Putnam
Pennsylvania
Tax Exempt
Income Fund
ANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "We currently plan to continue to manage Putnam Pennsylvania Tax
Exempt Income Fund with a conservative mindset. In our opinion, this is
not a good time to expose the portfolio to bonds with longer maturities
and higher interest-rate risk. We continue to believe that a cautious
strategy will produce the best returns in the months ahead."
-- Jerome J. Jacobs, Fund Manager
* "Surging tax revenues in most states help bolster municipal credit
bond ratings. Standard & Poor's says the number of rating upgrades in this
year's first quarter was more than nine times the number of downgrades.
This was the 10th quarter in a row in which upgrades exceeded downgrades."
-- The Wall Street Journal, April 8, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
19 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Pennsylvania Tax Exempt Income Fund turned in another positive period
during the fiscal year that closed on May 31, 1998. It also received a new
manager who is uniquely qualified to supervise its portfolio. Jerome J. Jacobs
joined Putnam in 1996 as managing director and chief investment officer of the
Tax-Exempt Group, a position he continues to hold in conjunction with the
management of your fund.
Jerry was previously with the Vanguard Group of Investment Companies and
Butcher & Singer, but what makes his appointment to your fund significant is
that he began his investment career as a tax-exempt securities analyst in the
Pennsylvania governor's budget office 18 years ago.
In the following report, Jerry discusses your fund's performance during the
fiscal year just ended and looks at prospects for the year ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Manager
Jerome J. Jacobs
Municipal bond securities are in the midst of a renaissance. With yields
currently equal to about 90% of the yields on long-term Treasuries, tax-free
securities offer some of the best values in today's fixed-income markets.
Furthermore, they are attracting an increasing number of investors who are
concerned by the current volatility in the world's stock markets. This
heightened interest is driving tax-exempt prices up in spite of record levels
of new issuance.
Putnam Pennsylvania Tax Exempt Income Fund made the most of this environment,
ending its fiscal year on May 31, 1998, with a total return of 8.92% at net
asset value for class A shares (3.74% at public offering price). Performance
for other share classes and over longer periods is detailed beginning on page
9.
* HISTORIC VALUE IN MUNICIPAL MARKET
Interest rates generally trended down during the period with the bellwether
30-year Treasury bond falling to below 6% in December. The fixed-income market
sold off sharply late in April, when the Federal Reserve Board suggested the
possibility of raising short-term interest rates in the coming months. While
the situation in Asia is widely expected to have a slowing effect on the pace
of the U.S. economy, the jobless rate has reached a 28-year low, the reason
behind the Fed's contemplation of an interest-rate increase to defuse the
potential for higher wages and prices.
By the close of the fund's fiscal year, however, the Fed had refrained from
taking any action. Interest rates remained lower than they would normally be
expected to be at that point in the economic cycle. A flight to quality by
foreign investors, who are buying U.S. Treasuries to avoid the turmoil in the
Pacific Rim, helped keep interest rates (and thus bond yields) lower -- doing
much of the Fed's work for it.
Despite the relative calm that has fallen over the $1.3 trillion municipal
bond market, prices on tax-exempt securities have become especially attractive
relative to Treasury securities, a condition that hasn't existed since the
flat-tax scare of 1996. Municipal bonds (as represented by 30-year insured
municipals) are offering almost 90% of the yields of long-term Treasury bonds.
A more normal level is 84%.
So far, 1998 has been most notable for the huge supply of municipal bonds
coming to market, including the sale of the largest municipal bond issuance in
history -- $3.4 billion by Long Island Power Authority. At its peak in March,
overall issuance was running approximately 90% above the supply brought to
market by this time last year. Bargain prices have maintained investors'
interest and enabled demand to keep pace with supply.
Within this quieter environment, well-valued opportunities are increasingly
difficult to find, but your fund continues to deliver the result it set out to
achieve: a reliable stream of income exempt from federal and state income
taxes along with relatively low share price volatility.
* ACTIVE RESEARCH UNCOVERS WINNING CREDITS
Careful security selection and in-depth credit analysis are fundamental to the
fund's investment strategy, particularly as we attempt to discover better
value in bonds that carry ratings below investment grade. These are the bonds
that can add tremendously to the fund's income level. But they also mean
greater credit risk and require the most meticulous research efforts. The
fund's health-care holdings, which make up nearly 23% of net assets, provide
an excellent example of this strategy.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 22.7%
Education 13.0%
Water and sewerage 11.8%
Utilities 4.5%
Transportation 3.5%
Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.
