Putnam
Pennsylvania
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-00
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years in which
Putnam has experienced tremendous growth and transformed itself from a
respected U.S. investment management firm to a financial institution
with a global presence.
As the organization makes its way into the new century, we are certain
that the changes that lie ahead will be even more breathtaking in their
scope. What will not change is the Trustees' dedication to serving the
best interests of our shareholders.
We embark upon this new era of Putnam's rich heritage with confidence
and we look forward to the opportunity of continuing to help you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
July 19, 2000
REPORT FROM THE FUND MANAGER
Susan A. McCormack
Wavering from a year of steady interest-rate increases, the municipal
bond market may slowly be approaching the point at which the news gets
better. It may not seem like good news, but a responsible Federal
Reserve Board, like the one we have, is positive for bond investors. To
be sure, Fed policy and rising interest rates have had a negative effect
on bond prices, as evidenced by the performance of Putnam Pennsylvania
Tax Exempt Income Fund for the 12 months ended May 31, 2000. However, in
the longer run, short-term interest rate increases should keep
inflation, the bond market's worst enemy, under control. Meanwhile, we
have focused on meeting the fund's objective of providing a high level
of tax-free income.
Total return for 12 months ended 5/31/00
Class A Class B Class M
NAV POP NAV CDSC NAV POP
-------------------------------------------------------------
-3.30% -7.85% -3.94% -8.51% -3.48% -6.65%
-------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* LOWER-TIER INVESTMENT-GRADE HOLDINGS BOOST YIELD BUT HAVE HINDERED RETURNS
Over the fiscal year, we used a number of strategies to successfully
boost the fund's yield. Due in part to our efforts, the fund's SEC yield
for class A shares increased from 3.90% at the start of the year to
5.45% as of May 31. This is equivalent to 9.28% for an investor in the
maximum 41.29% combined federal and state income tax rate. One way we
increased yield was by investing in securities at the lower end of the
investment-grade spectrum, primarily BBB/Baa-rated credits. Bonds rated
BBB/Baa are at the cusp of what rating agencies consider investment
grade. Investors who own these bonds are compensated for the slightly
higher risk with higher yields. When investing in this sector, we rely
heavily on the expertise of our analytical team because there is intense
competition for a limited supply of lower-tier investment-grade bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 22.8%
Education 19.0%
Utilities 12.0%
Water
and sewer 11.1%
Transportation 7.1%
Footnote reads:
*Based on net assets as of 5/31/00. Holdings will vary over time.
A year ago, a BBB-rated bond would have yielded 40 basis points, almost
half a percentage point more than AAA-rated bonds, but recently we have
seen a difference of three-quarters of a point -- an unusually
attractive yield difference. While the fund is rewarded with higher
yields for owning the lower-rated bonds, over the past year, the prices
of these bonds dropped more dramatically when interest rates rose.
Consequently this strategy, although lucrative in terms of yield, has
dampened total return performance in the past few months. Once interest
rates begin to level off or head downward, a situation we believe is
likely to occur in the coming months, this strategy should once again
improve the fund's performance.
One lower-tier investment-grade bond we purchased this year is a revenue
bond issued by the Puerto Rico Industrial, Tourist, Educational,
Medical, and Environmental Control Authority. Additional power sources
are badly needed on the island and this issue is intended to finance the
building of a coal-fired electric generating facility. This Baa2-rated
issue's long maturity of 2026 and yield of 6.65% made it a strong
addition to the portfolio. While this holding and others discussed in
this report were viewed favorably as of May 31, 2000, all holdings are
subject to review in accordance with the fund's investment strategy and
may vary in the future.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa/AAA -- 50.8%
Aa/AA -- 0.9%
A -- 5.2%
Baa/BBB -- 35.7%
Baa/BB and lower -- 6.0%
VMIG1 -- 1.4%
Footnote reads:
*As a percentage of market value as of 5/31/00. A bond rated BBB/Baa or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality.
Ratings will vary over time.
* LENGTHENING OF MATURITIES BOLSTERS PERFORMANCE
Another example of how we sought to increase yield was by lengthening
maturities whenever possible. With this strategy in mind, we sold a
portion of the fund's position in Philadelphia Water Authority bonds
that mature in 2009. In their place we purchased McKeesport School
District general obligation bonds that mature in 2018. Although the
McKeesport bonds are zero coupon bonds, bonds purchased at a deep
discount that only pay interest at maturity, they do offer the potential
to appreciate greatly in value when interest rates fall. The McKeesport
bonds offer a yield to maturity of 6.22%.
The fund's 5.45% 30-day SEC yield at the end of May for class A shares
was equivalent to a 9.28% taxable yield for investors in Pennsylvania's
highest tax bracket.
