Putnam
Pennsylvania
Tax Exempt
Income Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-98
[LOGO: BOSTON * LONDON * TOKYO]
* "We're at historical highs in terms of muni yields relative to
Treasuries. They represent an unprecedented bargain and opportunity."
-- Money, Year End, 1998
* "A healthy state economy, combined with the relatively low yields
offered by U.S. Treasury bonds, should continue to provide a positive
backdrop for the fund."
-- David E. Hamlin, manager
Putnam Pennsylvania Tax Exempt Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
18 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The rush of foreign investors to the safety of U.S. Treasury bonds in
recent months has driven prices on these securities markedly higher.
Because of the inverse relationship of yields to prices, yields on 30-year
Treasuries have declined to virtually the same level as those on long-term
municipals. This near parity has made Pennsylvania tax-exempt bonds
unusually attractive for the state's tax-conscious investors.
On the other side, however, the ability to find appropriate investments
for Putnam Pennsylvania Tax Exempt Income Fund's portfolio has become the
biggest challenge for David E. Hamlin, who was recently appointed as your
fund's manager. David, who joined Putnam in August from the Vanguard
Group, is also responsible for the management of a number of other
municipal bond funds and institutional portfolios. He has 16 years of
investment experience. Jerome Jacobs, who had served as interim manager,
continues to monitor the fund in his role as chief investment officer of
the Tax Exempt Group.
In the following report, David discusses the fund's performance during the
first half of fiscal 1999 and provides comment on his current expectations
for the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 20, 1999
Report from the Fund Manager
David E. Hamlin
Putnam Pennsylvania Tax Exempt Income Fund pursued a conservative strategy
during the first half of the fund's 1999 fiscal year, seeking to maximize
income while providing a measure of stability in the midst of volatile
global markets. In keeping with its investment strategy, the fund provided
a 30-day SEC yield of 3.83% at the end of November, equivalent to a 6.52%
yield offered by a comparable taxable investment for an investor in
Pennsylvania's top tax bracket. For the six months ended November 30,
1998, the fund's class A shares provided a total return at net asset value
of 1.53% (-3.26% at public offering price). For more detailed performance
and yield information, including returns for other share classes, turn to
page 9.
* DECLINING TREASURY BOND YIELDS ENHANCE VALUE OF MUNICIPALS
Throughout the semiannual period, municipal bonds offered unprecedented
value when compared with similarly rated taxable investments. By the end
of November, long-term municipal bonds offered yields that were roughly
equivalent to the 30-year Treasury bond yield -- close to 5% -- providing
municipal bond investors with a significant after-tax advantage.
Although Treasury bond yields had been trending lower for most of the
year, the decline in Treasury yields accelerated after a string of
international problems this summer sparked another round of stock market
volatility and bond market rallies. Foreign investors and hedge fund
investors panicked in the fall and began a flight to quality, selling
investments with virtually any element of risk and rushing to the safety
of U.S. Treasury bonds. This buying surge drove up the prices of
Treasuries while pushing down their yields. Since foreign investors do not
benefit from the tax advantages of municipal bonds, prices in this market
didn't rise as much as those of Treasuries. The resulting disparity in
performance between the two groups was significant. For the period, the
Lehman Brothers Long Treasury Bond Index returned 9.55%, compared with
3.84% for the Lehman Brothers Municipal Bond Index.
* FUND STRATEGY EMPHASIZES DIVERSIFICATION AND CALL PROTECTION
Given the heightened volatility in global investment markets, we
maintained a cautious investment strategy throughout the period. Portfolio
changes were aimed at broadening sector diversification and enhancing call
protection where possible.
The fund's largest concentration of assets continues to be in
heath-care-related bonds. As rates declined during the period, the fund
benefited from the above-market yields offered by a number of hospital
bonds, some with ratings at or just below investment grade. Bonds issued
to finance not-for-profit hospitals typically offer higher yields than
other segments of the municipal market to compensate for a higher level of
investment risk. The financial health of a not-for-profit hospital is
determined by a number of outside factors, including local demographics,
government policy, private insurance vendors, and competition from private
hospitals. The increase in managed care over the past several years has
added to the risks associated with hospital bonds as managed care
providers have reined in their payments for medical procedures.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 21.9%
Education 15.1%
Water and sewerage 10.6%
Transportation 8.8%
Utilities 3.8%
Footnote reads:
*Based on net assets as of 11/30/98. Holdings will vary over time.