In today's low interest-rate environment, we have been drawn to the
above-market yields offered by hospital bonds in the tier just below
investment grade. Rated Ba or below, these bonds also offer strong potential
for credit upgrades, which generally occur when hospitals consolidate. Larger
nonprofit hospitals, driven by the need to reduce costs, are linking up with
smaller community hospitals. As a single entity, the two hospitals can improve
their bargaining power with managed care companies and positively impact their
profit margins.
The fund holds bonds of several community hospitals that have recently been
involved in merger discussions, including Northwest Medical Center (BB-rated
by Standard & Poor's), which is merging with the University of Pittsburgh
Medical Center (AA-rated by S&P). The prices of Northwest's bonds have risen
to reflect the potential union and investors' anticipation of the bonds'
improving credit rating. 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.
Overall our outlook on the health-care sector remains favorable. Balance
sheets are solid, resulting in what we believe will be far more credit rating
upgrades than downgrades. Despite a reduction in Medicare payments mandated by
the federal Balanced Budget Act of 1997, states are managing to cover the
shortfall with income from higher tax receipts rather than by terminating
programs.
* PREREFUNDINGS CONTINUE TO ENHANCE FUND PERFORMANCE
Over the fiscal year, prerefundings continued to make a healthy contribution
to your fund's performance and portfolio quality. A prerefunding occurs when
inflation and interest rates are low enough to encourage a municipality to
refinance its higher-interest bonds. This is accomplished by issuing enough
new bonds to pay off the original issues at the first call date or maturity.
Proceeds from the new issue, in an amount sufficient to pay off the entire
original issue, are invested in an escrow fund made up of U.S. government
obligations. Because of the safety of principal represented by the government
securities, the older bonds generally are considered to have the quality of
Aaa-rated bonds once the escrow fund is established. Upgrades by the rating
agencies will typically follow.
[GRAPHIC OMITTED: pie chart of CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
B -- 0.2%
Aaa -- 52.2%
Ba -- 5.4%
Aa -- 2.1%
VMIGI -- 0.5%
Baa -- 32.2%
A -- 7.4%
Footnote reads:
* Based on percentage of market value as of 5/31/98. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions unless noted otherwise; percentages may include unrated
bonds considered by Putnam Management to be of comparable quality.
Ratings will vary over time.
Another way of providing shareholders with the best value is to improve the
call risk within the fund. With interest rates hovering around a 20-year low,
budget-minded issuers continue to call in their higher-yielding bonds, many of
which were issued during the late 1980s and early 1990s, and issue new bonds
at today's lower rates. Thus investing in noncallable bonds and bonds with
distant call dates improves the fund's prospects of maintaining a competitive,
sustainable level of income.
Education remains a dominant portfolio theme for several reasons. The strong
economy and rising stock prices have led to generous endowment gifts.
Furthermore, even though colleges and universities are still raising tuition,
enrollment continues to climb. Finally the Taxpayer Relief Act of 1997
repealed the limit on tax-exempt debt that nonprofit institutions can issue,
opening the door for more bond issuance to finance school-related projects.
Robert Morris College, a business school with strong debt coverage, and
Allegheny College, a well-endowed school with a strong balance sheet, are two
institutions currently benefiting from these positive trends, and your fund
holds bonds issued by each.
* CHALLENGING MARKET WARRANTS VIGILANCE AND CAUTIOUS OPPORTUNISM
Concern over continuing financial turmoil in Asia and other emerging markets
should keep U.S. interest rates low for the foreseeable future. Eventually the
good times may give way to slightly higher inflation, and so we currently plan
to continue to manage the portfolio with a conservative mindset. In our
opinion, this is not a good time to expose the portfolio to bonds with longer
maturities and higher interest-rate risk. We continue to believe that a
cautious strategy will produce the best returns in the months ahead.
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 5/31/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
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.
TOTAL RETURN FOR PERIODS ENDED 5/31/98
Class A Class B Class M
(inception date) (7/21/89) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
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1 year 8.92% 3.74% 8.22% 3.22% 8.47% 4.94%
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5 years 36.31 29.89 31.39 29.39 34.14 29.83
Annual average 6.39 5.37 5.61 5.29 6.05 5.36
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Life of fund 94.84 85.67 81.80 81.80 88.10 82.04
Annual average 7.82 7.23 6.98 6.98 7.39 7.00
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98
Lehman Bros.