See pages 6 and 7 for complete performance information.
Another holding we replaced illustrates our efforts to protect the
portfolio's value as we lengthen maturities. Our analysts believe that
lesser-known colleges with weak balance sheets and smaller endowments
could experience financial problems if there is an economic slowdown.
Based on this analysis, we sold bonds issued by two of those colleges
and replaced them with those of Haverford College, a more financially
stable college located in Delaware County near Philadelphia. The
Haverford bond is AA-rated and also carries the benefit of a longer
maturity (2025) and a 6.01% yield to maturity.
Fiscal policy? Monetary policy?
Fiscal policy refers to the federal government's use of spending and
taxation to control the economy. If the government raises taxes, people
will have less money to spend, therefore reducing demand. If the government
lowers taxes, people will be more inclined to spend money. The government
can also spend money to influence demand.
Monetary policy attempts to influence the economy by controlling the
money supply. Monetary policy is normally carried out by a central bank.
The U.S. central bank is the Federal Reserve Bank. Monetary policy can
influence the economy by altering interest rates. By reducing the supply
of money, monetary policy can raise interest rates and discourage
lending. Decreased lending results in less investment and less
production.
Right now, the Federal Reserve's Board of Governors is implementing
tighter monetary policy and bond funds, including municipal bonds, are
not performing well in such an environment. Because of the inverse
relationship of interest rates and bond prices. Treasury bonds take the
brunt of the impact when interest rates rise, while municipal bonds
(attracting only domestic investors) are somewhat insulated but by no
means exempt. Rising interest rates also affect the supply of municipal
bonds because cities and towns do not want to float new bonds or refund
outstanding bonds when interest rates are rising.
Source: First two paragraphs are adapted from The Importance of
Independence by David W. Gallivan.
Sometimes a decision to maintain a position can be as important as the
decision to buy or sell it. One such decision we made during the fiscal
year was to hold on to water, sewer, and utility bonds through the
advent of the year 2000. When we last communicated with our
shareholders, the Y2K issue was a concern for many municipal bond fund
portfolio managers, who believed that municipalities could have problems
with their essential services and subsequently sold off some of these
positions. We were not among that group and the fund benefited from
remaining fully invested as January 1, 2000, came and went without any
problems.
* BONDS FACE PRESSURE NEAR TERM
While interest rates are rising, a natural reaction among investors can
be to buy guaranteed certificates of deposit in preference to tax-free
bond fund investments because the unchanging income from CDs seems more
appealing. In such an environment, however, investors may find they end
up with only one to two years of attractive income and are then out of
the bond market during the period of its strongest returns just when the
direction of interest rates turns around. The investment value and
return on bond funds, of course, will fluctuate with the market. On the
other hand, while the principal value of CDs does not fluctuate and
their rate of return is fixed, they may be subject to penalties for
early withdrawal and the income they provide is fully taxable.
At the end of May, the Fed remained in an aggressive stance in its fight
against inflation, pushing short-term interest rates up for the sixth
time in the past year, the last time by half a percentage point. This
was the first time the central bank raised rates that sharply in more
than five years. Finally, after this last increase, there were some
reports that the unemployment rate was up and wages were down slightly.
However, many investors remain cautious and are waiting for more
definitive readings on whether the economy is really slowing.
While we are waiting for a clearer reading of the economy's strength,
the state of Pennsylvania has kept its finances in good order and as a
result, has experienced a fair amount of credit upgrades among its
cities, counties, and developmental authorities. High credit ratings
among many bond issuers in the state continue to make Pennsylvania a
good place to invest in municipal bonds and to receive double-tax-exempt
investment income.
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 5/31/00, there is no guarantee the fund will
continue to hold these securities in the future.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
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 5/31/00
Class A Class B Class M
(inception dates) (7/21/89) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
----------------------------------------------------------------------
1 year -3.30% -7.85% -3.94% -8.51% -3.48% -6.65%
----------------------------------------------------------------------
5 years 20.28 14.59 16.41 14.60 18.58 14.73
Annual average 3.76 2.76 3.09 2.76 3.47 2.79
----------------------------------------------------------------------
10 years 84.35 75.51 71.07 71.07 78.09 72.21
Annual average 6.31 5.79 5.52 5.52 5.94 5.59
----------------------------------------------------------------------
Life of fund 92.13 83.09 76.92 76.92 84.59 78.64
Annual average 6.20 5.73 5.39 5.39 5.81 5.49
----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/00
Lehman Bros. Municipal Consumer
Bond Index price index
----------------------------------------------------------------------
1 year -0.86% 3.07%
----------------------------------------------------------------------
5 years 28.55 12.55
Annual average 5.15 2.39
----------------------------------------------------------------------
10 years 94.58 32.59
Annual average 6.88 2.86
----------------------------------------------------------------------
Life of fund 103.26 37.70
Annual average 6.77 3.00
----------------------------------------------------------------------
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
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.
