Putnam
Pennsylvania
Tax Exempt
Income Fund
ANNUAL REPORT
May 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, an independent rating agency, gave the fund's class A
shares a ranking of 4 stars for overall performance as of June 30, 1997
(based on the fund's average annual returns for the 3- and 5-year
periods). 22.5% of the funds in the municipal category received
4 stars.*
* "Depending on your tax bracket, municipal bonds may offer juicier
after-tax yields than Treasuries of comparable maturities."
-- Money, June 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
19 Financial statements
* Morningstar ratings reflect risk-adjusted performance through 6/30/97 and
are subject to change every month. Morningstar ratings are calculated from
a fund's 3-, 5-, and 10-year returns (with fee adjustments) in exess of
90-day Treasury bill returns and a risk factor that reflects performance
below 90-day Treaury bill returns. The one-year rating is calculated using
the same methodology, but it is not a component of the overall rating. For
the 3-year and 5-year performance, the fund received 3 stars and 4 stars,
respectively. There were 1,315, 640 municipal bond funds rated. 10%
of the funds in an investment category receive 5 stars; 22.5% receive 4;
35% receive 3 stars. Performance of other share classes will vary. Past
performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Pennsylvania Tax Exempt Income Fund began fiscal 1997 on a hopeful, yet
cautious note in June 1996 after a somewhat tumultuous year for the municipal
bond market. The hope was warranted, as the market rallied in the fall. The
caution was also justified, for the rally ended abruptly in late winter, cut
short by investor worries that inflation and interest rates would both rise in
the wake of an economy still growing too fast.
From the vantage point of the fiscal year's close on May 31, 1997, we can see
that the volatility, while somewhat nerve-racking for many investors, was
unusually low by historical standards. By spring, even the Federal Reserve
Board's increase in the federal funds rate in late March, the source of
considerable earlier anxiety, caused little stir.
It is in these contexts that Fund Manager Howard Manning discusses your fund's
performance for the year just past and his view of its prospects for the year
ahead. His report begins on the following page.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 16, 1997
Report from the Fund Manager
Howard K. Manning
Putnam Pennsylvania Tax Exempt Income Fund ended fiscal 1997 on an upbeat
note, benefiting from positive supply/demand trends, the narrowing of credit
spreads, and the strength of its position in hospital bonds from around the
Keystone State. For the 12 months ended May 31, 1997, the fund's class A
shares provided a total return of 7.94% at net asset value and 2.84% at public
offering price. The fund's competitive benchmark, the Lehman Brothers
Municipal Bond Index, posted an 8.29% return for the same period. Results for
class B and class M shares and performance details for longer periods can be
found on pages 9 through 11.
* MARKET CHARACTERIZED BY ABNORMALLY LOW VOLATILITY
Compared with its experience in other years in the not-too-distant past, the
municipal bond market was characterized by abnormally low volatility in all
dimensions during fiscal 1997. This covers not only interest-rate movements,
but changes in bond spreads as well. Even the Federal Reserve Board's quarter
point increase in the federal funds rate in late March was virtually a
non-event, primarily because the long-awaited rise had already been priced
into the market. Throughout the period, interest rates moved up and down in a
relatively narrow trading range with the 30-year Aaa municipal bond falling
from 5.82% to 5.47%. This modest drop produced similarly modest appreciation
in net asset value while keeping dividends at an attractive level.
At its May policy-setting meeting, the Fed once again evaluated the economy's
strength, but took no action on interest rates. The municipal bond market
reaction appeared subdued, but bond prices did respond favorably. Until there
is more conclusive evidence of inflation, we believe the bond markets will
continue to show some uncertainty while they await further Fed action.
A well-balanced supply/demand relationship has also helped the municipal bond
market move slightly upward. Supply is running slightly below the pace of one
year ago, while demand -- from individual investors and insurance companies --
has remained steady. This favorable combination has helped enable municipals
to outperform Treasuries over the past year.
Amidst robust economic growth, and with yields on long-term municipal bonds
near historic lows, we have adopted a defensive strategy toward managing your
fund. This means moving toward a slightly shorter duration and placing an
emphasis on premium bonds. Shorter durations can help preserve portfolio value
as interest rates rise. Longer durations can mean a more volatile net asset
value if rates change, but also one more likely to appreciate substantially if
rates decline. Premium bonds sell at prices above par, carry higher coupons,
and tend to be more stable in price when interest rates are rising.