Municipal Consumer
Bond Index Price Index
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1 year 9.39% 1.69%
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5 years 38.53 12.90
Annual average 6.74 2.46
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Life of fund 95.86 30.87
Annual average 7.91 3.09
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Past performance is not indicative of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost. 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
Lehman Bros. Consumer
Fund's class A Municipal Bond Price
Date shares at POP Index Index
7/21/89 9,529 10,000 10,000
5/31/90 9,932 10,446 10,386
5/31/91 10,913 11,498 10,900
5/31/92 12,118 12,628 11,229
5/31/93 13,622 14,139 11,590
5/31/94 14,004 14,489 11,856
5/31/95 15,223 15,813 12,234
5/31/96 15,805 16,535 12,588
5/31/97 17,060 17,906 12,868
5/31/98 18,567 19,586 13,087
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 $18,180 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class M shares
would have been valued at $18,810 ($18,204 at public offering price).
See first page of performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/98
Class A Class B Class M
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Distributions (number) 12 12 12
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Income $0.482955 $0.420892 $0.454737
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Capital gains1
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Long-term 0.029000 0.029000 0.029000
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Short-term 0.013000 0.013000 0.013000
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Total $0.524955 $0.462892 $0.496737
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Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/97 $9.21 $9.67 $9.20 $9.22 $9.53
- ------------------------------------------------------------------------------
5/31/98 9.49 9.96 9.48 9.49 9.81
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 5.10% 4.85% 4.45% 4.78% 4.63%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.69 8.26 7.58 8.14 7.89
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 4.66 4.44 4.01 4.40 4.26
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Taxable equivalent3 7.94 7.56 6.83 7.49 7.26
- ------------------------------------------------------------------------------
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 6/30/98
(most recent calendar quarter)
Class A Class B Class M
(inception) (7/21/89) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 8.00% 2.90% 7.30% 2.30% 7.67% 4.19%
- ------------------------------------------------------------------------------
5 years 35.00 28.56 30.20 28.20 32.97 28.60
Annual average 6.19 5.15 5.42 5.09 5.86 5.16
- ------------------------------------------------------------------------------
Life of fund 95.53 86.33 82.33 82.33 88.92 82.83
Annual average 7.79 7.21 6.95 6.95 7.38 6.98
- ------------------------------------------------------------------------------
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. See first page of performance section for performance
calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in the
fund, and may pose different risks than the fund. 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,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at May 31, 1998
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.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 13, 1998
Portfolio of investments owned
May 31, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (97.9%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
Delaware (1.5%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 4,000,000 Delaware Valley, Regl. Fin. Auth. Local Govt.
Rev. Bonds, Ser. B, AMBAC, 5.7s, 7/1/27 Aaa $ 4,385,000
Pennsylvania (91.0%)
- -------------------------------------------------------------------------------------------------------------
3,000,000 Allegheny Cnty., Arpt. Rev. Bonds (Pittsburgh
Intl. Arpt.), Ser. A, MBIA, 5 3/4s, 1/1/14 Aaa 3,221,250
5,000,000 Allegheny Cnty., Higher Ed. Bldg. Auth.
Rev. Bonds (Robert Morris College),
Ser. A, 6 1/4s, 2/15/26 Baa3 5,300,000
Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
2,450,000 (Childrens Hosp.), MBIA, 5 3/8s, 7/1/17 Aaa 2,495,938
3,450,000 (South Hills Hlth.), Ser. A, MBIA, 5 1/8s, 5/1/25 A2 3,299,063
Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds
1,865,000 (Med. Ctr.), FHA Insd., 6 3/4s, 2/1/26 AAA 2,023,525
4,305,000 (Environmental Impt. - USX Corp.), 6s, 1/15/14 Baa3 4,574,063
4,000,000 (Environmental Impt. - USX Corp.),
Ser. A, MBIA, 5.6s, 9/1/30 Baa3 4,035,000
520,000 Allegheny Cnty., Indl. Dev. Auth. Arpt. Special
Fac Rev. Bonds (Southwestern Arpt. Cargo
Fac.), 8 3/4s, 2/15/09 BB+/P 543,416
Allentown, Hosp. Auth. Rev. Bonds (Sacred
Heart Hosp.), Ser. A
6,650,000 6 3/4s, 11/15/14 BBB 7,273,438
1,200,000 6 1/2s, 11/15/08 BBB 1,311,000
1,500,000 Blair Cnty., Hosp. Auth. Rev. Bonds (Altoona
Hosp.), AMBAC, 6 1/2s, 7/1/22 Aaa 1,631,250
1,100,000 Cambria Cnty., Indl. Dev. Auth. Res. Recvy.