Occasionally the financial strain proves too great. In July, Allegheny
Health System's Philadelphia facilities declared bankruptcy after their
operating expenses surpassed incoming revenues. Three issues representing
less than 1% of the portfolio were affected. Allegheny has since been
purchased out of bankruptcy by the for-profit Tenet Healthcare
Corporation, and we are monitoring the situation closely.
Given the sector's ongoing concerns, we trimmed back the fund's
health-care exposure slightly to 22% by the end of the period. With the
proceeds we purchased general obligation issues and added to the fund's
holdings in the education and transportation sectors. Aa-rated bonds
issued to finance the construction of new academic facilities at the
University of Pennsylvania are one example of the fund's recent purchases.
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.
Throughout the period, we took advantage of opportunities to improve the
fund's call risk. With interest rates at historic lows, budget-minded
issuers are continuing to call in their higher-yielding bonds -- many of
which were issued more than 10 years ago -- and issuing new bonds at
today's lower rates. By investing in noncallable bonds and bonds with
distant call dates, we have sought to improve the fund's prospects of
maintaining a reliable level of income.
* COUPON AND DURATION STRUCTURE ALSO DEFENSIVE
Although municipals did not rally as much as Treasuries this summer, we
believe the municipal sector nevertheless could be affected if Treasuries
were to suffer a setback in the coming months. In addition to beefing up
the fund's overall diversification, we targeted higher-coupon bonds for
new purchases during the period, since the higher income offered by these
bonds tends to cushion overall performance in down markets. At the end of
November, 42% of the portfolio was concentrated in bonds with coupons
between 6% and 7%.
[GRAPHIC OMITTED: pie chart of CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA 50.3%
Caa 0.9%
Aa/AA 6.7%
A 6.8%
VMIG1 0.4%
Baa/BBB 32.5%
Ba/BB 2.2%
B 0.2%
Footnote reads:
*Based on percentage of market value as of 11/30/98. A bond rated Baa or
higher is considered investment grade. Ratings reflect Moody's and
Standard's & Poor's(R) descriptions; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings will
vary over time.
In keeping with its conservative approach, the fund's duration strategy
remained neutral throughout the period. Duration measures an investment's
sensitivity to changing interest rates. Generally the higher the duration
(expressed in years), the more an investment will be adversely affected by
rising rates. At the same time, a short duration limits the extent to
which an investment can participate in market rallies. At the end of
November, holdings were concentrated in bonds with durations between 4
years and 8 years, resulting in an average duration for the portfolio of
5.92 years.
* SLOWING SUPPLY, STRONG ECONOMY SHOULD SUPPORT BOND PRICES
It is reassuring to note that we have a Federal Reserve Board that is
prepared to step in to stabilize the markets when the situation warrants.
As of period's end, the Fed had cut interest rates three times, totaling
three quarters of a percentage point, sending a positive message to the
world and to Wall Street. Looking ahead, we anticipate a slowing but still
strong economy supported by the Fed and by consumers' willingness to
spend.
As we began the first half of fiscal 1999, the supply of Pennsylvania
bonds was limited and supported by increasing demand. This favorable
situation was augmented by a healthy and diverse state economy, which
bodes well for your fund's performance in the coming months. We expect to
continue seeking ways to improve the fund's income stream while also
protecting the portfolio from any surprises in the global financial
markets. We believe this investment strategy should prove advantageous in
a climate of slow, steady economic growth.