[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 5/31/90
Lehman Bros.
Fund's class A Municipal Bond Consumer price
Date shares at POP Index index
5/31/90 9,520 10,446 10,386
5/31/91 10,460 11,499 10,900
5/31/92 11,616 12,628 11,230
5/31/93 13,169 14,139 11,592
5/31/94 13,423 14,488 11,857
5/31/95 14,591 15,812 12,235
5/31/96 15,150 16,534 12,588
5/31/97 16,352 17,906 12,870
5/31/98 17,811 19,586 13,087
5/31/99 18,150 20,502 13,360
5/31/00 $17,551 $19,458 $13,259
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $17,107 and no contingent deferred sales charges would apply;
a $10,000 investment in the fund's class M shares would have been valued at
$17,809 ($17,221 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/00
Class A Class B Class M
---------------------------------------------------------------------------
Distributions (number) 12 12 12
---------------------------------------------------------------------------
Income $0.4688 $0.4122 $0.4430
---------------------------------------------------------------------------
Capital gains1 -- -- --
---------------------------------------------------------------------------
Total $0.4688 $0.4122 $0.4430
---------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
---------------------------------------------------------------------------
5/31/99 $9.12 $9.57 $9.11 $9.12 $9.43
---------------------------------------------------------------------------
5/31/00 8.35 8.77 8.34 8.36 8.64
---------------------------------------------------------------------------
Current return (end of period)
---------------------------------------------------------------------------
Current dividend rate2 5.60% 5.33% 4.95% 5.29% 5.12%
---------------------------------------------------------------------------
Taxable equivalent3 9.54 9.08 8.43 9.01 8.72
---------------------------------------------------------------------------
Current 30-day SEC
yield4 5.45 5.18 4.82 5.15 4.99
---------------------------------------------------------------------------
Taxable equivalent3 9.28 8.82 8.21 8.77 8.50
---------------------------------------------------------------------------
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 6/30/00 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (7/21/89) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
----------------------------------------------------------------------
1 year 0.29% -4.51% -0.36% -5.11% 0.10% -3.14%
----------------------------------------------------------------------
5 years 24.39 18.52 20.40 18.53 22.58 18.54
Annual average 4.46 3.46 3.78 3.46 4.16 3.46
----------------------------------------------------------------------
10 years 86.77 77.83 73.45 73.45 80.36 74.44
Annual average 6.45 5.93 5.66 5.66 6.08 5.72
----------------------------------------------------------------------
Life of fund 96.58 87.33 80.94 80.94 88.82 82.73
Annual average 6.37 5.91 5.57 5.57 5.98 5.67
----------------------------------------------------------------------
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. 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 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 and may pose different risks than the fund.
Securities in the fund do not match those in the index and performance
will differ. It is not possible to invest directly in an index.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended May 31, 2000
To the Trustees and Shareholders of
Pennsylvania Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio (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 Pennsylvania Tax Exempt Income Fund (the "fund") at May 31,
2000, and the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity
with accounting principles generally accepted in the United States.
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 auditing standards
generally accepted in the United States, 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,
2000 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 6, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
May 31, 2000
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FRB -- Floating Rate Bonds
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 (98.2%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C> <C>
Pennsylvania (93.4%)
-------------------------------------------------------------------------------------------------------------------
$ 5,000,000 Allegheny Cnty., Higher Ed. Bldg. Auth. Rev. Bonds
(Robert Morris College), Ser. A, 6 1/4s, 2/15/26 Baa3 $ 4,712,500
Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
2,450,000 (Childrens Hosp.), MBIA, 5 3/8s, 7/1/17 Aaa 2,293,813
3,450,000 (South Hills Hlth.), Ser. A, MBIA, 5 1/8s, 5/1/25 A/P 2,708,250
Allegheny Cnty., Indl. Dev. Auth. Rev. Bonds
1,765,000 (Med. Ctr.), FHA Insd., 6 3/4s, 2/1/26 AAA 1,800,300
3,305,000 (Environmental Impt. - USX Corp.), 6s, 1/15/14 Baa2 3,168,669
4,000,000 (Environmental Impt. - USX Corp.), Ser. A,
5.6s, 9/1/30 Baa1 3,345,000
Allentown, Hosp. Auth. Rev. Bonds
(Sacred Heart Hosp.), Ser. A
6,650,000 6 3/4s, 11/15/14 Baa2 6,367,375
1,200,000 6 1/2s, 11/15/08 Baa2 1,185,000
Bethlehem, Wtr. Auth. Rev. Bonds
4,000,000 FSA, zero %, 11/15/23 Aaa 942,880
1,000,000 FSA, zero %, 11/15/22 Aaa 251,250
1,500,000 Blair Cnty., Hosp. Auth. Rev. Bonds (Altoona Hosp.),
AMBAC, 6 1/2s, 7/1/22 Aaa 1,573,125
660,000 College Township, Indl. Dev. Auth. 1st Mtge. Hlth.
