------------------------------------
5 years 41.06 15.49
Annual average 7.12 2.92
- ------------------------------------------------------------------------
Life of class A 62.20 25.88
Annual average 7.33 3.41
- ------------------------------------------------------------------------
Life of class B 12.69 8.45
Annual average 4.31 2.86
- ------------------------------------------------------------------------
Life of class M 5.49 2.69
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Class A share
performance data do not take into account distribution fees prior to
implementation of the class A distribution plan in 1993. Investment
returns and net asset value will fluctuate so that an investor's shares,
when sold, may be worth more or less than their original cost. POP
assumes 4.75% maximum sales charge for class A shares and 3.25% for
class M shares. CDSC for class B shares assumes 5% maximum contingent
deferred sales charge.
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (7/21/89) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 6.04% 1.04% 5.35% 0.35% -- --
- ------------------------------------------------------------------------
5 years 46.35 39.42 -- -- -- --
Annual average 7.91 6.87 -- -- -- --
- ------------------------------------------------------------------------
Life of class 67.59 59.70 11.98 9.09 5.77% 2.28%
Annual average 7.71 6.97 3.90 2.98 -- --
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
[GRAPHIC OMITTED worm chart GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 7/21/89
Starting value (Insert ending Total)
$9,525 Fund's class A shares at POP $15,805
$10,000 Lehman Bros. Municipal Bond Index $16,220
$10,000 Consumer Price Index $12,588
(plot points for 10-year total return mountain chart)
Lehman Bros.
Date/year Fund at POP Muni Bond Index CPI
- ---------------------------------------------------------
7/21/89 $9,525 $10,000 $10,000
5/31/90 9,932 10,446 10,386
5/31/91 10,913 11,499 10,900
5/31/92 12,118 12,628 11,230
5/31/93 13,622 14,139 11,592
5/31/94 14,004 14,488 11,857
5/31/95 15,223 15,511 12,235
5/31/96 15,805 16,220 12,588
Foonote reads:
Past performance is no assurance of future results. A $10,000 investment
in the fund's class B shares at inception on 7/15/93 would have been
valued at $11,087 on 5/31/96 ($10,800 with a redemption at the end of
the period). A $10,000 investment in the fund's class M shares at
inception on 7/3/95 would have been valued at $10,470 at net asset
value on 5/31/96 ($10,124 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/96
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 12 12 11
- ------------------------------------------------------------------------
Income $0.509587 $0.448045 $0.435817
- ------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------
Total $0.509587 $0.448045 $0.435817
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
5/31/95 $9.24 $9.70 $9.23 -- --
- ------------------------------------------------------------------------
7/3/95
(Inception of class M) -- -- -- $9.10 $9.41
- ------------------------------------------------------------------------
5/31/96 9.08 9.53 9.07 9.09 9.40
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate2 5.41% 5.16% 4.76% 5.11% 4.94%
- ------------------------------------------------------------------------
Taxable equivalent3 9.21 8.79 8.11 8.70 8.41
- ------------------------------------------------------------------------
Current 30-day SEC yield4 5.29 5.04 4.63 4.98 4.82
- ------------------------------------------------------------------------
Taxable equivalent3 9.01 8.58 7.89 8.48 8.21
- ------------------------------------------------------------------------
1Capital gains are taxable for federal and, in most cases, state tax
purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3Assumes maximum 41.29% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4Based only on investment income, calculated using SEC guidelines.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 5% maximum during the first
year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in
the fund, and may pose different risks than the fund. It is not possible
to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
International New Opportunities Fund
Investors Fund
Natural Resources Fund
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
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PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
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High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds*
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments to help maximize your return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENT+
Putnam money market funds:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts++
* Not available in all states.
+ Relative to above.