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 11/30/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
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 11/30/98
Class A Class B Class M
(inception date) (7/21/89) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 1.53% -3.26% 1.09% -3.86% 1.37% -1.94%
- ------------------------------------------------------------------------------
1 year 5.14 0.15 4.35 -0.62 4.71 1.28
- ------------------------------------------------------------------------------
5 years 32.24 25.98 27.85 25.86 30.10 25.86
Annual average 5.75 4.73 5.04 4.71 5.40 4.71
- ------------------------------------------------------------------------------
Life of fund 97.96 88.65 83.89 83.89 90.82 84.67
Annual average 7.57 7.02 6.72 6.72 7.15 6.77
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/98
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 3.84% 0.74%
- ------------------------------------------------------------------------------
1 year 7.77 1.55
- ------------------------------------------------------------------------------
5 years 37.81 12.48
Annual average 6.63 2.38
- ------------------------------------------------------------------------------
Life of fund 103.39 31.83
Annual average 7.90 3.01
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 1-, 5-, and 10-year
(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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.233635 $0.202597 $0.219478
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Total $0.233635 $0.202597 $0.219478
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/98 $9.49 $9.96 $9.48 $9.49 $9.81
- ------------------------------------------------------------------------------
11/30/98 9.40 9.87 9.38 9.40 9.72
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.97% 4.74% 4.31% 4.67% 4.52%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.47 8.07 7.34 7.95 7.70
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 3.83 3.64 3.12 3.51 3.39
- ------------------------------------------------------------------------------
Taxable equivalent3 6.52 6.20 5.31 5.98 5.77
- ------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject
to the federal alternative minimum tax. Investment income may be subject
to state and local taxes.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 41.29% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(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
- ------------------------------------------------------------------------------
6 months 1.28% -3.50% 0.95% -3.95% 1.13% -2.17%
- ------------------------------------------------------------------------------
1 year 3.75 -1.14 3.08 -1.81 3.43 0.07
- ------------------------------------------------------------------------------
5 years 30.07 23.87 25.76 23.82 28.20 24.08
Annual average 5.40 4.37 4.69 4.37 5.09 4.41
- ------------------------------------------------------------------------------
Life of fund 98.09 88.77 84.11 84.11 91.10 84.94
Annual average 7.50 6.95 6.67 6.67 7.09 6.72
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in the
fund, and may pose different risks than the fund. Securities in the fund
do not match those in the index and performance of the fund will differ.
It is not possible to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
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<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1998 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investor 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
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (99.2%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C>
Delaware (1.2%)
- ------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Delaware Valley, Regl. Fin. Auth. Local Govt.
Rev. Bonds, Ser. B, AMBAC, 5.7s, 7/1/27 Aaa $ 3,341,250
Pennsylvania (92.3%)
- ------------------------------------------------------------------------------------------------------------------------
3,000,000 Allegheny Cnty., Arpt. Rev. Bonds (Pittsburgh
Intl. Arpt.), Ser. A, MBIA, 5 3/4s, 1/1/14 Aaa 3,288,750
5,000,000 Allegheny Cnty., Higher Ed. Bldg. Auth. Rev. Bonds
(Robert Morris College), Ser. A, 6 1/4s, 2/15/26 Baa3 5,318,750
Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
2,450,000 (Childrens Hosp.), MBIA, 5 3/8s, 7/1/17 Aaa 2,529,625
3,450,000 (South Hills Hlth.), Ser. A, MBIA, 5 1/8s, 5/1/25 A2 3,350,813
Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds
1,840,000 (Med. Ctr.), FHA Insd., 6 3/4s, 2/1/26 AAA 1,994,100
4,305,000 (Environmental Impt. -- USX Corp.), 6s, 1/15/14 Baa3 4,568,681
4,000,000 (Environmental Impt. -- USX Corp.), Ser. A,
5.6s, 9/1/30 Baa3 4,020,000
520,000 Allegheny Cnty., Indl. Dev. Auth. Arpt. Special Fac
Rev. Bonds (Southwestern Arpt. Cargo Fac.),
8 3/4s, 2/15/09 BB+/P 534,056
Allentown, Hosp. Auth. Rev. Bonds (Sacred Heart
Hosp.), Ser. A
6,650,000 6 3/4s, 11/15/14 BBB 7,240,188
1,200,000 6 1/2s, 11/15/08 BBB 1,303,500
3,800,000 Berks Cnty., Muni. Auth. Rev. Bonds (Health Care),
5s, 3/1/28 Aa3 3,638,500
1,500,000 Blair Cnty., Hosp. Auth. Rev. Bonds (Altoona Hosp.),
AMBAC, 6 1/2s, 7/1/22 Aaa 1,663,125
720,000 College Township, Indl. Dev. Auth. 1st Mtge. Hlth.