Fac. Rev. Bonds (Nittany Valley Rehab. Hosp.),
7 5/8s, 11/1/07 BBB-/P 678,150
775,000 Columbia Cnty., Hosp. Auth. Rev. Bonds
(Bloomsberg Hosp.), 5.9s, 6/1/29 BBB- 602,563
1,000,000 Council Rock, Schl. Dist. G.O. Bonds, FGIC,
4 3/4s, 11/15/17 AAA 855,000
2,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s, 1/15/25 BB-/P 2,193,750
2,300,000 Dauphin Cnty., Gen. Auth. Hosp. Rev. Bonds
(Northwest Med. Ctr.), 8 5/8s, 10/15/13 BBB- 2,501,250
1,000,000 Dauphin Cnty., Indl. Dev. Auth. Wtr. Rev. Bonds
(Dauphin Cons. Wtr. Supply), Ser. A, 6.9s,
6/1/24 A3 1,081,250
1,000,000 Delaware Cnty., College Auth. Rev. Bonds
(Haverford College), 5 3/4s, 11/15/25 AA 963,750
Delaware Cnty., Hosp. Auth. Rev. Bonds
(Crozer-Chester Med. Ctr.)
1,000,000 6s, 12/15/20 Baa1 851,250
3,235,000 Ser. A, 5.3s, 12/1/27 Baa1 2,357,506
4,000,000 Delaware Cnty., Indl. Dev. Auth. Resource Recvy.
Rev. Bonds, Ser. A, 6.1s, 7/1/13 B2 3,565,000
3,000,000 Delaware Valley, Regl. Fin. Auth. Local Govt. Rev.
Bonds, Ser. B, AMBAC, 5.7s, 7/1/27 Aaa 2,857,500
4,100,000 Doylestown, Hosp. Auth. Rev. Bonds (Doylestown
Hosp. Pine Run), Ser. A, 7.2s, 7/1/23 Baa1 4,407,500
2,000,000 Erie, Higher Ed. Bldg. Auth. College Rev. Bonds
(Gannon U.), Ser. D, 5.85s, 6/1/15 Baa2 1,887,500
3,500,000 Erie, Wtr. Auth. Rev. Bonds, 7 1/8s, 12/1/11 (SEG) BBB 3,609,370
Erie-Western PA Port Auth. Rev. Bonds
750,000 8 5/8s, 6/15/10 BBB/P 765,743
915,000 6 7/8s, 6/15/16 BBB/P 931,013
1,365,000 6 1/4s, 6/15/10 BBB/P 1,378,650
4,150,000 Harrisburg, Auth. Wtr. IFB, FGIC, 7.47s, 6/18/15 Aaa 4,165,563
2,350,000 Hazleton, Hlth. Svcs. Auth. Rev. Bonds
(St. Joseph Med. Ctr.), 6.2s, 7/1/26 Baa3 1,994,563
5,050,000 Lehigh Cnty., Indl. Dev. Auth. Poll. Control IFB
(PA Pwr. & Lt. Co.), 8.362s, 9/1/29
(acquired 6/20/95, cost $5,572,473) (RES) AAA/P 5,195,188
Lehigh Cnty., Indl. Dev. Auth. Poll. Control Rev.
Bonds (PA Pwr. & Lt. Co.)
3,575,000 Ser. B, MBIA, 6.4s, 9/1/29 Aaa 3,628,625
3,000,000 Ser. A, MBIA, 5 1/2s, 2/15/27 Aaa 2,707,500
2,000,000 Luzerne Cnty., Indl. Dev. Auth. Rev. Bonds
(Gas & Wtr. Co.), Ser. B, 7 1/8s, 12/1/22 A3 2,095,000
4,655,000 McKeesport, Area School Dist. G.O. Bonds,
zero %, MBIA, 10/1/18 AAA 1,541,969
1,345,000 McKeesport, Hosp. Auth. Rev. Bonds, 6 1/4s,
7/1/03 Baa2 1,360,131
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. (Abington Hosp.), IFB, Ser. A, AMBAC,
8.695s, 7/5/11 Aaa 2,115,000
3,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (Sacred Heart Hosp. Norristown),
Ser. A, MBIA, 6.8s, 2/1/13 Aaa 3,007,140
3,000,000 New Morgan, Indl. Dev. Auth. Solid Waste Disp.