* PORTFOLIO SHIFTS FAVOR Baa-RATED BONDS AND SHORTER DURATION
When interest rates are low, the economy is strong and there are no signs of
inflation, bond investors are often more comfortable with higher-risk
investments. This, coupled with little net new issuance of lower-rated,
higher-yielding bonds, has produced increased demand for these bonds. In such
an environment, the gap between yields of low-rated versus higher-rated
securities often narrows. That explains why the continued tightening of
quality spreads between higher- and lower-quality bonds became one of the
defining events of your fund's fiscal year. In fact, Baa-rated municipal bonds
were the top performing securities for the period, followed by A-rated bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Healthcare 19.6%
Education 19.2%
Water & sewer 13.4%
Utilities 5.8%
Transportation 5.6%
Footnote reads:
*Based on net assets as of 5/31/97. Holdings will vary over time.
As more investors opt for lower-rated, higher-yielding bonds, their prices
appreciate. Conversely, demand for -- and prices of -- Aaa-rated and
insured bonds generally softens. The fund's A-rated and Baa-rated bonds
made up 38.2% of the fund's market value at period's end, up from 27% a year
earlier. At period's end, the portfolio has an average quality rating of Aa,
with 56.2% of its holdings rated Aaa.
After the market's positive performance during the summer and fall of 1996, we
saw signs of overvaluation. To preserve the value of the fund's portfolio, we
took steps to reduce its effective duration, which decreased from 7.46 years
to 6.45 years by the end of the period. We achieved this by repositioning the
portfolio away from a barbell structure, which concentrates holdings at both
the short-term and long-term ends of the yield curve, to a bulleted structure,
which emphasizes bonds clustered in a rather narrow range along the yield
curve. In this case, we are concentrating on the 9- to 15-year maturity range,
which we consider the best current value.
* CAPTURING REFUNDING AND UPGRADE POTENTIAL IN HEALTH-CARE MARKET
Health-care investments have traditionally played a important role in your
fund's performance. This sector rose to 19.6% of the fund's net assets by
period's end, the result of the increased weighting of hospital bonds -- many
of which are Baa-rated. Jeanes Hospital and Philadelphia Graduate Hospital are
two holdings added during the period.
The merger activity generated by for-profit hospitals acquiring not-for-profit
hospitals has quieted somewhat. However, McKeesport Hospital, a fund holding,
may benefit from a merger with a major health-care provider in Pittsburgh.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
A -- 7.8%
Aa -- 1.7%
Aaa -- 56.2%
B -- 0.2%
Ba -- 3.7%
Baa -- 30.4%
Footnote reads:
*As a percentage of market value as of 5/31/97. A bond rated Baa or higher is
considered investment grade. All ratings reflect Moody's descriptions, unless
noted otherwise; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
Another holding, issued by Moses Taylor Hospital, was prerefunded just before
the close of the fiscal year. Prerefunding occurs when an issuer raises money
to pay off a specific bond in advance and invests the funds in a U.S.
government bond that matures at the bond's maturity date. This often results
in a credit upgrade to an Aaa rating and can substantially boost the bond's
price. While these holdings, along with others discussed in this report, were
viewed favorably at the end of the fiscal period, all are subject to review
and adjustment in accordance with the fund's investment strategy and may vary
in the future.
* DEFENSIVE STRATEGIES SHOULD REMAIN IN PLACE
Looking ahead, we consider continuation of the market's current low volatility
to be an unrealistic expectation. In fact, unless the economy shows more
convincing signs of a slowdown, we believe there is a strong possibility of
another Fed tightening this summer. However, investors should not let a small
rise in interest rates keep them from investing in municipal bonds. Municipals
still represent good after-tax value against taxable investments for most
investors and provide an excellent way to diversify a stock-heavy portfolio.
As steady economic growth continues, we will maintain a defensive portfolio
that emphasizes high current income and price stability. This should serve the
funds well if rates move up. Our large, highly experienced staff of research
analysts will concentrate on trying to identify undervalued issues,
particularly of A-rated and Baa-rated bonds, to seek to generate an attractive
and competitive income for the fund. In this environment, attention to credit
and sector selection becomes especially important in providing stability,
steady income, and liquidity.
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 5/31/97, 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 high current income free from federal and state income
taxes, consistent with capital preservation.
TOTAL RETURN FOR PERIODS ENDED 5/31/97
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 7.94% 2.84% 7.24% 2.24% 7.61% 4.06%
- ------------------------------------------------------------------------------
5 years 40.78 34.08 35.49 33.49 38.60 34.09
Annual average 7.08 6.04 6.26 5.95 6.75 6.04
- ------------------------------------------------------------------------------
Life of fund 79.01 70.59 68.10 68.10 73.53 67.94
Annual average 7.69 7.03 6.83 6.83 7.26 6.82
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97
Lehman Bros. Consumer
Municipal Bond Price
Index Index
- ------------------------------------------------------------------------------
1 year 8.29% 2.23%
- ------------------------------------------------------------------------------
5 years 41.80 14.60
Annual average 7.24 2.76
- ------------------------------------------------------------------------------
Life of fund 79.06 28.70
Annual average 7.72 3.27
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% for class A shares and 3.25% for class M shares.