Rev. Bonds (Cambria Cogen.), Ser. F1,
7 3/4s, 9/1/19 A3 1,108,536
775,000 College Township, Indl. Dev. Auth. 1st Mtge.
Hlth. Fac. Rev. Bonds (Nittany Valley
Rehab. Hosp.), 7 5/8s, 11/1/07 BB/P 870,906
2,455,000 Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
(Northwest Med. Ctr.), 8 5/8s, 10/15/13 BBB- 2,967,481
1,000,000 Dauphin Cnty., Indl. Dev. Auth. Wtr. Rev. Bonds
(Dauphin Cons. Wtr. Supply), Ser. A, 6.9s, 6/1/24 A3 1,222,500
2,200,000 Delaware Cnty., College Auth. Rev. Bonds
(Neumann College), Ser. A, 5 3/8s, 10/1/26 BBB- 2,145,000
Delaware Cnty., Hosp. Auth. Rev. Bonds
(Crozer-Chester Med. Ctr.)
1,000,000 MBIA, 7 1/2s, 12/15/20 Aaa 1,101,250
1,000,000 6s, 12/15/20 Baa1 1,041,250
3,235,000 Ser. A, 5.3s, 12/1/27 Baa1 3,109,644
4,000,000 Delaware Cnty., Indl. Dev. Auth. Resource
Recvy. Rev. Bonds, Ser. A, 6.1s, 7/1/13 A 4,330,000
4,100,000 Doylestown, Hosp. Auth. Rev. Bonds
(Doylestown Hosp. Pine Run), Ser. A,
7.2s, 7/1/23 BBB/P 4,715,000
3,000,000 Emmaus, Gen. Auth. Rev. Bonds (Local
Govt. Bond Pool), Ser. A, MBIA, 8.15s, 5/15/18 Aaa 3,047,730
Erie, Higher Ed. Bldg. Auth. College Rev. Bonds
1,150,000 (Mercyhurst College), 7.85s, 9/15/19 AAA 1,207,500
2,000,000 (Gannon U.), Ser. D, 5.85s, 6/1/15 Baa2 2,040,000
1,865,000 (Mercyhurst College), Ser. A, 5 3/4s, 3/15/20 BBB 1,906,963
1,000,000 (Mercyhurst College), Ser. A, 5 3/4s, 3/15/13 BBB 1,028,750
3,500,000 Erie, Wtr. Auth. Rev. Bonds, 7 1/8s, 12/1/11 BBB/P 3,841,250
Erie-Western PA Port. Auth. Rev. Bonds
750,000 8 5/8s, 6/15/10 BBB/P 830,625
915,000 6 7/8s, 6/15/16 BBB/P 976,763
1,365,000 6 1/4s, 6/15/10 BBB/P 1,472,494
2,000,000 Exeter Township, Swr. Auth. Rev. Bonds,
MBIA, 6.2s, 7/15/22 Aaa 2,152,500
2,100,000 General Mclane School Dist. G.O. Bonds,
FGIC, 5 3/4s, 5/15/17 Aaa 2,231,250
930,000 Greene Cnty., Hosp. Auth. Rev. Bonds
(Greene Cnty. Memorial Hosp.), 6 1/2s, 1/1/02 BBB-/P 931,609
4,150,000 Harrisburg, Auth. Wtr. IFB, 7.57s, 6/18/15 Aaa 4,720,625
2,350,000 Hazleton, Hlth. Svcs. Auth. Rev. Bonds
(St. Joseph Med. Ctr.), 6.2s, 7/1/26 Baa3 2,520,375
2,200,000 Lebanon Cnty., Good Samaritan Hosp. Auth.
Rev. Bonds, Ser. B, 8 1/4s, 11/1/18 BBB+ 2,370,500
1,000,000 Lehigh Cnty., Gen. Purpose Auth. Rev. Bonds
(Muhlenberg Hosp.), Ser. A, 8.1s, 7/15/10 A3 1,057,500
5,050,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB,
(PA Pwr. & Light Co.), 8.628s, 9/1/29
(acquired 6/20/95, cost $5,572,473) (RES) Aaa/P 6,236,750
Lehigh Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds (PA Pwr. & Ltg. Co.)