Fac. Rev. Bonds (Nittany Valley Rehab. Hosp.),
7 5/8s, 11/1/07 BBB-/P 805,500
2,385,000 Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
(Northwest Med. Ctr.), 8 5/8s, 10/15/13 BBB- 2,859,019
2,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s, 1/15/25 BB-/P 2,525,000
1,000,000 Dauphin Cnty., Indl. Dev. Auth. Wtr. Rev. Bonds
(Dauphin Cons. Wtr. Supply), Ser. A, 6.9s, 6/1/24 A3 1,243,750
2,200,000 Delaware Cnty., College Auth. Rev. Bonds
(Neumann College), Ser. A, 5 3/8s, 10/1/26 BBB- 2,169,750
Delaware Cnty., Hosp. Auth. Rev. Bonds
(Crozer-Chester Med. Ctr.)
1,000,000 MBIA, 7 1/2s, 12/15/20 Aaa 1,097,500
1,000,000 6s, 12/15/20 Baa1 1,045,000
3,235,000 Ser. A, 5.3s, 12/1/27 Baa1 3,133,906
4,000,000 Delaware Cnty., Indl. Dev. Auth. Resource Recvy.
Rev. Bonds, Ser. A, 6.1s, 7/1/13 A 4,295,000
4,100,000 Doylestown, Hosp. Auth. Rev. Bonds (Doylestown
Hosp. Pine Run), Ser. A, 7.2s, 7/1/23 AAA/P 4,730,375
Erie, Higher Ed. Bldg. Auth. College Rev. Bonds
1,150,000 (Mercyhurst College), 7.85s, 9/15/19 AAA 1,192,780
2,000,000 (Gannon U.), Ser. D, 5.85s, 6/1/15 Baa2 2,045,000
1,000,000 (Mercyhurst College), Ser. A, 5 3/4s, 3/15/13 BBB 1,031,250
1,865,000 (Mercyhurst College), Ser. A, 5 3/4s, 3/15/20 BBB 1,911,625
3,500,000 Erie, Wtr. Auth. Rev. Bonds, 7 1/8s, 12/1/11 (SEG) BBB 3,836,875
Erie-Western PA Port. Auth. Rev. Bonds
750,000 8 5/8s, 6/15/10 BBB/P 821,250
915,000 6 7/8s, 6/15/16 BBB/P 1,001,925
1,365,000 6 1/4s, 6/15/10 BBB/P 1,510,031
2,000,000 Exeter Township, Swr. Auth. Rev. Bonds, MBIA,
6.2s, 7/15/22 Aaa 2,165,000
2,100,000 General Mclane School Dist. G.O. Bonds, FGIC,
5 3/4s, 5/15/17 Aaa 2,344,125
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, FGIC, 8.47s, 6/18/15 Aaa 4,772,500
2,350,000 Hazleton, Hlth. Svcs. Auth. Rev. Bonds (St. Joseph
Med. Ctr.), 6.2s, 7/1/26 Baa3 2,535,063
2,200,000 Lebanon Cnty., Good Samaritan Hosp. Auth.