One and five year and life of fund returns for class B shares reflect the
applicable contingent deferred sales charges (CDSC), which is 5% in the
first year, declines each year to 1% in the sixth year, and is eliminated
thereafter. Returns shown for class B and class M shares for periods prior
to their inception are derived from the historical performance of class A
shares, adjusted to reflect both the initial sales charge or CDSC, if any,
currently applicable to each class and, in the case of class B and class M
shares, the higher operating costs applicable to such shares. All returns
assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
net asset value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Returns
shown for class A shares have not been adjusted to reflect payments under
the class A distribution plan prior to its implementation.
[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 7/21/89
Fund's Class Lehman Bros. Consumer
A shares Municipal Price
Date at POP Bond Index Index
------- ------ ------ ------
7/21/89 9,530 10,000 10,000
5/31/90 9,944 10,446 10,386
5/31/91 10,823 11,499 10,900
5/31/92 12,256 12,628 11,230
5/31/93 13,739 14,139 11,592
5/31/94 13,911 14,488 11,857
5/31/95 15,124 15,812 12,235
5/31/96 15,858 16,534 12,588
5/31/97 17,059 17,906 12,870
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $16,810 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have
been valued at $17,353 ($16,794 at public offering price). See first page
of performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/97
Class A Class B Class M
- -------------------------------------------------------------------------
Distributions (number) 12 12 12
- -------------------------------------------------------------------------
Income $0.495024 $0.434387 $0.467296
- -------------------------------------------------------------------------
Capital gains1
- -------------------------------------------------------------------------
Long-term 0.065 0.065 0.065
- -------------------------------------------------------------------------
Short-term 0.013 0.013 0.013
- -------------------------------------------------------------------------
Total $0.573024 $0.512387 $0.545296
- -------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -------------------------------------------------------------------------
05/31/96 $9.08 $9.53 $9.07 $9.09 $9.40
- -------------------------------------------------------------------------
05/31/97 9.21 9.67 9.20 9.22 9.53
- -------------------------------------------------------------------------
Current return
(end of period)
- -------------------------------------------------------------------------
Current dividend rate2 5.39% 5.13% 4.74% 5.09% 4.92%
- -------------------------------------------------------------------------
Taxable equivalent3 9.18 8.74 8.07 8.67 8.38
- -------------------------------------------------------------------------
Current 30-day SEC yield4 5.31 5.05 4.65 5.00 4.84
- -------------------------------------------------------------------------
Taxable equivalent3 9.04 8.60 7.92 8.52 8.24
- -------------------------------------------------------------------------
1Capital 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.
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.
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(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 7.97% 2.79% 7.27% 2.27% 7.64% 4.11%
- ------------------------------------------------------------------------------
5 years 40.03 33.44 34.89 32.89 37.86 33.42
Annual average 6.97 5.94 6.17 5.85 6.63 5.94
- ------------------------------------------------------------------------------
Life of fund 81.04 72.53 69.93 69.93 75.46 69.80
Annual average 7.76 7.11 6.91 6.91 7.34 6.90
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and principal value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost. Please see the first page of the performance section for
the method of performance calculation.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in the
fund, and may pose different risks than the fund. Securities in the fund
do not match those in the indexes and performance of the fund will differ.
It is not possible to invest directly in an index.
Consumer Price Index (CPI ) is a commonly used measure of inflation; it
does not represent an investment return.
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,
1997, 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, 1997
by correspondence with the custodian and the application of alternative
auditing procedures where investments purchased were not yet received by the
custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 10, 1997
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1997
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investors Guaranty Insurance
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
MUNICIPAL BONDS AND NOTES (97.9%) *
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Pennsylvania (86.2%)
- ------------------------------------------------------------------------------------------------------------
$1,000,000 Allegheny Cnty., Arpt. Rev. Bonds
(Pittsburgh Intl. Arpt.),
Ser. C, MBIA, 8 1/4s, 1/1/16 Aaa $1,041,420
5,000,000 Allegheny Cnty., Higher Ed. Bldg. Auth. Rev. Bonds
(Robert Morris College), Ser. A, 6 1/4s, 2/15/26 Baa 5,025,000
Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds
540,000 (Southwestern Arpt. Cargo Fac.),
8 3/4s, 2/15/09 BB/P 566,325
1,910,000 (Med. Ctr.), FHA Insd., 6 3/4s, 2/1/26 Aaa 2,010,275
4,305,000 (Environmental Impt. - USX Corp.),
6s, 1/15/14 Baa 4,353,431
5,500,000 Allentown, Hosp. Auth. Rev. Bonds
(Sacred Heart Hosp.), Ser. A, 6 3/4s, 11/15/14 BBB 5,685,625
1,500,000 Blair Cnty., Hosp. Auth. Rev. Bonds
(Altoona Hosp.), AMBAC, 6 1/2s, 7/1/22 Aaa 1,590,000
Cambria Cnty., Indl. Dev. Auth. Res. Recvy.