3,575,000 Ser. B, MBIA, 6.4s, 9/1/29 Aaa 3,963,781
4,700,000 Ser. A, MBIA, 5 1/2s, 2/15/27 Aaa 4,794,000
2,000,000 Luzerne Cnty., Indl. Dev. Auth. Rev. Bonds
(Gas & Wtr. Co.), Ser. B, 7 1/8s, 12/1/22 A3 2,200,000
2,005,000 McKeesport, Hosp. Auth. Rev. Bonds,
6 1/4s, 7/1/03 (SEG) Baa2 2,125,300
Montgomery Cnty., Higher Ed. & Hlth. Auth.
400,000 VRDN (Philadelphia Presbyterian Hosp.),
3.9s, 7/1/25 VMIG1 400,000
2,000,000 IFB (Abington Hosp.), Ser. A, AMBAC,
9.395s, 6/1/11 Aaa 2,330,000
Montgomery Cnty., Higher Ed. & Hlth.
Auth. Hosp. Rev. Bonds
1,000,000 (UTD Hosp.), Ser. B, 7 1/2s, 11/1/12 AAA 1,047,500
3,000,000 (Sacred Heart Hosp. Norristown), Ser. A,
MBIA, 6.8s, 2/1/13 Aaa 3,036,720
3,000,000 New Morgan, Indl. Dev. Auth. Solid Waste
Disp. Rev. Bonds (New Morgan Landfill
Co., Inc.), 6 1/2s, 4/1/19 A3 3,270,000
880,000 Northampton Cnty., Indl. Dev. Auth. Rev. Bonds
(Citizens Util. Co.), 6.95s, 8/1/15 AAA 936,100
2,000,000 Northeastern PA Hosp. & Edl. Auth. College
Rev. Bonds (Kings College), Ser. B, 6s, 7/15/11 BBB 2,070,000
PA Convention Ctr. Auth. Rev. Bonds
1,150,000 MBIA, 6 3/4s, 9/1/19 AAA 1,306,688
5,000,000 Ser. A, 6 3/4s, 9/1/19 Baa 5,525,000
3,000,000 PA Econ. Dev. Fin. Auth. Indl. Dev. Rev. Bonds
(GEHL Co. Inc.), 9s, 9/1/10 BB+/P 3,318,750
2,300,000 PA Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds (Northampton Generating),
Ser. A, 6.6s, 1/1/19 BBB-/P 2,452,375
PA Econ. Dev. Fin. Auth. Rev. Bonds
4,000,000 (MacMillan Ltd. Partnership), 7.6s, 12/1/20 Baa2 4,370,000
2,000,000 (Northampton Generating), Ser. A, 6 1/2s,
1/1/13 BBB-/P 2,127,500
500,000 PA Hosp. & Higher Edl. Fac. Auth. Rev. Bonds
(Graduate Hlth. Syst.), 7s, 7/1/01 BB 500,625
PA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
315,000 Ser. U, 7.8s, 10/1/20 Aa2 332,719
235,000 Ser. 29, 7 3/8s, 10/1/16 Aa2 248,806
1,510,000 Ser. 33, 6.9s, 4/1/17 Aa2 1,628,913
3,650,000 Ser. 61A, 5 1/2s, 4/1/29 Aa2 3,681,938
7,830,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 7,702,763
PA State Econ. Dev. Fin. Auth. Resource
Recvy. Rev. Bonds
2,490,000 (Colver), Ser. D, 7.15s, 12/1/18 BBB- 2,779,463
1,000,000 (Colver), Ser. D, 7 1/8s, 12/1/15 BBB- 1,115,000
1,500,000 (Northhampton), Ser. B, 6 3/4s, 1/1/07 BB+/P 1,646,250
2,500,000 PA State Econ. Indl. Dev. Auth. Rev. Bonds,
AMBAC, 5.8s, 1/1/09 Aaa 2,759,375
PA State Higher Ed. Assistance Agcy. IFB, Ser. B
3,850,000 AMBAC, 8.107s, 3/1/22 Aaa 4,398,625
2,400,000 MBIA, 10.717s, 3/1/20 Aaa 2,733,000
4,450,000 PA State Higher Ed. Assistance Agcy. Student
Loan IFB, Ser. A&B, 7 1/4s, 7/1/18 BB 4,722,563
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 2,678,125
2,600,000 (Allegheny College), Ser. B, 6 1/8s, 11/1/13 BBB+ 2,769,000
PA State Higher Ed. Fac. Auth. Rev. Bonds
(Med. College), Ser. A
1,300,000 8 3/8s, 3/1/11 AAA 1,368,692
3,000,000 7 3/8s, 3/1/21 AAA 3,307,500
Philadelphia, Gas Works Rev. Bonds
2,550,000 6 3/8s, 7/1/26 Aaa 2,776,313
1,225,000 Ser. 13, 7.7s, 6/15/21 Aaa 1,373,531
Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Rev. Bonds
1,315,000 (Graduate Hlth. Syst.), 6 5/8s, 7/1/21 BB2 1,346,231
4,600,000 (Jeanes Hlth. Syst.), 6.6s, 7/1/10 BBB 5,111,750