Rev. Bonds, Ser. B, 8 1/4s, 11/1/18 BBB+ 2,342,670
1,000,000 Lehigh Cnty., Gen. Purpose Auth. Rev. Bonds
(Muhlenberg Hosp.), Ser. A, 8.1s, 7/15/10 A3 1,042,290
5,050,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB
(PA Pwr. & Lt. Co.), 9.348s, 9/1/29
(acquired 6/20/95, cost $5,572,473) (RES) AAA/P 6,211,500
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 3,990,594
3,000,000 Ser. A, MBIA, 5 1/2s, 2/15/27 Aaa 3,120,000
2,000,000 Luzerne Cnty., Indl. Dev. Auth. Rev. Bonds
(Gas & Wtr. Co.), Ser. B, 7 1/8s, 12/1/22 A3 2,205,000
1,685,000 McKeesport, Hosp. Auth. Rev. Bonds, 6 1/4s, 7/1/03 Baa2 1,788,206
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
IFB (Abington Hosp.), Ser. A, AMBAC,
9.545s, 7/5/11 Aaa 2,325,000
Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds
1,000,000 (UTD Hosp.), Ser. B, 7 1/2s, 11/1/12 AAA 1,039,190
3,000,000 (Sacred Heart Hosp. Norristown), Ser. A, BIGI,
6.8s, 2/1/13 Aaa 3,008,310
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 3,255,000
880,000 Northampton Cnty., Indl. Dev. Auth. Rev. Bonds
(Citizens Util. Co.), 6.95s, 8/1/15 AA- 935,000
2,000,000 Northeastern PA Hosp. & Edl. Auth. College
Rev. Bonds (Kings College), Ser. B, 6s, 7/15/11 BBB 2,080,000
PA Convention Ctr. Auth. Rev. Bonds
1,150,000 MBIA, 6 3/4s, 9/1/19 Aaa 1,313,875
5,000,000 Ser. A, 6 3/4s, 9/1/19 BBB- 5,500,000
3,000,000 PA Econ. Dev. Fin. Auth. Indl. Dev. Rev. Bonds
(GEHL Co. Inc.), 9s, 9/1/10 BB+/P 3,270,000
2,300,000 PA Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds (Northampton Generating),
Ser. A, 6.6s, 1/1/19 BBB- 2,443,750
4,000,000 PA Econ. Dev. Fin. Auth. Rev. Bonds
(MacMillan Ltd. Partnership), 7.6s, 12/1/20 Baa2 4,875,000
2,490,000 PA Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds, Ser. D, 7.15s, 12/1/18 BBB- 2,767,013
PA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
25,000 Ser. U, 7.8s, 10/1/20 AA+ 26,188
215,000 Ser. 29, 7 3/8s, 10/1/16 AA+ 225,750
1,400,000 Ser. 33, 6.9s, 4/1/17 AA+ 1,499,750
3,650,000 Ser. 61A, 5 1/2s, 4/1/29 AA+ 3,713,875
7,830,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 7,849,575
1,000,000 PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds (Colver), Ser. D, 7 1/8s, 12/1/15 BBB- 1,110,000
1,500,000 PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds (Northampton), Ser. B, 6 3/4s, 1/1/07 BBB-/P 1,635,000
2,000,000 PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds (Northampton Generating),
Ser. A, 6 1/2s, 1/1/13 BBB- 2,125,000
PA State Higher Ed. Assistance Agcy. IFB, Ser. B
3,850,000 AMBAC, 8.381s, 3/1/22 Aaa 4,374,563
2,400,000 MBIA, 8.253s, 3/1/20 Aaa 2,697,000
4,450,000 PA State Higher Ed. Assistance Agcy. Student Loan,
Ser. A&B, 7 1/4s, 7/1/18 (In default) (NON) Caa3 1,780,000
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 2,675,000
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
1,300,000 (Med. College), Ser. A, 8 3/8s, 3/1/11 AAA 1,342,562
3,000,000 (Med. College), Ser. A, 7 3/8s, 3/1/21 AAA 3,292,500
9,500,000 (U. of Pennsylvania), 4 3/4s, 7/15/33 Aa2 9,025,000
PA State, Tpk. Comm. Oil Franchise Tax Rev. Bonds
4,135,000 6.6s, 12/1/10 (acquired 8/7/98, cost $4,561,897) (RES) AAA/P 4,744,913
3,250,000 Ser. B, AMBAC, 4 3/4s, 12/1/27 Aaa 3,107,813
2,500,000 Philadelphia G.O. Bonds, FSA, 5s, 3/15/28 Aaa 2,468,750
2,550,000 Philadelphia, Gas Works Rev. Bonds, FSA,
6 3/8s, 7/1/26 Aaa 2,859,188
3,400,000 Philadelphia, Wtr. & Waste Wtr. Rev. Bonds, MBIA,