++ Not offered by Putnam Investments. Certificates of deposit offer a
fixed rate of return and may be insured up to certain limits by
federal/state agencies. Savings accounts may also be insured up to
certain limits. Please call your financial advisor or Putnam at 1-800-
225-1581 to obtain a prospectus for any Putnam fund. It contains more
complete information, including charges and expenses. Please read it
carefully before you invest or send money.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Pennsylvania Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings),
and the related statements of operations and of changes in net assets
and the financial highlights present fairly, in all material respects,
the financial position of Putnam Pennsylvania Tax Exempt Income Fund
(the "fund") at May 31, 1996, and the results of its operations, the
changes in its net assets, and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of investments owned at May 31, 1996 by correspondence with
the custodian and brokers, and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 12, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1996
Key to Abbreviations
AMBAC - AMBAC Indemnity Corporation
CLI Insd. - Connie Lee Insurance Insured
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Company
FHA Insd. - Federal Housing Administration Insured
FSA - Financial Security Assurance
G.O. Bonds - General Obligation Bonds
IFB - Inverse Floating Rate Bonds
MBIA - Municipal Bond Investors Assurance Corporation
VRDN - Variable Rate Demand Notes
<S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (102.3%) *
PRINCIPAL AMOUNT
Pennsylvania (88.9%) RATINGS** VALUE
- -------------------------------------------------------------------------------------------------------------------------------
$2,500,000 Abington Heights, School Dist. Rev. Bonds (Lackawana Cnty.),
FGIC, 5.1s, 3/15/18 Aaa $2,206,250
1,000,000 Allegheny Cnty., Arpt. Rev. Bonds (Pittsburgh Intl. Arpt.),
Ser. C, MBIA, 8 1/4s, 1/1/16 Aaa 1,067,500
Allegheny Cnty., Higher Ed. Bldg. Auth. Rev. Bonds
5,000,000 (Robert Morris College), Ser. A, 6 1/4s, 2/15/26 Baa 4,675,000
3,000,000 (Duquesne U. Project), AMBAC, 5s, 3/1/16 Aaa 2,685,000
Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
2,000,000 (Southside Hosp. Pittsburgh), Ser. A, 8 3/4s, 6/1/10 BBB/P 2,061,500
1,000,000 (St. Francis Med. Ctr. Project), AMBAC, 8 1/8s, 6/1/13 Aaa 1,020,000
Allegheny Cnty., Hosp. Dev. Auth. VRDN, (Childrens Hosp.)
2,200,000 Ser. B, MBIA, 3.05s, 1/1/21 VMIG1 2,200,000
1,000,000 Ser. B, MBIA, 3.05s, 12/1/15 VMIG1 1,000,000
Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds
560,000 (Southwestern Arpt. Cargo Fac.), 8 3/4s, 2/15/09 BB/P 589,400
1,950,000 (Presbyterian Med. Ctr. of Oakmont), FHA Insd., 6 3/4s, 2/1/26 Aaa 2,006,063
4,000,000 Allentown Wtr. Rev. Bonds, FGIC, 5 1/2s, 10/15/15 Aaa 3,840,000
1,500,000 Blair Cnty., Hosp. Auth. Rev. Bonds (Altoona Hosp. Project),
AMBAC, 6 1/2s, 7/1/22 Aaa 1,560,000
Cambria Cnty., Indl. Dev. Auth. Resource Recvy. Rev. Bonds
400,000 Ser. F2, 7 3/4s, 9/1/19 A 412,500
1,100,000 (Cambria Cogen. Project), Ser. F1, 7 3/4s, 9/1/19 A 1,134,375
875,000 College Township, Indl. Dev. Auth. 1st Mtge. Hlth. Facs.