Rev. Bonds
400,000 Ser. F2, 7 3/4s, 9/1/19 A 406,888
1,100,000 (Cambria Cogen.), Ser. F1, 7 3/4s, 9/1/19 A 1,118,942
825,000 College Township, Indl. Dev. Auth. 1st Mtge.
Hlth. Fac. Rev. Bonds (Nittany Valley Rehab.
Hosp.), 7 5/8s, 11/1/07 BB/P 893,063
2,470,000 Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
(Northwest Med. Ctr.), 8 5/8s, 10/15/13 BBB 2,837,413
1,000,000 Dauphin Cnty., Indl. Dev. Auth. Wtr. Rev. Bonds
(Dauphin Cons. Wtr. Supply),
Ser. A, 6.9s, 6/1/24 A 1,160,000
1,000,000 Delaware Cnty., Hosp. Auth. Rev. Bonds
(Crozer-Chester Med. Ctr.),
MBIA, 7 1/2s, 12/15/20 Aaa 1,115,000
4,000,000 Delaware Cnty., Indl. Dev. Auth. Res. Recvy.
Rev. Bonds, Ser. A, 8.1s, 7/1/13 A 4,055,000
4,100,000 Doylestown, Hosp. Auth. Rev. Bonds
(Doylestown Hosp. Pine Run),
Ser. A, 7.2s, 7/1/23 BBB/P 4,248,625
3,000,000 Emmaus, Gen. Auth. Rev. Bonds
(Local Govt. Bond Pool), Ser. A,
BIGI, 8.15s, 5/15/18 # Aaa 3,138,750
5,300,000 Erie, City School Dist. G.O. Bonds,
Ser. B, MBIA, zero%, 9/1/05 Aaa 3,531,125
Erie, Higher Ed. Bldg. Auth. College Rev. Bonds
1,150,000 (Mercyhurst College), 7.85s, 9/15/19 AAA 1,237,688
2,000,000 (Gannon U.), Ser. D, 5.85s, 6/1/15 Baa 1,947,500
1,000,000 (Mercyhurst College), Ser. A, 5 3/4s, 3/15/13 BBB 981,250
1,860,000 (Mercyhurst College), Ser. B, 5 3/4s, 3/15/13 BBB 1,825,125
5,865,000 (Mercyhurst College), Ser. A, 5 3/4s, 3/15/20 BBB 5,659,725
3,500,000 Erie, Wtr. Auth. Rev. Bonds, 7 1/8s, 12/1/11 AAA/P 3,858,750
Erie-Western PA Port Auth. Gen. Rev. Bonds
750,000 8 5/8s, 6/15/10 BBB/P 826,875
915,000 6 7/8s, 6/15/16 BBB/P 935,588
2,000,000 Exeter Township, Swr. Auth. Rev. Bonds,
MBIA, 6.2s, 7/15/22 Aaa 2,060,000
1,130,000 Greene Cnty., Hosp. Auth. Rev. Bonds
(Greene Cnty. Memorial Hosp.), 6 1/2s, 1/1/02 BBB/P 1,132,441
3,500,000 Harrisburg, Auth. Lease Rev. Bonds
(Greene Cnty. Prison), FSA, 6 1/4s, 6/1/10 Aaa 3,718,750
2,350,000 Hazleton, Hlth. Svcs. Auth. Rev. Bonds
(St. Joseph Med. Ctr.), 6.2s, 7/1/26 Baa 2,320,625
2,200,000 Lebanon Cnty., Good Samaritan Hosp. Auth.