6 1/4s, 8/1/09 Aaa 3,948,250
1,225,000 Philadelphia, Gas Works Rev. Bonds, Ser. 13, 7.7s,
6/15/21 Aaa 1,367,406
Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Rev. Bonds
500,000 (Graduate Hlth. Syst.), 7s, 7/1/01 (In default) (NON) Caa3 200,000
1,315,000 (Graduate Hlth. Syst.), 6 5/8s, 7/1/21 (In default) (NON) Caa3 526,000
4,600,000 (Jeanes Hlth. Syst.), 6.6s, 7/1/10 BBB 5,100,250
5,150,000 Philadelphia, Indl. Dev. Auth. Rev. Bonds
(Gallery II Garage), 6.4s, 2/15/13 BBB-/P 5,362,438
1,000,000 Philadelphia, Muni. Auth. Rev. Bonds, Ser. B, FGIC,
7 1/8s, 11/15/18 Aaa 1,113,750
2,000,000 Philadelphia, School Dist. G.O. Bonds, Ser. A,
AMBAC, 6 1/4s, 9/1/09 Aaa 2,332,500
3,250,000 Philadelphia, Wtr. & Swr. Rev. Bonds, Ser. 16,
FSA, 7s, 8/1/21 Aaa 3,587,188
3,000,000 Philadelphia, Wtr. & Wastewtr. Rev. Bonds, MBIA,
6 1/4s, 8/1/08 Aaa 3,472,500
Pittsburgh, G.O. Bonds AMBAC
4,160,000 5 1/2s, 9/1/14 Aaa 4,430,400
3,965,000 5 1/2s, 9/1/12 Aaa 4,267,326
2,850,000 Pittsburgh, Wtr. & Swr. Auth. Rev. Bonds, Ser. 415,
9.1s, 9/1/13 (acquired9/3/98, cost $3,950,727) (RES) Aaa 3,993,563
1,710,000 Pittsburgh, Urban Redev. Auth. Rev. Bonds, Ser. C,
5.9s, 10/1/22 AAA 1,823,288
2,000,000 Pottsville, Hosp. Auth. Rev. Bonds (Pottsville Hosp.
& Warne Clinic), 7 1/4s, 7/1/24 BBB 2,355,000
1,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 1,092,500
3,000,000 Scranton-Lackawanna, Hlth. & Welfare Auth.
Rev. Bonds (Moses Taylor Hosp.), Ser. B,
8 1/2s, 7/1/20 AAA 3,408,750
1,000,000 Smithfield, Swr. Auth. Gtd. Rev. Bonds,
8 5/8s, 1/15/11 AAA/P 1,100,000
2,470,000 Trafford, School Dist. Rev. Bonds, MBIA, 6.6s, 5/1/08 Aaa 2,825,061
400,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge.
Rev. Bonds (AHF/Central States Inc.),
10 1/4s, 11/1/19 B-/P 408,500
3,000,000 Wilkes-Barre, School Dist. Rev. Bonds, FGIC,
6 3/8s, 4/1/15 Aaa 3,375,000
1,800,000 Wilkins Area, Indl. Dev. Auth. 1st Mtge. Rev. Bonds
(Fairview Extended Care), Ser. A, 10 1/4s, 1/1/21 Aaa 2,083,500
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
1,450,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac.
Rev. Bonds (Rehabilitation Hosp. of York),
7 1/2s, 9/1/07 BBB-/P 1,587,750
--------------
263,224,154
Puerto Rico (5.7%)
- ------------------------------------------------------------------------------------------------------------------------
1,200,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA,
3.05s, 12/1/15 VMIG1 1,200,000
2,000,000 Cmnwlth. of PR, Elec. Pwr. Auth. Rev. Bonds,
Ser. AA, MBIA, 6 1/4s, 7/1/10 Aaa 2,362,500
2,500,000 Cmnwlth. of PR, Hwy. Auth. Rev. Bonds, Ser. Q,
7 3/4s, 7/1/10 AAA 2,715,625
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
3,500,000 Ser. T, 6 5/8s, 7/1/12 A 3,885,000
3,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/14 Aaa 3,551,250
200,000 Cmnwlth. of PR, IFB, MBIA, 8.134s, 7/1/08 Aaa 229,250
2,150,000 Cmnwlth. of PR, Impt. G.O. Bonds, 7.7s, 7/1/20 AAA 2,332,750
--------------
16,276,375
- ------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $269,652,767) (b) $ 282,841,779
- ------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $285,108,906.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
November 30, 1998 for the securities listed. Ratings are generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the
Ratings do not necessarily represent what the agencies would ascribe to these securities at November 30, 1998.