Rev. Bonds (New Morgan Landfill Co., Inc.),
6 1/2s, 4/1/19 B1 2,711,250
880,000 Northampton Cnty., Indl. Dev. Auth. Rev. Bonds
(Citizens Util. Co.), 6.95s, 8/1/15 A+ 900,363
2,000,000 Northeastern PA Hosp. & Edl. Auth. College Rev.
Bonds (Kings College), Ser. B, 6s, 7/15/11 BBB 1,957,500
5,000,000 PA Convention Ctr. Auth. Rev. Bonds, Ser. A,
6 3/4s, 9/1/19 Baa3 5,075,000
3,000,000 PA Econ. Dev. Fin. Auth. Indl. Dev. Rev. Bonds
(GEHL Co. Inc.), 9s, 9/1/10 BBB/P 3,106,830
4,000,000 PA Econ. Dev. Fin. Auth. Rev. Bonds
(MacMillan Ltd. Partnership), 7.6s, 12/1/20 A3 4,480,000
2,600,000 PA Gas Works Rev. Bonds, Ser. 2, FSA,
5 1/2s, 7/1/16 AAA 2,512,250
PA G.O. Bonds (Canon McMillan School Dist.)
3,200,000 FGIC, zero %, 12/1/19 AAA 968,000
3,230,000 FGIC, zero %, 12/1/18 AAA 1,049,750
2,000,000 FGIC, zero %, 12/1/17 AAA 695,000
1,020,000 PA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds,
Ser. 33, 6.9s, 4/1/17 Aa2 1,053,150
2,000,000 PA School Dist. G.O. Bonds, Ser. C, MBIA,
5 1/2s, 3/1/24 Aaa 1,857,500
7,830,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 7,164,450
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
2,490,000 Ser. D, 7.15s, 12/1/18 BBB- 2,536,688
1,000,000 (Colver), Ser. D, 7 1/8s, 12/1/15 BBB- 1,018,750
1,500,000 (Northhampton), Ser. B, 6 3/4s, 1/1/07 BBB-/P 1,494,375
2,300,000 (Northampton Generating), Ser. A, 6.6s, 1/1/19 BBB- 2,173,500
2,000,000 (Northampton Generating), Ser. A, 6 1/2s, 1/1/13 BBB- 1,902,500
PA State Higher Ed. Assistance Agcy. IFB, Ser. B
3,850,000 AMBAC, 8.381s, 3/1/22 Aaa 3,859,625
2,400,000 MBIA, 8.253s, 3/1/20 Aaa 2,715,000
4,450,000 PA State Higher Ed. Assistance Agcy. Student Loan,
Ser. A&B, 7 1/4s, 7/1/18 (acquired various dates
from 1/8/97 to 3/18/98, cost $4,651,703)
(In default) (NON) (RES) Ca 1,468,500
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 2,541,650
2,600,000 (Allegheny College), Ser. B, 6 1/8s, 11/1/13 BBB+ 2,619,500
1,000,000 PA State Higher Ed. Fac. Auth. Rev. Bonds
(Med. College), Ser. A, 7 3/8s, 3/1/21 Baa3 1,038,050
9,500,000 PA State Higher Ed. Facs. Auth. College &
U. Revisions Rev. Bonds (Trustees U.),
MBIA, 4 3/4s, 7/15/33 Aaa 7,505,000
3,250,000 PA State, Tpk. Comm. Oil Franchise Tax Rev.