Rev. Bonds, Ser. B, 8 1/4s, 11/1/18 AAA/P 2,431,000
1,000,000 Lehigh Cnty., Gen. Purpose Auth. Rev. Bonds
(Muhlenberg Hosp.), Ser. A, 8.1s, 7/15/10 A 1,055,000
5,050,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB
(PA Pwr. & Lt. Co.), 8.312s, 9/1/29
(acquired 6/20/95, cost $5,572,473) [DBL. DAGGER] Aaa 5,542,375
3,575,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds (PA Pwr. & Lt. Co.),
Ser. B, MBIA, 6.4s, 9/1/29 Aaa 3,785,031
2,000,000 Luzerne Cnty., Indl. Dev. Auth. Rev. Bonds
(Gas & Wtr. Co.), Ser. B, 7 1/8s, 12/1/22 A 2,130,000
2,305,000 McKeesport, Hosp. Auth. Rev. Bonds
(McKeesport Hosp.), 6 1/4s, 7/1/03 Baa 2,382,794
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. IFB (Abington Hosp.), Ser. A,
AMBAC, 9.145s, 6/1/11 Aaa 2,260,000
Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. Rev. Bonds
1,305,000 (United Hosp. Inc. - St. Christopher),
8 1/4s, 11/1/03 AAA 1,353,624
1,000,000 (UTD Hosp.), Ser. B, 7 1/2s, 11/1/12 AAA/P 1,070,000
3,000,000 (Sacred Heart Hosp. Norristown),
Ser. A, BIGI, 6.8s, 2/1/13 Aaa 3,052,500
3,000,000 New Morgan, Indl. Dev. Auth. Solid Waste
Disp. Rev. Bonds (New Morgan Landfill Co., Inc.),
6 1/2s, 4/1/19 A 3,123,750
2,000,000 Northeastern PA Hosp. & Ed. Auth. College
Rev. Bonds (Kings College), Ser. B, 6s, 7/15/11 BBB 1,992,500
5,000,000 PA Convention Ctr. Auth. Rev. Bonds,
Ser. A, 6 3/4s, 9/1/19 Baa 5,343,750
PA Econ. Dev. Fin. Auth. Rev. Bonds
4,000,000 (MacMillan Ltd. Partnership), 7.6s, 12/1/20 Baa 4,480,000
2,300,000 (Northampton Generating), Ser. A, 6.6s, 1/1/19 BB/P 2,285,625
2,000,000 (Northampton Generating), Ser. A, 6 1/2s, 1/1/13 BB/P 1,980,000
PA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
385,000 Ser. U, 7.8s, 10/1/20 Aa 405,694
260,000 Ser. 29, 7 3/8s, 10/1/16 Aa 274,950
1,655,000 Ser. 33, 6.9s, 4/1/17 Aa 1,731,544
7,830,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 7,252,538
PA State Econ. Dev. Fin. Auth. Res. Recvy.
Rev. Bonds (Colver), Ser. D
2,000,000 7.15s, 12/1/18 BBB 2,112,500
1,000,000 7 1/8s, 12/1/15 BBB 1,058,750
2,500,000 PA State Econ. Indl. Dev. Auth. Rev. Bonds,
AMBAC, 5.8s, 1/1/09 Aaa 2,625,000
PA State G.O. Bonds, Ser. 1
3,515,000 FGIC, 5 3/8s, 5/15/13 Aaa 3,515,000
2,000,000 AMBAC, 5 1/8s, 3/15/16 Aaa 1,905,000
PA State Higher Ed. Assistance Agcy. IFB, Ser. B
3,850,000 AMBAC, 7.905s, 3/1/22 Aaa 3,869,250
2,400,000 MBIA, 10.828s, 3/1/20 Aaa 2,685,000
PA State Higher Ed. Fac. Auth. College &
U. Rev. Bonds
2,500,000 (Duquesne U.), Ser. C, MBIA, 6 3/4s, 4/1/20 Aaa 2,640,625
2,600,000 (Allegheny College), Ser. B, 6 1/8s, 11/1/13 BBB 2,626,000
PA State Higher Ed. Fac. Auth. Rev. Bonds
(Med. College), Ser. A
1,300,000 8 3/8s, 3/1/11 AAA 1,413,750
3,000,000 7 3/8s, 3/1/21 AAA 3,330,000
4,000,000 Philadelphia, Gas Works IFB, FSA, 5.724s,
8/1/21 (acquired 1/24/94, cost $3,747,680) [DBL. DAGGER] Aaa 3,450,000
1,225,000 Philadelphia, Gas Works Rev. Bonds,
Ser. 13, 7.7s, 6/15/21 Aaa 1,387,313
Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Rev. Bonds
3,390,000 (Graduate Hlth. Syst.), 7 1/4s, 7/1/18 BBB 3,559,500
1,000,000 (Graduate Hlth. Syst.), 6 5/8s, 7/1/21 BBB 1,002,500
4,600,000 (Jeanes Hlth. Syst.), 6.6s, 7/1/10 Baa 4,858,750
2,000,000 (Graduate Hlth. Syst.), Ser. A, AMBAC,
6 1/4s, 7/1/13 BBB 1,965,000
5,150,000 Philadelphia, Indl. Dev. Auth. Rev. Bonds
(Gallery II Garage), 6.4s, 2/15/13 BBB/P 5,207,938
Philadelphia, Muni. Auth. Rev. Bonds
3,130,000 FGIC, 7.8s, 4/1/18 Aaa 3,407,788
320,000 Prerefunded, FGIC, 7.8s, 4/1/18 Aaa 336,259