Rev. Bonds (Nittany Valley Rehab. Hosp. Project), 7 5/8s, 11/1/07 BBB/P 930,781
2,485,000 Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
(Northwest Med. Ctr. Project), 8 5/8s, 10/15/13 Baa 2,783,200
1,000,000 Dauphin Cnty., Indl. Dev. Auth. Wtr. Rev. Bonds
(Dauphin Cons. Wtr. Supply), Ser. A, 6.9s, 6/1/24 A 1,086,250
3,000,000 Delaware Cnty., Hlth. Care Auth. Rev. Bonds
(Mercy Hlth. Corp. Southeastern), Ser. A, CLI Insd., 5 1/8s, 11/15/12 Aaa 2,715,000
1,000,000 Delaware Cnty., Hosp. Auth. Rev. Rfdg. Bonds
(Crozer-Chester Med. Ctr.), MBIA, 7 1/2s, 12/15/20 Aaa 1,128,750
5,400,000 Delaware Cnty., Indl. Dev. Auth. Arpt. Fac. VRDN
(UTD Parcel Svc. Project), 3.6s, 12/1/15 VMIG1 5,400,000
1,035,000 Delaware Cnty., Indl. Dev. Auth. Rev. Bonds
(Resource Recvy. Project), Ser. A, 8.1s, 12/1/13 Aa 1,076,897
4,100,000 Doylestown, Hosp. Auth. Rev. Bonds
(Doylestown Hosp. Pine Run), Ser. A, 7.2s, 7/1/23 BBB/P 4,089,750
3,000,000 Emmaus, Gen. Auth. Rev. Bonds (Local Govt. Bond Pool),
Ser. A, MBIA, 8.15s, 5/15/18 # Aaa 3,213,750
Erie, Higher Ed. Bldg. Auth. College Rev. Bonds
1,150,000 (Mercyhurst College Project), 7.85s, 9/15/19 Aaa 1,266,438
2,000,000 (Gannon U. Project), 5.85s, 6/1/15 Baa 1,882,500
1,000,000 (Mercyhurst College Project), Ser. A, 5 3/4s, 3/15/13 Baa 907,500
1,860,000 (Mercyhurst College Project), Ser. B, 5 3/4s, 3/15/13 Baa 1,687,950
5,300,000 Erie, School Dist. Rev. Bonds, Ser. B, MBIA, zero %, 9/1/05 ## Aaa 3,266,125
3,500,000 Erie, Wtr. Auth. Rev. Bonds, 7 1/8s, 12/1/11 BBB 3,880,625
750,000 Erie-Western PA Port Auth. Rev. Bonds, 8 5/8s, 6/15/10 Baa 798,750
2,000,000 Exeter Township, Swr. Auth. Rev. Bonds, MBIA, 6.2s, 7/15/22 Aaa 2,025,000
1,350,000 Greene Cnty., Hosp. Auth. Rev. Bonds (Greene Cnty. Memorial Hosp.),
6 1/2s, 1/1/02 BBB/P 1,339,875
3,500,000 Harrisburg, Auth. Lease Rev. Bonds (Greene Cnty. Prison Project),
FSA, 6 1/4s, 6/1/10 Aaa 3,736,250
3,285,000 Lawrence Cnty., G.O. Bonds, FGIC, 4 7/8s, 8/1/14 Aaa 2,907,225
2,200,000 Lebanon Cnty., Good Samaritan Hosp. Auth. Rev. Bonds,
Ser. B, 8 1/4s, 11/1/18 BBB 2,480,500
1,000,000 Lehigh Cnty., Gen. Purpose Auth. Rev. Bonds
(Muhlenberg Hosp.), Ser. A, 8.1s, 7/15/10 A 1,057,500
5,050,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB
(Pennsylvania Pwr. & Light Co. Project), MBIA, 8.267s, 9/1/29
(acquired 6/20/95, cost $5,572,473)(double dagger) AAA/P 5,334,063
3,575,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds
(PA Pwr. & Lt. Co. Project), Ser. B, MBIA, 6.4s, 9/1/29 Aaa 3,664,375
4,500,000 Lower Providence Township, Swr. Auth. Rev. Bonds,
MBIA, 5 1/4s, 5/1/22 Aaa 4,128,750
2,000,000 Luzerne Cnty., Indl. Dev. Auth. Rev. Bonds (Gas & Wtr. Co. Project),
Ser. B, 7 1/8s, 12/1/22 Baa 2,052,500
2,305,000 McKeesport, Hosp. Auth. Rev. Bonds
(McKeesport Hosp. Project), 6 1/4s, 7/1/03 Baa 2,293,475
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp. IFB (Abington Hosp.),
Ser. A, AMBAC, 9.245s, 6/1/11 Aaa 2,222,500
Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp. Rev. Bonds
1,305,000 (United Hosp. Inc. - St. Christopher), 8 1/4s, 11/1/03 Ba 1,404,506