Bonds, Ser. B, AMBAC, 4 3/4s, 12/1/27 Aaa 2,632,500
2,000,000 Philadelphia, G.O. Bonds, FGIC, 4 3/4s, 5/15/20 Aaa 1,667,500
2,220,000 Philadelphia, Auth. For Indl. Dev. Arpt. Rev. Bonds
(Aero Philadelphia LLC), 5 1/2s, 1/1/24 BB/P 1,848,150
Philadelphia, Gas Works Rev. Bonds
1,225,000 Ser. 13, 7.7s, 6/15/21 Aaa 1,284,780
2,550,000 FSA, 6 3/8s, 7/1/26 Aaa 2,591,438
Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Rev. Bonds
500,000 (Graduate Hlth. Syst.), 7s, 7/1/01 (acquired
1/30/98, cost $499,375) (In default) (NON) (RES) B2 165,000
1,315,000 (Graduate Hlth. Syst.), 6 5/8s, 7/1/21 (acquired
3/18/97, cost $1,301,113) (In default) (NON) (RES) B2 433,950
4,600,000 (Jeanes Hlth. Syst.), 6.6s, 7/1/10 Baa3 4,467,750
5,150,000 Philadelphia, Indl. Dev. Auth. Rev. Bonds
(Gallery II Garage), 6.4s, 2/15/13 BBB-/P 4,995,500
1,000,000 Philadelphia, Muni. Auth. Rev. Bonds, Ser. B,
FGIC, 7 1/8s, 11/15/18 Aaa 1,048,750
4,125,000 Philadelphia, School Dist. , FRB, 5 3/4s, 3/1/29
(acquired 2/1/00, cost $3,645,923) (RES) AAA/P 3,795,000
2,000,000 Philadelphia, School Dist. G.O. Bonds, Ser. A,
AMBAC, 6 1/4s, 9/1/09 Aaa 2,132,500
2,250,000 Philadelphia, Wtr. & Swr. Rev. Bonds, Ser. 16,
FSA, 7s, 8/1/21 Aaa 2,345,625
3,000,000 Philadelphia, Wtr. & Wastewtr. Rev. Bonds, MBIA,
6 1/4s, 8/1/08 Aaa 3,187,500
2,160,000 Pittsburgh, G.O. Bonds, AMBAC, 5 1/2s, 9/1/14 Aaa 2,122,200
2,850,000 Pittsburgh, Wtr. & Swr. Auth. Rev. Bonds, Ser. 415,
9.1s, 9/1/13 (acquired 9/3/98, cost $3,950,727) (RES) Aaa 3,352,313
1,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 1,040,380
3,000,000 Scranton-Lackawanna, Hlth. & Welfare Auth. Rev.
Bonds (Moses Taylor Hosp.), Ser. B,
8 1/2s, 7/1/20 AAA 3,173,130
1,000,000 Smithfield, Swr. Auth. Gtd. Rev. Bonds, 8 5/8s,
1/15/11 AAA/P 1,022,980
2,470,000 Trafford, School Dist. Rev. Bonds, MBIA,
6.6s, 5/1/08 Aaa 2,642,900
400,000 Washington Cnty., Indl. Dev. Auth. 1st Mtge.
Rev. Bonds (AHF/Central States Inc.),
10 1/4s, 11/1/19 B-/P 401,500
3,000,000 Wilkes-Barre, School Dist. Rev. Bonds, FGIC,
6 3/8s, 4/1/15 Aaa 3,150,000
1,800,000 Wilkins Area, Indl. Dev. Auth. 1st Mtge. Rev.
Bonds (Fairview Extended Care), Ser. A,
10 1/4s, 1/1/21 Aaa 1,906,614
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 1,098,238
1,330,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac.
Rev. Bonds (Rehabilitation Hosp. of York),
7 1/2s, 9/1/07 BBB-/P 1,356,600
----------------
205,912,565
Puerto Rico (4.8%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 Cmnwlth. of PR, Govt. Dev. Bank, VRDN, MBIA,
3.4s, 12/1/15 VMIG1 3,000,000
1,500,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds,
Ser. T, 6 5/8s, 7/1/12 Aaa 1,573,125
2,500,000 PR Comnwlth. G.O. Bonds, MBIA, 5 3/4s, 7/1/26 Aaa 2,465,625
1,500,000 PR Indl. Tourist Edl. Med. & Env. Control Facs. Rev.
Bonds (Cogen Facs. - AES PR Project),
6 5/8s, 6/1/26 Baa2 1,509,375
2,000,000 PR Muni. Fin Agcy. G.O. Bonds, Ser. A, FSA,
5 7/8s, 8/1/14 AAA 2,060,000
----------------
10,608,125
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $226,758,866) (b) $ 216,520,690
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $220,524,355.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at May 31, 2000 for the securities
listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at May 31, 2000. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the Report
of independent accountants.
(b) The aggregate identified cost on a tax basis is $226,758,866,
resulting in gross unrealized appreciation and depreciation of
$3,817,123 and $14,055,299, respectively, or net unrealized depreciation
of $10,238,176.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at May 31, 2000 was
$14,409,951 or 6.5% of net assets.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at May 31,
2000.
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 May 31, 2000.