5,150,000 Philadelphia, Indl. Dev. Auth. Rev. Bonds
(Gallery II Garage), 6.4s, 2/15/13 BBB-/P 5,375,313
1,000,000 Philadelphia, Muni. Auth. Rev. Bonds, Ser. B,
FGIC, 7 1/8s, 11/15/18 Aaa 1,115,000
2,000,000 Philadelphia, School Dist. G.O. Bonds, Ser. A,
AMBAC, 6 1/4s, 9/1/09 Aaa 2,282,500
3,250,000 Philadelphia, Wtr. & Swr. Rev. Bonds, Ser. 16,
FSA, 7s, 8/1/21 Aaa 3,595,313
Philadelphia, Wtr. & Wastewtr. Rev. Bonds
3,400,000 6 1/4s, 8/1/09 Aaa 3,901,500
3,000,000 MBIA, 6 1/4s, 8/1/08 Aaa 3,412,500
Pittsburgh, G.O. Bonds AMBAC
4,160,000 5 1/2s, 9/1/14 Aaa 4,347,200
3,965,000 5 1/2s, 9/1/12 Aaa 4,178,119
5,705,000 Pittsburgh, Wtr. & Swr. Auth. Rev. Bonds, Ser. A,
FGIC, 6 1/2s, 9/1/13 Aaa 6,739,031
1,710,000 Pittsburgh, Urban Redev. Auth. Rev. Bonds,
Ser. C, 5.9s, 10/1/22 AAA 1,819,013
2,000,000 Pottsville, Hosp. Auth. Rev. Bonds (Pottsville
Hosp. & Warne Clinic), 7 1/4s, 7/1/24 BBB 2,230,000
1,000,000 Sayre, Hlth. Care Fac. Auth. VRDN (VHR PA
Cap. Fin.), Ser. F, AMBAC, 3.75s, 12/1/20 VMIG1 1,000,000
1,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 1,097,500
3,000,000 Scranton-Lackawanna, Hlth. & Welfare Auth.
Rev. Bonds (Moses Taylor Hosp.), Ser. B,
8 1/2s, 7/1/20 AAA 3,435,000
1,000,000 Smithfield, Swr. Auth. Gtd. Rev. Bonds,
8 5/8s, 1/15/11 AAA/P 1,111,250
2,470,000 Trafford, School Dist. Rev. Bonds,
MBIA, 6.6s, 5/1/08 Aaa 2,809,625
500,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge.
Rev. Bonds (AHF/Central States Inc.),
10 1/4s, 11/1/19 B-/P 512,500
3,000,000 Wilkes-Barre, School Dist. Rev. Bonds, FGIC,
6 3/8s, 4/1/15 Aaa 3,292,500
1,800,000 Wilkins Area, Indl. Dev. Auth. 1st Mtge.
Rev. Bonds (Fairview Extended Care),
Ser. A, 10 1/4s, 1/1/21 AAA/P 2,115,000
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 1,175,488
1,560,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth.
Fac. Rev. Bonds (Rehabilitation Hosp. of York),
7 1/2s, 9/1/07 BB/P 1,716,000
--------------
254,407,942
Puerto Rico (5.4%)
- -------------------------------------------------------------------------------------------------------------
2,000,000 Cmnwlth. of PR, Elec. Pwr. Auth. Rev. Bonds,
Ser. AA, 6 1/4s, 7/1/10 Aaa 2,315,000
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
3,500,000 Ser. T, 6 5/8s, 7/1/12 A 3,880,625
3,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/14 Aaa 3,494,992
2,500,000 Cmnwlth. of PR, Hwy. Auth. Rev. Bonds,
Ser. Q, 7 3/4s, 7/1/10 AAA 2,740,625
200,000 Cmnwlth. of PR, IFB, MBIA, 7.784s, 7/1/08 Aaa 226,500
2,150,000 Cmnwlth. of PR, Impt. G.O. Bonds, 7.7s, 7/1/20 Aaa 2,354,250
--------------
15,011,992
- -------------------------------------------------------------------------------------------------------------
Total Investments (cost $257,962,680) (b) $ 273,804,934
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $279,568,990.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at May 31, 1998 for the securities listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to
do so, and the ratings do not necessarily represent what the agencies would ascribe to these securities
at May 31, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings
are not covered by the Report of independent accountants.