Securities rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $269,652,767, resulting in gross unrealized appreciation and
depreciation of $17,262,388 and $4,073,376, respectively, or net unrealized depreciation of $13,189,012.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at November 30, 1998 was $14,949,976 or 5.2% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at November 30, 1998.
The rates shown on IFB, which are securities paying interest rates that vary inversely to changes in the
market interest rates, and VRDN's are the current interest rates at November 30, 1998.
The fund had the following industry group concentrations greater than 10% at November 30, 1998 (as a
percentage of net assets):
Health care 21.9%
Education 15.1
Water and sewerage 10.6
The fund had the following insurance concentration greater than 10% at November 30, 1998 (as a percentage of
net assets):
MBIA 15.4%
AMBAC 10.7
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1998 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Index
(Long) $15,682,125 $15,586,285 Dec-98 $ 95,840
U. S. Treasury Bond
20 yr. (Short) 3,887,813 3,871,421 Mar-99 (16,392)
U. S. Treasury Bond
(Short) 10,647,188 10,353,482 Dec-98 (293,706)
- -----------------------------------------------------------------------------------
$(214,258)
- -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $269,652,767) (Note 1) $282,841,779
- -----------------------------------------------------------------------------------------------
Cash 418,235
- -----------------------------------------------------------------------------------------------
Interest and other receivables 5,066,165
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 637,524
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 976,742
- -----------------------------------------------------------------------------------------------
Total assets 289,940,445
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 70,891
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 611,592
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 3,417,642
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 100,925
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 427,765
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 38,439
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,287
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,037
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 131,175
- -----------------------------------------------------------------------------------------------
Other accrued expenses 22,786
- -----------------------------------------------------------------------------------------------
Total liabilities 4,831,539
- -----------------------------------------------------------------------------------------------
Net assets $285,108,906
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $271,015,321
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 318,790
- -----------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 800,041
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 12,974,754
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $285,108,906
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($185,389,356 divided by 19,721,127 shares) $9.40
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.40)* $9.87
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($97,168,432 divided by 10,354,596 shares)+ $9.38
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,551,118 divided by 271,304 shares) $9.40
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.40)** $9.72
- -----------------------------------------------------------------------------------------------
* 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
Six months ended November 30, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $8,346,749
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 850,922
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 191,249
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 4,456
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,107
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 187,126
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 396,708
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 5,486
- -----------------------------------------------------------------------------------------------
Reports to shareholders 10,688
- -----------------------------------------------------------------------------------------------
Registration fees 2,645
- -----------------------------------------------------------------------------------------------
Auditing 5,907
- -----------------------------------------------------------------------------------------------
Legal 2,485
- -----------------------------------------------------------------------------------------------
Postage 19,545
- -----------------------------------------------------------------------------------------------
Other 11,261
- -----------------------------------------------------------------------------------------------
Total expenses 1,691,585
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (19,664)
- -----------------------------------------------------------------------------------------------
Net expenses 1,671,921
- -----------------------------------------------------------------------------------------------
Net investment income 6,674,828
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 497,867
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (130,541)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the period (3,191,031)
- -----------------------------------------------------------------------------------------------
Net loss on investments (2,823,705)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $3,851,123
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
1998* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 6,674,828 $ 13,566,720
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 367,326 941,262
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (3,191,031) 8,180,365
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,851,123 22,688,347
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (4,617,578) (9,631,773)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,994,639) (3,736,612)
- ---------------------------------------------------------------------------------------------------------------
Class M (50,748) (61,339)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (840,329)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (374,512)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (5,683)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 8,351,758 8,430,711
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 5,539,916 16,468,810
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 279,568,990 263,100,180
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $318,790 and $306,927 respectively) $285,108,906 $279,568,990
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share November 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value
beginning of period $9.49 $9.21 $9.08 $9.24
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .23 .49 .50 .51
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) .31 .20 (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .14 .80 .70 .35
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.23) (.48) (.49) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.23) (.52) (.57) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.40 $9.49 $9.21 $9.08