1,000,000 (UTD Hosp. Project), Ser. B, 7 1/2s, 11/1/12 Ba 1,087,500
3,000,000 (Sacred Heart Hosp. Norristown), Ser. A, MBIA,,6.8s, 2/1/13 Aaa 3,033,750
5,000,000 (Montgomery Hosp.), AMBAC, 5 1/8s, 6/1/14 Aaa 4,525,000
3,000,000 New Morgan, Indl. Dev. Auth. Solid Waste Disp. Rev. Bonds
(New Morgan Landfill Co., Inc. Project), 6 1/2s, 4/1/19 A 3,052,500
1,000,000 Northeastern PA Hosp. & Ed. Auth. College Rev. Bonds
(Kings College Project), Ser. B, 6s, 7/15/11 Baa 957,500
PA Econ. Dev. Fin. Auth. Rev. Bonds
4,000,000 (MacMillan Ltd. Partnership Project), 7.6s, 12/1/20 Baa 4,355,000
1,300,000 (Northampton Generating Project), Ser. A, 6.6s, 1/1/19 BB/P 1,230,125
2,000,000 (Northampton Generating Project), Ser. A, 6 1/2s, 1/1/13 BB/P 1,907,500
PA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
410,000 Ser. R, 8 1/8s, 10/1/19 Aa 422,300
385,000 Ser. U, 7.8s, 10/1/20 Aa 405,694
400,000 Ser. 29, 7 3/8s, 10/1/16 Aa 425,500
2,000,000 Ser. 33, 6.9s, 4/1/17 Aa 2,075,000
7,830,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 6,909,975
PA State Econ. Dev. Fin. Auth. Resource Recvy. Rev. Bonds
(Colver Project)
2,000,000 Ser. D, 7.15s, 12/1/18 Baa 2,047,500
1,000,000 Ser. D, 7 1/8s, 12/1/15 Baa 1,025,000
PA State Higher Ed. Assistance Agcy. IFB, Ser. B
2,400,000 MBIA, 10.924s, 3/1/20 Aaa 2,586,000
3,850,000 AMBAC, 8.329s, 3/1/22 Aaa 3,734,500
PA State Higher Ed. Fac. Auth. College & University
1,300,000 (Med. College), Ser. A, 8 3/8s, 3/1/11 Baa 1,404,000
3,000,000 (Med. College), Ser. A, 7 3/8s, 3/1/21 Baa 3,101,250
2,500,000 (Duquesne U. Project), Ser. C, MBIA, 6 3/4s, 4/1/20 # Aaa 2,640,625
2,600,000 (Allegheny College Project), Ser. B, 6 1/8s, 11/1/13 Baa 2,548,000
5,000,000 (U. of PA), Ser. A, 5.35s, 1/1/08 Aa 4,900,000
PA State G.O. Bonds
7,515,000 Ser. 1, FGIC, 5 3/8s, 5/15/13 ## Aaa 7,186,219
2,700,000 Ser. 2, FGIC, 5 1/4s, 6/15/13 Aaa 2,544,750
4,000,000 Philadelphia, Gas Works IFB, FSA, 6.116s, 8/1/21
(acquired 1/24/94, cost $3,747,680) (double dagger) Aaa 3,195,000
1,225,000 Philadelphia, Gas Works Rev. Bonds, Ser. 13, 7.7s, 6/15/21 Aaa 1,401,094
Philadelphia, Muni. Auth. Rev. Bonds
3,130,000 FGIC, 7.8s, 4/1/18 Aaa 3,466,475
320,000 Prerefunded, FGIC, 7.8s, 4/1/18 Aaa 345,600
1,000,000 Ser. B, FGIC, 7 1/8s, 11/15/18 Aaa 1,126,250
2,125,000 Ser. A, FGIC, 5 5/8s, 11/15/14 Aaa 2,047,969
3,000,000 Philadelphia, School Dist. Rev. Bonds, Ser. B, AMBAC,
5 1/2s, 9/1/18 Aaa 2,831,250
3,250,000 Philadelphia, Wtr. & Swr. Rev. Bonds, Ser. 16, FSA, 7s, 8/1/21 Aaa 3,623,750
Philadelphia, Wtr. & Wastewtr. Rev. Bonds
7,000,000 AMBAC, 5 1/2s, 6/15/07 Aaa 7,070,000
2,500,000 FSA and MBIA, 5 1/2s, 6/15/15 Aaa 2,350,000
5,005,000 MBIA, 5s, 6/15/18 Aaa 4,366,863
1,950,000 FGIC, 5s, 6/15/12 Aaa 1,767,188
3,000,000 FSA, 5s, 6/15/16 Aaa 2,651,250
4,000,000 Sayre, Hlth. Care Facs. VRDN, Ser. K, AMBAC, 3.5s, 12/1/20 VMIG1 4,000,000
1,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds, Ser. A, FGIC,
7 1/8s, 6/1/13 Aaa 1,102,500
3,000,000 Scranton-Lackawanna, Hlth. & Welfare Auth. Rev. Bonds
(Moses Taylor Hosp. Project), Ser. B, 8 1/2s, 7/1/20 Ba 3,183,750