1,000,000 Ser. B, FGIC, 7 1/8s, 11/15/18 Aaa 1,120,000
2,000,000 Philadelphia, School Dist. G.O. Bonds,
Ser. A, AMBAC, 6 1/4s, 9/1/09 Aaa 2,172,500
3,250,000 Philadelphia, Wtr. & Swr. Rev. Bonds,
Ser. 16, FSA, 7s, 8/1/21 Aaa 3,603,438
Philadelphia, Wtr. & Wastewater Rev. Bonds
5,250,000 MBIA, 6 1/4s, 8/1/08 Aaa 5,761,875
5,005,000 MBIA, 5s, 6/15/18 Aaa 4,560,806
3,000,000 FSA, 5s, 6/15/16 Aaa 2,763,750
1,950,000 FGIC, 5s, 6/15/12 Aaa 1,850,063
5,705,000 Pittsburgh, Wtr. & Swr. Auth. Rev. Bonds,
Ser. A, FGIC, 6 1/2s, 9/1/13 Aaa 6,396,731
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.),
Ser. B, 8 1/2s, 7/1/20 BBB 3,345,000
1,000,000 Smithfield, Swr. Auth. Gtd. Rev. Bonds,
8 5/8s, 1/15/11 Aaa 1,133,750
2,470,000 Trafford, School Dist. Rev. Bonds, MBIA,
6.6s, 5/1/08 Aaa 2,732,438
3,800,000 U. of Pittsburgh, Cmnwlth. of Higher Ed. Rev.
Bonds (U. Cap. Impt.), FGIC, 5 1/8s, 6/1/22 Aaa 3,529,250
500,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge.
Rev. Bonds (AHF/Central States Inc.),
10 1/4s, 11/1/19 B/P 501,250
3,000,000 Wilkes-Barre, School Dist. Rev. Bonds, FGIC,
6 3/8s, 4/1/15 Aaa 3,202,500
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 2,034,000
1,030,000 York Cnty., Hosp. Auth. Rev. Bonds (Hlth. Ctr.
Village at Sprenkle Drive), Ser. A, 7 3/4s, 4/1/21 AAA/P 1,181,925
1,665,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac.
Rev. Bonds (Rehabilitation Hosp. of York),
7 1/2s, 9/1/07 BB/P 1,748,250
York Cnty., Solid Waste & Refuse Auth. Indl. Dev.
Rev. Bonds (Resource Recvy.)
650,000 Ser. A, 8.2s, 12/1/14 AA 680,570
890,000 Ser. C, 8.2s, 12/1/14 AA 931,857
300,000 Ser. B, 8.1s, 12/1/07 AA 313,104
--------------
226,835,354
Puerto Rico (11.2%)
- ------------------------------------------------------------------------------------------------------------
6,000,000 Cmnwlth. of PR, Elec. Pwr. Auth. Rev. Bonds,
Ser. W, MBIA, 6 1/2s, 7/1/05 Aaa 6,705,000
4,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/2s, 7/1/10 Aaa 4,530,000
Cmnwlth. of PR, Hwy. Auth. Rev. Bonds
200,000 Ser. P, 8 1/8s, 7/1/13 Aaa 212,572
250,000 Ser. O, 8s, 7/1/05 Aaa 265,390
900,000 Ser. Q, 7 3/4s, 7/1/16 Aaa 1,003,500
2,500,000 Ser. Q, 7 3/4s, 7/1/10 Aaa 2,787,500
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
3,500,000 Ser. T, 6 5/8s, 7/1/12 A 3,863,125
3,000,000 Ser. Y, 6 1/4s, 7/1/14 A 3,251,250
200,000 Cmnwlth. of PR, IFB, MBIA, 7.733s, 7/1/08 Aaa 217,250
Cmnwlth. of PR, Impt. G.O. Bonds
450,000 Ser. A, 7 3/4s, 7/1/17 AAA 488,250
200,000 Ser. A, 7 3/4s, 7/1/13 AAA 211,792
2,150,000 7.7s, 7/1/20 AAA 2,394,556
1,600,000 Cmnwlth. of PR, Rev. Bonds, MBIA, 5.642s, 7/1/08 Aaa 1,664,000
575,000 Cmnwlth. of PR, Urban Renewal & Hsg. Corp.
G.O. Bonds (Cmnwlth. Appropriation),
7 7/8s, 10/1/04 Baa 622,438
1,200,000 Cmnwlthh. of PR, Pub. Bldgs. Auth., Gtd. Edl. &
Hlth. Fac. Rev. Bonds, Ser. H, 7 7/8s, 7/1/16 Aaa 1,227,660
--------------
29,444,283
Washington (0.5%)
- ------------------------------------------------------------------------------------------------------------
$ 1,930,000 Thurston Cnty., School Dist. G.O. Bonds,
Ser. B, FGIC, zero%, 12/1/05 Aaa $ 1,244,850
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $249,032,065) *** $257,524,487
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $263,100,180.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
May 31, 1997 for the securities listed. Ratings are generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the
ratings do not necessarily represent what the agencies would ascribe to these securities at May 31, 1997.
Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the
Report of independent accountants.
*** The aggregate identified cost on a tax basis is $249,032,065, resulting in gross unrealized appreciation and
depreciation of $9,819,698 and $1,327,276, respectively, or net unrealized appreciation of $8,492,422.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at May 31, 1997 was $8,992,375 or 3.4% of net assets.
# A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at May 31, 1997.
The rates shown on IFBs, which are securities paying interest rates that vary inversely to changes in the market
interest rates, are the current interest rates at May 31, 1997.
The fund had the following industry group concentrations greater than 10% at May 31, 1997 (as a percentage of net
assets):
Healthcare 19.6%
Education 19.2
Water and Sewer 13.4
The fund had the following insurance concentration greater than 10% at May 31, 1997 (as a percentage of net assets):
MBIA 16.4%
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1997
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Index Future
(Short) $ 11,700,000 $ 11,192,998 Jun-97 $ (507,002)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $249,032,065) (Note 1) $257,524,487
- ---------------------------------------------------------------------------------------------------
Interest receivable 5,213,364
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 364,507
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 3,071,225
- ---------------------------------------------------------------------------------------------------
Total assets 266,173,583
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 1,063,721
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 31,250
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 185,566
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 1,011,433
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 169,417
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 395,247
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 44,692
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,910
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,179
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 117,453
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 47,535
- ---------------------------------------------------------------------------------------------------
Total liabilities 3,073,403
- ---------------------------------------------------------------------------------------------------
Net Assets $263,100,180
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $254,216,697
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 164,364
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments
(Note 1) 733,699
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,985,420
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $263,100,180
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($185,041,126 divided by 20,085,543 shares) $9.21
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.21)* $9.67
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($77,398,899 divided by 8,411,948 shares)+ $9.20
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($660,155 divided by 71,590 shares) $9.22
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.22)** $9.53
- ---------------------------------------------------------------------------------------------------
* 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, 1997
<S> <C>
Tax exempt interest income $16,324,517
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,554,372
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 283,851
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 16,759
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,084
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 371,011
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 616,891
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,838
- --------------------------------------------------------------------------------------------------
Reports to shareholders 31,250
- --------------------------------------------------------------------------------------------------
Registration fees 3,682
- --------------------------------------------------------------------------------------------------
Auditing 23,764
- --------------------------------------------------------------------------------------------------
Legal 23,950
- --------------------------------------------------------------------------------------------------
Postage 27,567
- --------------------------------------------------------------------------------------------------
Other 41,192
- --------------------------------------------------------------------------------------------------
Total expenses 3,004,211
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (163,410)
- --------------------------------------------------------------------------------------------------
Net expenses 2,840,801
- --------------------------------------------------------------------------------------------------
Net investment income 13,483,716
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,228,011
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 84,913
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 4,514,137
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,827,061
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $19,310,777
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $13,483,716 $12,597,727
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,312,924 2,785,836
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 4,514,137 (7,165,681)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,310,777 8,217,882
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (9,994,717) (10,000,537)
- ----------------------------------------------------------------------------------------------------------------------
Class B (3,430,844) (2,682,096)
- ----------------------------------------------------------------------------------------------------------------------
Class M (28,680) (5,299)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (1,561,648) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (622,187) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (5,824) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 10,310,292 30,556,384
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 13,977,169 26,086,334
Net Assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 249,123,011 223,036,677
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $164,364 and $13,925, respectively) $263,100,180 $249,123,011
- ----------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Three months
Per-share ended
operating performance Year ended May 31 May 31 Year ended February 28
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 ++ 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $9.08 $9.24 $8.98 $9.39 $9.40 $8.76
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .50 .51 .13 .53 .54 .57 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .20 (.16) .26 (.40) .01 .65
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .70 .35 .39 .13 .55 1.22
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.49) (.51) (.13) (.53) (.54) (.57)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.08) -- -- (.01) (.02) (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.57) (.51) (.13) (.54) (.56) (.58)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.21 $9.08 $9.24 $8.98 $9.39 $9.40
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) 7.94 3.82 4.39 * 1.60 5.93 14.34
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $185,041 $183,117 $178,785 $171,568 $171,757 $144,374
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .98 .98 .21 * .92 .91 .72 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.39 5.46 1.44 * 5.94 5.36 6.31 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 38.10 41.40 4.15 * 26.09 15.65 12.26
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ 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,
reflects expense reductions of approximately $0.01 per share.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period ended May 31, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts.
(Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- -------------------------------------------------------------------------------------------------------------------------
Three months For the period
Per-share ended Year ended July 15, 1993+
operating performance Year ended May 31 May 31 February 28 to Feb. 28
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 ++ 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of period $9.07 $9.23 $8.97 $9.38 $9.48
- -------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .44 .11 .47 .28
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .20 (.15) .27 (.40) (.08)
- -------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .64 .29 .38 .07 .20
- -------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.45) (.12) (.47) (.28)
- -------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.08) -- -- (.01) (.02)
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (.51) (.45) (.12) (.48) (.30)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.20 $9.07 $9.23 $8.97 $9.38
- -------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) 7.24 3.14 4.23 * 0.93 2.18 *
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $77,399 $65,669 $44,252 $36,670 $12,633
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.63 1.62 .38 * 1.57 1.00 *
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.73 4.78 1.26 * 5.23 2.90 *
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 38.10 41.40 4.15 * 26.09 15.65
- -------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ 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,
reflects expense reductions of approximately $0.01 per share.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period ended May 31, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts.
(Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 3, 1995+
operating performance May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value
beginning of period $9.09 $9.10
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .47 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .21 (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .68 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.47) (.44)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.55) (.44)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.22 $9.09
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(b) 7.61 4.70 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $660 $337
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.28 1.13 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.04 4.49 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 38.10 41.40
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ 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,
reflects expense reductions of approximately $0.01 per share.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) The ratio of expenses to average net assets for the period ended May 31, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts.
(Note 2)
</TABLE>
Notes to financial statements
May 31, 1997
Note 1
Significant accounting policies
Putnam Pennsylvania 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 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 Putnam Management following
procedures approved by the Trustees, and such valuations and procedures are
reviewed periodically by the Trustees.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it 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, 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.
E) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gain distributions if any, are
recorded on the ex-dividend date and paid 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 realized and
unrealized gains and losses on certain futures contracts and market discount.
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, 1997, the fund
reclassified $120,964 to increase undistributed net investment income and
$21,751 to decrease paid-in-capital, with a decrease to accumulated net
realized gain on investments of $99,213. The calculation of net investment
income per share in the financial highlights table excludes these adjustments.
F) 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. Discounts on zero coupon bonds and
original issue discount bonds are accreted 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. Such
fee is based on the following annual rates: 0.60% of the first $500 million of
average net assets, 0.50% of the next $500 million, 0.45% of the next $500
million, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355%
of the next $5 billion, 0.340% of the next $5 billion, and 0.330% thereafter.
Prior to September 20, 1996, any amount over $1.5 billion was based
on 0.40%.
As part of the custodian contract between the subcustodian bank and Putnam
Fiduciary Trust Company (PFTC), 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 May 31, 1997, the payable
to the subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC, 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, 1997, fund expenses were reduced by $163,410 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.
Trustees of the fund receive an annual Trustees fee of $470 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund at an annual rate of 0.20%, 0.85%
and 0.50% of the average net assets attributable to class A, class B and class
M shares respectively.
For the year ended May 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $33,135 and $552 from the sale of
class A and class M shares, respectively and $178,614 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, 1997, Putnam Mutual Funds Corp., acting as underwriter received
$18 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $103,513,622 and
$91,732,743, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Capital shares
At May 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 4,107,338 $37,745,941
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 759,897 6,990,804
- ------------------------------------------------------------
4,867,235 44,736,745
Shares
repurchased (4,950,826) (45,476,572)
- ------------------------------------------------------------
Net decrease (83,591) $(739,827)
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 1,930,926 $17,732,021
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 275,149 2,528,179
- ------------------------------------------------------------
2,206,075 20,260,200
Shares
repurchased (1,036,459) (9,529,313)
- ------------------------------------------------------------
Net increase 1,169,616 $10,730,887
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 50,639 $467,269
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,564 32,823
- ------------------------------------------------------------
54,203 500,092
Shares
repurchased (19,702) (180,860)
- ------------------------------------------------------------
Net increase 34,501 $319,232
- ------------------------------------------------------------
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 99.15% of dividends paid from net
investment income during the fiscal year as tax exempt for
Federal income tax purposes.
Pursuant to Section 852 of the Internal Revenue Code of 1986,
as amended, the Fund hereby designates $0.0650 per share (or if
different, the amount necessary to offset net capital gain
earned by the Fund) for all classes of shares as capital gain
dividends for its taxable year ended May 31, 1997.
The Form 1099 you receive in January 1998 will show the tax status
of all distributions paid to your account in calendar 1997.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
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
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
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Howard K. Manning
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. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
34409-047/226/2AE 7/97