(b) The aggregate identified cost on a tax basis is $257,962,680, resulting in gross unrealized appreciation
and depreciation of $17,306,872 and $1,464,618, respectively, or net unrealized appreciation of
$15,842,254.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at May 31, 1998 was $6,236,750 or 2.2% of net assets.
(SEG) A portion of this security was pledged and segregated with the subcustodian to cover margin requirements
for futures contracts at May 31, 1998.
The rates shown on IFB, 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, 1998.
The fund had the following industry group concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
Healthcare 22.7%
Education 13.0
Water and Sewerage 11.8
The fund had the following insurance concentration greater than 10% at May 31, 1998
(as a percentage of net assets):
MBIA 17.1%
AMBAC 12.5
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1998
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date Depreciation
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Municipal Index
Future (long) $20,346,250 $19,890,563 Jun-98 $ 455,687
US Treasury Bond
Futures (short) 18,622,969 18,490,813 Jun-98 (132,156)
- --------------------------------------------------------------------------------------------
$ 323,531
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $257,962,680) (Note 1) $273,804,934
- ---------------------------------------------------------------------------------------------------
Cash 833,281
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 5,171,475
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 767,328
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 71,122
- ---------------------------------------------------------------------------------------------------
Total assets 280,648,140
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 7,500
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 185,359
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 231,442
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 418,167
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 53,467
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,580
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,038
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 127,990
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 45,607
- ---------------------------------------------------------------------------------------------------
Total liabilities 1,079,150
- ---------------------------------------------------------------------------------------------------
Net assets $279,568,990
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 262,663,563
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 306,927
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 432,715
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 16,165,785
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $279,568,990
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($187,271,924 divided by 19,725,861 shares) $9.49
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.49)* $9.96
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($90,303,253 divided by 9,525,058 shares)+ $9.48
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,993,813 divided by 210,067 shares) $9.49
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.49)** $9.81
- ---------------------------------------------------------------------------------------------------
* 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.
** 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.
+ Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1998
<S> <C>
Tax exempt interest income: $16,697,154
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,640,373
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 353,710
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,425
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,330
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 376,584
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 712,559
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 6,420
- --------------------------------------------------------------------------------------------------
Reports to shareholders 16,464
- --------------------------------------------------------------------------------------------------
Registration fees 222
- --------------------------------------------------------------------------------------------------
Auditing 34,184
- --------------------------------------------------------------------------------------------------
Legal 25,458
- --------------------------------------------------------------------------------------------------
Postage 15,267
- --------------------------------------------------------------------------------------------------
Other 21,175
- --------------------------------------------------------------------------------------------------
Total expenses 3,219,171
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (88,737)
- --------------------------------------------------------------------------------------------------
Net expenses 3,130,434
- --------------------------------------------------------------------------------------------------
Net investment income 13,566,720
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,451,554
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1) (1,510,292)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts during the year 8,180,365
- --------------------------------------------------------------------------------------------------
Net gain on investments 9,121,627
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $22,688,347
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 13,566,720 $ 13,483,716
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 941,262 1,312,924
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,180,365 4,514,137
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 22,688,347 19,310,777
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (9,631,773) (9,994,717)
- ----------------------------------------------------------------------------------------------------------------------
Class B (3,736,612) (3,430,844)
- ----------------------------------------------------------------------------------------------------------------------
Class M (61,339) (28,680)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (840,329) (1,561,648)
- ----------------------------------------------------------------------------------------------------------------------
Class B (374,512) (622,187)
- ----------------------------------------------------------------------------------------------------------------------
Class M (5,683) (5,824)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 8,430,711 10,310,292
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 16,468,810 13,977,169
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 263,100,180 249,123,011
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $306,927 and $164,364, respectively) $279,568,990 $263,100,180
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value
beginning of period $9.21 $9.08 $9.24
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .49 .50 .51
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .31 .20 (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .80 .70 .35
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.48) (.49) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.52) (.57) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.49 $9.21 $9.08
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.92 7.94 3.82
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $187,272 $185,041 $183,117
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .98 .98 .98
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.16 5.39 5.46
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40.76 38.10 41.40
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations
* Not annualized.