1,000,000 Smithfield, Swr. Auth. Gtd. Rev. Bonds, 8 5/8s, 1/15/11 AAA/P 1,152,500
1,930,000 Thurston Cnty., G.O. Bonds, Ser. B, FGIC, zero %, 12/1/05 Aaa 1,148,350
2,470,000 Trafford, School District Rev. Bonds, MBIA, 6.6s, 5/1/08 Aaa 2,679,950
500,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge. Rev. Bonds
(AHF/Central States Inc. Project), 10 1/4s, 11/1/19 B/P 485,000
3,000,000 Wilkes-Barre, School Dist. Rev. Bonds, FGIC, 6 3/8s, 4/1/15 Aaa 3,120,000
1,800,000 Wilkins Area, Indl. Dev. Auth. 1st Mtge. Rev. Bonds
(Fairview Extended Care), Ser. A, 10 1/4s, 1/1/21 BB/P 2,038,500
1,030,000 York Cnty., Hosp. Auth. Rev. Bonds
(Hlth. Ctr. Village at Sprenkle Drive), Ser. A, 7 3/4s, 4/1/21 BBB/P 1,189,650
1,760,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac. Rev. Bonds
(Rehabilitation Hosp. of York Project), 7 1/2s, 9/1/07 BB/P 1,810,600
York Cnty., Solid Waste & Refuse Auth. Indl. Dev. Rev. Bonds
(Resource Recvy. Project)
650,000 Ser. A, 8.2s, 12/1/14 Aa 698,750
890,000 Ser. C, 8.2s, 12/1/14 Aa 956,750
300,000 Ser. B, 8.1s, 12/1/07 Aa 319,500
-----------
221,452,050
Puerto Rico (13.4%)
- -------------------------------------------------------------------------------------------------------------------------------
3,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 5 1/4s, 7/1/18 Aaa $2,782,500
200,000 Cmnwlth. of PR, IFB, MBIA, 7.610s, 7/1/08 Aaa 208,750
1,600,000 Cmnwlth. of PR, Rev. Bonds, MBIA, 5.642s, 7/1/08 Aaa 1,632,000
Cmnwlth. of PR, Aqueduct & Swr. Auth. Rev. Bonds
800,000 5s, 7/1/19 A 686,000
3,700,000 5s, 7/1/15 A 3,242,125
6,000,000 Cmnwlth. of PR, Elec. Pwr. Auth. Rev. Bonds, MBIA,
Ser. W, 6 1/2s, 7/1/05 Aaa 6,585,000
Cmnwlth. of PR, Hwy. Auth. Rev. Bonds
200,000 Ser. P, 8 1/8s, 7/1/13 Aaa 219,000
250,000 Ser. O, 8s, 7/1/05 Aaa 273,125
900,000 Ser. Q, 7 3/4s, 7/1/16 Aaa 1,019,250
2,500,000 Ser. Q, 7 3/4s, 7/1/10 Aaa 2,831,250
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
3,500,000 Ser. T, 6 5/8s, 7/1/12 A 3,854,375
3,000,000 Ser. Y, 6 1/4s, 7/1/14 A 3,127,500
Cmnwlth. of PR, Impt. G.O. Bonds
450,000 Ser. A, 7 3/4s, 7/1/17 Aaa 498,934
200,000 Ser. A, 7 3/4s, 7/1/13 Aaa 217,750
2,150,000 7.7s, 7/1/20 Aaa 2,429,500
Cmnwlth. of PR, Pub. Bldgs. Auth., Gtd. Ed. & Hlth.
Facs. Rev. Bonds
1,200,000 Ser. H, 7 7/8s, 7/1/16 Aaa 1,274,556
2,000,000 Ser. M, 5 3/4s, 7/1/15 A 1,925,000
575,000 Cmnwlth. of PR, Urban Renewal & Hsg. Corp. G.O. Bonds
(Cmnwlth. Appropriation), 7 7/8s, 10/1/04 Baa 633,938
----------
33,440,553
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $251,455,690)*** $254,892,603
- -------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $249,123,011.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most
recent ratings available at May 31, 1996 for the securities listed. Ratings are generally ascribed to
securities at the time of issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not necessarily represent what the agencies
would ascribe to these securities at May 31, 1996. Securities rated by Putnam are indicated by "/P"
and are not publicly rated. Ratings are not covered in the Report of independent accountants.