The fund had the following industry group concentrations greater
than 10% at May 31, 2000 (as a percentage of net assets):
Health care 22.8%
Education 19.0
Utilities 12.0
Water and sewer 11.1
The fund had the following insurance concentrations greater than
10% at May 31, 2000 (as a percentage of net assets):
MBIA 18.9%
AMBAC 11.1
--------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
--------------------------------------------------------------------------
Municipal Bond
Index (long) $1,123,875 $1,119,395 Jun-00 $4,480
--------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $226,758,866) (Note 1) $216,520,690
-------------------------------------------------------------------------------------------
Cash 489,148
-------------------------------------------------------------------------------------------
Interest and other receivables 4,199,828
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 162,997
-------------------------------------------------------------------------------------------
Receivable for securities sold 2,050,167
-------------------------------------------------------------------------------------------
Receivable for variation margin 9,750
-------------------------------------------------------------------------------------------
Total assets 223,432,580
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 518,716
-------------------------------------------------------------------------------------------
Payable for securities purchased 1,495,380
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 427,114
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 287,090
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 13,338
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 12,180
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 962
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 104,945
-------------------------------------------------------------------------------------------
Other accrued expenses 48,500
-------------------------------------------------------------------------------------------
Total liabilities 2,908,225
-------------------------------------------------------------------------------------------
Net assets $220,524,355
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $237,888,289
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 86,945
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (7,217,183)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (10,233,696)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $220,524,355
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($141,406,083 divided by 16,930,189 shares) $8.35
-------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.35)* $8.77
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($76,921,189 divided by 9,220,589 shares)+ $8.34
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,197,083 divided by 262,848 shares) $8.36
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.36)** $8.64
-------------------------------------------------------------------------------------------
* 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, 2000
<S> <C>
Tax exempt interest income: $ 15,621,093
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,270,495
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 273,628
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,638
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 5,924
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 318,751
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 740,245
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 12,499
-------------------------------------------------------------------------------------------
Reports to shareholders 15,611
-------------------------------------------------------------------------------------------
Auditing 40,189
-------------------------------------------------------------------------------------------
Legal 8,537
-------------------------------------------------------------------------------------------
Postage 14,266
-------------------------------------------------------------------------------------------
Other 33,577
-------------------------------------------------------------------------------------------
Total expenses 2,746,360
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (76,719)
-------------------------------------------------------------------------------------------
Net expenses 2,669,641
-------------------------------------------------------------------------------------------
Net investment income 12,951,452
-------------------------------------------------------------------------------------------
Net realized loss on investments (Note 1) (4,768,935)
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (714,307)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (17,230,853)
-------------------------------------------------------------------------------------------
Net loss on investments (22,714,095)
-------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (9,762,643)
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended May 31
-------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 12,951,452 $ 13,242,425
--------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (5,483,242) 457,099
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (17,230,853) (9,168,628)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (9,762,643) 4,530,896
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (8,662,464) (9,139,589)
--------------------------------------------------------------------------------------------------
Class B (4,160,353) (4,093,772)
--------------------------------------------------------------------------------------------------
Class M (128,635) (116,254)
--------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (1,742,908)
--------------------------------------------------------------------------------------------------
Class B -- (903,508)
--------------------------------------------------------------------------------------------------
Class M -- (24,458)
--------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (37,898,758) 13,057,811
--------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (60,612,853) 1,568,218
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 281,137,208 279,568,990
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $86,945 and $152,619, respectively) $220,524,355 $281,137,208
--------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of period 9.12 9.49 $9.21 $9.08 $9.24
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .47 .46 .49 .50 .51
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.77) (.28) .31 .20 (.16)
------------------------------------------------------------------------------------------------
Total from
investment operations (.30) .18 .80 .70 .35
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.47) (.46) (.48) (.49) (.51)
------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.09) (.04) (.08) --
------------------------------------------------------------------------------------------------
Total distributions (.47) (.55) (.52) (.57) (.51)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.35 $9.12 $9.49 $9.21 $9.08
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (3.30) 1.91 8.92 7.94 3.82
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $141,406 $179,327 $187,272 $185,041 $183,117
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .87 .98 .98 .98 .98
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.44 4.89 5.16 5.39 5.46
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.85 14.28 40.76 38.10 41.40
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements. (Note 2).
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of period $9.11 $9.48 $9.20 $9.07 $9.23
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .41 .40 .42 .44 .44
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.77) (.28) .32 .20 (.15)
------------------------------------------------------------------------------------------------
Total from
investment operations (.36) .12 .74 .64 .29
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.41) (.40) (.42) (.43) (.45)
------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.09) (.04) (.08) --
------------------------------------------------------------------------------------------------
Total distributions (.41) (.49) (.46) (.51) (.45)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.34 $9.11 $9.48 $9.20 $9.07
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (3.94) 1.24 8.22 7.24 3.14
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $76,921 $98,447 $90,303 $77,399 $65,669
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.52 1.63 1.63 1.63 1.62
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.79 4.24 4.51 4.73 4.78
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.85 14.28 40.76 38.10 41.40
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements. (Note 2).