++ The fiscal year end advanced from February 28 to May 31.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) 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 A (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months
Per-share ended
operating performance May 31 Year ended February 28
- ------------------------------------------------------------------------------------------------------------------------------------
1995 ++ 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<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 gain
on investments -- (.01) (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.13) (.54) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.24 $8.98 $9.39
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.39* 1.60 5.93
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $178,785 $171,568 $171,757
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .21* .92 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.44* 5.94 5.36
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 4.15* 26.09 15.65
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations
* Not annualized.
++ The fiscal year end advanced from February 28 to May 31.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 ++ 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value
beginning of period $9.20 $9.07 $9.23 $8.97 $9.38 $9.48
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .42 .44 .44 .11 .47 .28
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .32 .20 (.15) .27 (.40) (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .74 .64 .29 .38 .07 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.42) (.43) (.45) (.12) (.47) (.28)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) (.08) -- -- (.01) (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.51) (.45) (.12) (.48) (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.48 $9.20 $9.07 $9.23 $8.97 $9.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.22 7.24 3.14 4.23 * 0.93 2.18*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $90,303 $77,399 $65,669 $44,252 $36,670 $12,633
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.63 1.63 1.62 .38 * 1.57 1.00*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.51 4.73 4.78 1.26 * 5.23 2.90*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40.76 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) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value
beginning of period $9.22 $9.09 $9.10
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .46 .47 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .30 .21 (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .76 .68 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.47) (.44)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.04) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.49) (.55) (.44)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.49 $9.22 $9.09
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.47 7.61 4.70*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,994 $660 $337
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.28 1.28 1.13*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.85 5.04 4.49*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40.76 38.10 41.40
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations
* Not annualized.
++ The fiscal year end advanced from February 28 to May 31.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) 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, 1998
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 within approximately six to 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. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
D) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the year ended May 31, 1998, the fund had
no borrowings against the line of credit.
E) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
F) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gain distributions if any, are
recorded on the ex-dividend date and paid at least annually. The amount and
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences include temporary and permanent
differences of realized and unrealized gains and losses on certain futures
contracts and straddle loss deferrals. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For the
year ended May 31, 1998, the fund reclassified $5,567 to increase
undistributed net investment income and $16,155 to increase paid-in-capital,
with a decrease to accumulated net realized gain on investments of $21,722.
The calculation of net investment income per share in the financial highlights
table excludes these adjustments.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and
original issue discount are accreted according to the yield-to-maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.60% of the first $500 million of
average net assets, 0.50% of the next $500 million, 0.45% of the next $500
million, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355%
of the next $5 billion, 0.340% of the next $5 billion, and 0.330% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a 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, 1998, fund expenses were reduced by $88,737 under
expense offset arrangements with PFTC. Investor servicing and custodian fees
reported in the Statement of operations exclude these credits. The fund could
have invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered into
such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $390 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00%, and 1.00% of the average net
assets attributable to class A, class B and class M shares, respectively. The
Trustees currently limit payment by the fund to an annual rate of 0.20%,
0.85%, and 0.50% of the average net assets attributable to class A, class B,
and class M shares respectively.
For the year ended May 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $33,326 and $1,666 from the sale of
class A and class M shares, respectively and $140,736 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, 1998, Putnam Mutual Funds Corp., acting as underwriter received
$11,243 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $114,151,064 and
$110,056,874, 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
Year ended
May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 2,888,742 $27,228,107
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 635,723 6,002,555
- ------------------------------------------------------------
3,524,465 33,230,662
Shares
repurchased (3,884,147) (36,640,689)
- ------------------------------------------------------------
Net decrease (359,682) $(3,410,027)
- ------------------------------------------------------------
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, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 1,795,478 $16,967,106
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 270,466 2,551,522
- ------------------------------------------------------------
2,065,944 19,518,628
Shares
repurchased (952,834) (8,983,401)
- ------------------------------------------------------------
Net increase 1,113,110 $10,535,227
- ------------------------------------------------------------
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, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 144,578 $1,363,465
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,743 54,313
- ------------------------------------------------------------
150,321 1,417,778
Shares
repurchased (11,844) (112,267)
- ------------------------------------------------------------
Net increase 138,477 $1,305,511
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% 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, as amended,
the Fund hereby designates $1,982,755 as capital gain, which
includes $1,172,417 as 20% capital gain, for its taxable year
ended May 31, 1998.
The Form 1099 you receive in January 1999 will show the tax status
of all distributions paid to your account in calendar 1998.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President
Jerome J. Jacobs
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
AN054-43776 047/226/2AE 7/98