*** The aggregate identified cost on a tax basis is $251,474,269, resulting in gross unrealized appreciation and
depreciation of $7,593,811 and $4,175,477, respectively, or net unrealized appreciation of $3,418,334.
(double dagger) Restricted, excluding 144A securities, as to public resale. The total market value of
restricted securities held at May 31,
1996 was $8,529,063 or 3.4% of net assets.
# A portion of this security was pledged to cover margin requirements for futures contracts at May 31, 1996.
The market value of segregated securities with the custodian for transactions in futures contracts is $52,813
or less than 0.1% of net assets.
## When-issued securities (Note 1).
The rates shown on IFBs which are securities paying interest rates that vary inversely to changes in the
market interest rates, and VRDNs are the current interest rates at May 31, 1996, which are subject to change
based on the terms of the security.
The fund had the following industry group concentrations greater than 10% on May 31, 1996 (as a percentage of
net assets):
Health Care 19.8%
Education 17.9
Water & Sewerage 14.1
The fund had the following insurance group concentrations greater than 10% on May 31, 1996 (as a percentage
of net assets):
MBIA 17.9%
AMBAC 14.7
FGIC 13.2
<CAPTION>
- --------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1996
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond
Futures (Short) $ 2,053,188 $ 2,063,307 June 1996 $10,119
U.S. Treasury Bond
Futures (Short) 17,635,124 17,659,375 Sept. 1996 24,251
- --------------------------------------------------------------------------------------
$34,370
- --------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1996
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $251,455,690) (Note 1) $254,892,603
- ----------------------------------------------------------------------------------------------------------------
Cash 14,825
- ----------------------------------------------------------------------------------------------------------------
Interest receivable 4,888,625
- ----------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 737,790
- ----------------------------------------------------------------------------------------------------------------
Receivable for variation margin 42,656
- ----------------------------------------------------------------------------------------------------------------
Total assets 260,576,499
Liabilities
- ----------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 142,293
- ----------------------------------------------------------------------------------------------------------------
Payable for securities purchased 10,518,188
- ----------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 240,233
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 373,702
- ----------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 8,082
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 219
- ----------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,305
- ----------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 108,468
- ----------------------------------------------------------------------------------------------------------------
Other accrued expenses 60,998
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 11,453,488
- ----------------------------------------------------------------------------------------------------------------
Net assets $249,123,011
Represented by
- ----------------------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $243,928,156
- ----------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 13,925
- ----------------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 1,709,647
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,471,283
- ----------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $249,123,011
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share ($183,116,527 divided by 20,169,134 shares) $9.08
- ----------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.08)* $9.53
- ----------------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share ($65,669,447 divided by 7,242,332 shares)** $9.07
- ----------------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share ($337,037 divided by 37,089 shares) $9.09
- ----------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.09)*** $9.40
- ----------------------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000
or more and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1996
<S> <C>
Tax exempt interest income: $15,125,495
- -------------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,426,014
- -------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 237,695
- -------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,661
- -------------------------------------------------------------------------------------------------
Administrative services (Note 2) 8,046
- -------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 364,644
- -------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 473,557
- -------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 527
- -------------------------------------------------------------------------------------------------
Reports to shareholders 38,145
- -------------------------------------------------------------------------------------------------
Auditing 42,425
- -------------------------------------------------------------------------------------------------
Legal 13,524
- -------------------------------------------------------------------------------------------------
Postage 38,385
- -------------------------------------------------------------------------------------------------
Registration fees 13,279
- -------------------------------------------------------------------------------------------------
Other 15,796
- -------------------------------------------------------------------------------------------------
Total expenses 2,683,698
- -------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (155,930)
- -------------------------------------------------------------------------------------------------
Net expenses 2,527,768
- -------------------------------------------------------------------------------------------------
Net investment income 12,597,727
- -------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,735,794
- -------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 50,042
- -------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments and futures contracts during the year (7,165,681)
- -------------------------------------------------------------------------------------------------
Net loss on investments (4,379,845)
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $8,217,882
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Three months
Year ended ended
May 31 May 31
1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------
Net investment income $12,597,727 $3,010,830