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
------------------------------------------------------------------------------------------------------
For the period
Per-share July 3, 1995+
operating performance Year ended May 31 to May 31
------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value
beginning of period $9.12 $9.49 $9.22 $9.09 $9.10
------------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------------
Net investment income .44 .43 .46 .47 .44
------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.76) (.28) .30 .21 (.01)
------------------------------------------------------------------------------------------------------
Total from
investment operations (.32) .15 .76 .68 .43
------------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.43) (.45) (.47) (.44)
------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.09) (.04) (.08) --
------------------------------------------------------------------------------------------------------
Total distributions (.44) (.52) (.49) (.55) (.44)
------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.36 $9.12 $9.49 $9.22 $9.09
------------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (3.48) 1.60 8.47 7.61 4.70*
------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,197 $3,363 $1,994 $660 $337
------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.17 1.28 1.28 1.28 1.13*
------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.14 4.59 4.85 5.04 4.49*
------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.85 14.28 40.76 38.10 41.40
------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements. (Note 2).
</TABLE>
NOTES TO FINANCIAL STATEMENTS
May 31, 2000
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 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 higher than class A
but lower than class B 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 of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value.
Restricted securities are stated at fair value following procedures
approved by the Trustees. Such valuations and procedures are reviewed
periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined
on the identified cost basis. Interest income is recorded on the accrual
basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. When the contract is closed, the fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
D) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
May 31, 2000, the fund had no borrowings against the line of credit.
E) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At May 31, 2000 the fund had a capital loss carryover of approximately
$2,668,000 available to offset future capital gains, if any, which will
expire May 31, 2008.
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid 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 post-October loss deferrals, dividends payable,
defaulted bond interest, unrealized gains and losses on certain futures
contracts, straddle loss deferral and market discount accretion.
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,
2000, the fund reclassified $65,674 to decrease undistributed net
investment income and $46,027 to increase paid-in-capital, with a
decrease to accumulated net realized loss of $19,647. 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 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 upon the lesser of (i) an annual rate of
0.50% of the average net asset value of the fund or (ii) 0.60% of the
first $500 million, 0.50% of the next $500 million, 0.45% of the next
$500 million, 0.40% of the next $5 billion, 0.375% of the next $5
billion, 0.355% of the next $5 billion, 0.34% of the next $5 billion,
and 0.33% thereafter. Prior to July 1, 1999, the management fee was
based on (ii) above.
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, 2000, fund expenses were reduced by $76,719
under expense offset arrangements with PFTC and brokerage service
arrangements. 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 $560
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, Inc., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Retail Management, Inc. at an annual rate up to
0.35%, 1.00% 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 year ended May 31, 2000, Putnam Retail Management, Inc., acting
as underwriter received net commissions of $23,903 and $446 from the
sale of class A and class M shares, respectively and $246,477 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, 2000, Putnam Retail
Management, Inc., acting as underwriter received $181 on class A
redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 2000, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $36,553,938 and $78,966,489, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At May 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 1,903,581 $ 16,437,995
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 575,135 4,933,503
---------------------------------------------------------------------------
2,478,716 21,371,498
Shares
repurchased (5,217,578) (44,783,737)
---------------------------------------------------------------------------
Net decrease (2,738,862) $(23,412,239)
---------------------------------------------------------------------------
Year ended May 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 2,873,907 $26,965,937
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 685,831 6,400,031
---------------------------------------------------------------------------
3,559,738 33,365,968
Shares
repurchased (3,616,548) (33,827,464)
---------------------------------------------------------------------------
Net decrease (56,810) $ (461,496)
---------------------------------------------------------------------------
Year ended May 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 959,926 $ 8,296,358
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 296,089 2,536,156
---------------------------------------------------------------------------
1,256,015 10,832,514
Shares
repurchased (2,846,275) (24,385,706)
---------------------------------------------------------------------------
Net decrease (1,590,260) $(13,553,192)
---------------------------------------------------------------------------
Year ended May 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 2,135,123 $19,982,461
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 335,184 3,123,172
---------------------------------------------------------------------------
2,470,307 23,105,633
Shares
repurchased (1,184,516) (11,065,780)
---------------------------------------------------------------------------
Net increase 1,285,791 $12,039,853
---------------------------------------------------------------------------
Year ended May 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 89,479 $ 783,722
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 11,470 97,957
---------------------------------------------------------------------------
100,949 881,679
Shares
repurchased (206,814) (1,815,006)
---------------------------------------------------------------------------
Net decrease (105,865) $(933,327)
---------------------------------------------------------------------------
Year ended May 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 171,232 $1,597,191
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 10,853 101,148
---------------------------------------------------------------------------
182,085 1,698,339
Shares
repurchased (23,439) (218,885)
---------------------------------------------------------------------------
Net increase 158,646 $1,479,454
---------------------------------------------------------------------------
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.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
FUND INFORMATION
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Susan A. McCormack
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam
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' Web site: 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
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN054 62259 A47/226/2AE 7/00