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.53* 8.92 7.94 3.82
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $185,389 $187,272 $185,041 $183,117
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .49* .98 .98 .98
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.48* 5.16 5.39 5.46
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.83* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share November 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value
beginning of period $9.48 $9.20 $9.07 $9.23
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .20 .42 .44 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.10) .32 .20 (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .10 .74 .64 .29
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.42) (.43) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.46) (.51) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.38 $9.48 $9.20 $9.07
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.09* 8.22 7.24 3.14
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $97,168 $90,303 $77,399 $65,669
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .82* 1.63 1.63 1.62
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.15* 4.51 4.73 4.78
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.83* 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 B (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months For the period
Per-share ended Year ended July 15, 1993+
operating performance May 31 February 28 to Feb. 28
- ------------------------------------------------------------------------------------------------------------------------------------
1995++ 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value
beginning of period $8.97 $9.38 $9.48
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .11 .47 .28
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .27 (.40) (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .38 .07 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.12) (.47) (.28)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.01) (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.12) (.48) (.30)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.23 $8.97 $9.38
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.23* 0.93 2.18*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $44,252 $36,670 $12,633
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .38* 1.57 1.00*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.26* 5.23 2.90*
- ------------------------------------------------------------------------------------------------------------------------------------
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 M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share November 30 July 3, 1995+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value
beginning of period $9.49 $9.22 $9.09 $9.10
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 .46 .47 .44
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.09) .30 .21 (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .13 .76 .68 .43
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.45) (.47) (.44)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) (.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.49) (.55) (.44)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.40 $9.49 $9.22 $9.09
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 1.37* 8.47 7.61 4.70*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,551 $1,994 $660 $337
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .64* 1.28 1.28 1.13*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.33* 4.85 5.04 4.49*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.83* 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
November 30, 1998 (Unaudited)
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 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 six months
ended November 30, 1998, the fund had no borrowings against the line of
credit.
E) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies.
It is also the intention of the fund to distribute an amount sufficient to
avoid imposition of any excise tax under Section 4982 of the Internal
Revenue Code of 1986, as amended. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held nor for excise tax on income and capital gains.
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed monthly. Capital gain distributions if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. 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.
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 six months ended November 30, 1998, fund expenses were reduced by
$19,664 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 $400 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 have approved 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 six months ended November 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $17,957 and $736 from
the sale of class A and class M shares, respectively and $54,892 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 that were purchased without an initial sales charge as part
of an investment of $1 million or more. For the six months ended November
30, 1998, Putnam Mutual Funds Corp., acting as underwriter received $429
on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended November 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$38,833,557 and $27,340,373 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
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,421,065 $13,431,966
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 277,869 2,620,599
- -----------------------------------------------------------------------------
1,698,934 16,052,565
Shares
repurchased (1,703,668) (16,092,632)
- -----------------------------------------------------------------------------
Net decrease (4,734) $ (40,067)
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,222,829 $11,530,641
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 127,472 1,201,639
- -----------------------------------------------------------------------------
1,350,301 12,732,280
Shares
repurchased (520,763) (4,917,800)
- -----------------------------------------------------------------------------
Net increase 829,538 $ 7,814,480
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 66,831 $630,011
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,452 32,603
- -----------------------------------------------------------------------------
70,283 662,614
Shares
repurchased (9,046) (85,269)
- -----------------------------------------------------------------------------
Net increase 61,237 $577,345
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
High Quality Bond Fund [DAGGER]
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Rund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund **
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
[DAGGER] Formerly Putnam Federal Income Trust
[DBL.DAGGER] Closed to new investors. Some exceptions may apply.
Contact putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to
maintain a price of $1.00 per share, although there is no assurance
that this price will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
David E. Hamlin
Vice President and Fund Manager
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
www.putnaminv.com
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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