- ---------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 2,785,836 (192,151)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (7,165,681) 6,309,302
- ---------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,217,882 9,127,981
- ---------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------
From net investment income:
Class A (10,000,537) (2,522,292)
- ---------------------------------------------------------------------------------------------------
Class B (2,682,096) (515,060)
- ---------------------------------------------------------------------------------------------------
Class M (5,299) --
- ---------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 30,556,384 8,708,289
- ---------------------------------------------------------------------------------------------------
Total increase in net assets 26,086,334 14,798,918
- ---------------------------------------------------------------------------------------------------
Net assets
- ---------------------------------------------------------------------------------------------------
Beginning of period 223,036,677 208,237,759
- ---------------------------------------------------------------------------------------------------
End of period (including undistributed net investment income
of $13,925 and $76,798, respectively) $249,123,011 $223,036,677
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
July 3, 1995
commencement Three months
of operations) to Year ended ended
May 31 May 31 May 31
- ---------------------------------------------------------------------------------------------------------------------------
1996 1996 1995*
- ---------------------------------------------------------------------------------------------------------------------------
Class M
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.10 $9.23 $8.97
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .44 .11
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.01) (.15) .27
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .43 .29 .38
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.44) (.45) (.12)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gains on investments -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.45) (.12)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.09 $9.07 $9.23
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 4.70 (c) 3.14 4.23 (c)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $337 $65,669 $44,252
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) 1.13 (c) 1.62 .38 (c)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 4.49 (c) 4.78 1.26 (c)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 41.40 41.40 4.15 (c)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the period
July 15, 1993
(commencement
Year ended of operations) to Year ended
February 28 February 28 May 31
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1996
- ---------------------------------------------------------------------------------------------------------------------------
Class B
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $9.38 $9.48 $9.24
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .47 .28 .51
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.40) (.08) (.16)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .07 .20 .35
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.47) (.28) (.51)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gains on investments (.01) (.02) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.30) (.51)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.97 $9.38 $9.08
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 0.93 2.18 (c) 3.82
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $36,670 $12,633 $183,117
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) 1.57 1.00 (c) .98
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.23 2.90 (c) 5.46
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 26.09 15.65 41.40
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Three months
ended
May 31 Year ended February 28
- ---------------------------------------------------------------------------------------------------------------------------
1995* 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Class A
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.98 $9.39 $9.40
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .13 .53 .54
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .26 (.40) .01
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .39 .13 .55
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.13) (.53) (.54)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gains on investments -- (.01) (.02)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.13) (.54) (.56)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.24 $8.98 $9.39
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 4.39 (c) 1.60 5.93
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $178,785 $171,568 $171,757
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) .21 (c) .92 .91
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 1.44 (c) 5.94 5.36
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 4.15 (c) 26.09 15.65
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year ended February 28
- ------------------------------------------------------------------------------------------------------
1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $8.76 $8.42
- ------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------
Net investment income .57 (a) .61 (a)
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .65 .34
- ------------------------------------------------------------------------------------------------------
Total from investment operations 1.22 .95
- ------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------
From net investment income (.57) (.61)
- ------------------------------------------------------------------------------------------------------
From net realized gains on investments (.01) --
- ------------------------------------------------------------------------------------------------------
Total distributions (.58) (.61)
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.40 $8.76
- ------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 14.34 11.65
- ------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $144,374 $93,086
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) .72 (a) .52 (a)
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.31 (a) 6.98 (a)
- ------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.26 3.30
- ------------------------------------------------------------------------------------------------------
* The fiscal year end advanced from February 28 to May 31.
(a) Reflects an expense limitation. As a result, net investment income
for the year ended February 28, 1993,, and the year ended February
29, 1992, reflects expense reductions of
approximately $0.01 and $0.04, per share, respectively.
(b) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(c) Not annualized.
(d) The ratio of expenses to average net assets for the period ended May 31,
1996 includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts. (See Note 2)
</TABLE>
Notes to financial statements
May 31, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The
fund seeks as high a level of current income exempt from federal income
tax and Pennsylvania personal income tax as Putnam Investment
Management, Inc., ("Putnam Management"), the fund's manager, a wholly-
owned subsidiary of Putnam Investments, Inc., believes is consistent
with preservation of capital by investing primarily in a diversified
portfolio of Pennsylvania tax-exempt securities.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares,
which convert to class A shares after approximately eight years, do not
pay a front-end sales charge, but pay a higher ongoing distribution fee
than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class
M shares are sold with a maximum front-end sales charge of 3.25% and pay
an ongoing distribution fee that is lower than class B shares and higher
than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The fair
value of restricted securities is determined by the Manager following
procedures approved by the Trustees, and such valuations and procedures
are reviewed periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed delivery basis
may be settled a month or more after the trade date; interest income is
not accrued until settlement date. Losses may arise due to changes in
the market value of the underlying securities or if the counterparty
does not perform under the contract.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
D) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and excise tax on income and capital
gains.
E) 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 treatment of losses on wash sale
transactions, unrealized gains on futures contracts, and dividends paid.
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 May
31, 1996, the fund reclassified $27,332 to increase undistributed net
investment income and $3,831 to decrease paid-in capital, with a
decrease to accumulated net realized gains of $23,501. The calculation
of net investment income per share in the financial highlights table
excludes these adjustments.
F) Amortization of bond premium and discount Any premium resulting from
the purchase of securities in excess of maturity value is amortized
using the effective yield method for bonds issued after September 27,
1985, and on straight line basis for bonds issued prior thereto. The
premium in excess of the call price, if any, is amortized to the call
date thereafter, and the remaining excess premium is amortized to
maturity on a yield-to-maturity basis. Discount on zero-coupon bonds,
and income on original issue discount bonds, is recognized according to
the effective yield method.
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 for the quarter. Such fee is based on the following annual
rates: 0.60% of the first $500 million of average net assets, 0.50% of
the next $500 million, 0.45% of the next $500 million and 0.40% of any
amount over $1.5 billion, subject, under current law, to reduction in
any year to the amount of certain brokerage commissions and fees (less
expenses) received by affiliates of Putnam Management on the fund's
portfolio transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $740 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain invested in
certain Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended May 31, 1996, fund expenses were reduced by $155,930
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to .35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of .20%, .85% and .50% of the average net
assets attributable to class A, class B and class M shares,
respectively.
For the year ended May 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $52,102 and $432 from the sale
of class A and class M shares, respectively, and $105,045 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended May 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received $996 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $130,234,723 and
$94,081,219, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At May 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 4,774,300 $44,144,625
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 620,989 5,742,412
- ----------------------------------------------------
5,395,289 49,887,037
Shares
repurchased (4,579,112) (42,322,606)
- ----------------------------------------------------
Net increase 816,177 $ 7,564,431
- ----------------------------------------------------
Three months ended
May 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 1,088,734 $9,874,777
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 159,067 1,450,835
- ----------------------------------------------------
1,247,801 11,325,612
Shares
repurchased (996,648) (9,041,998)
- ----------------------------------------------------
Net increase 251,153 $2,283,614
- ----------------------------------------------------
Year ended
May 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 2,812,059 $26,012,566
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 169,396 1,565,233
- ----------------------------------------------------
2,981,455 27,577,799
Shares
repurchased (534,787) (4,928,924)
- ----------------------------------------------------
Net increase 2,446,668 $22,648,875
- ----------------------------------------------------
Three months ended
May 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 767,770 $6,959,062
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,557 305,770
- ----------------------------------------------------
801,327 7,264,832
Shares
repurchased (92,606) (840,157)
- ----------------------------------------------------
Net increase 708,721 $6,424,675
- ----------------------------------------------------
For the period
July 3, 1995
(commencement of
operations) to
May 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 41,822 $387,066
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 477 4,415
- ----------------------------------------------------
42,299 391,481
Shares
repurchased (5,210) (48,403)
- ----------------------------------------------------
Net increase 37,089 $343,078
- ----------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt interest for Federal income
tax purposes.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam
Pennsylvania Tax Exempt Income Fund. It may also be used as sales
literature when preceded or accompanied by the current prospectus, which
gives details of sales charges, investment objectives, and operating
policies of the fund, and the most recent copy of Putnam's Quarterly
Performance Summary. For more information, or to request a prospectus,
call toll free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution, are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
or any other agency, and involve risk, including the possible loss of
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- -------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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25869-047/226/2AE 7/96
