Putnam
Tax-Free
Insured
Fund
ANNUAL REPORT
July 31, 1994
(Graphic--balance scales)
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Performance highlights
"This fund is well suited for the investor looking for tax-free income and a
high-quality portfolio."
- --Richard Wyke, Fund Manager
Performance should always be considered in light of a fund's investment
strategy. Putnam Tax-Free Insured Fund is for investors seeking high current
income free from federal income tax through investments in insured,
investment-grade tax-exempt securities.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A(1) Class B
<S> <C> <C> <C> <C> <C>
Total return NAV POP NAV CDSC
...................................................................................................................
12 months ended 7/31/94 (change in
value during period plus reinvested
distributions) -- -- 0.00 -4.74%
Life of class A
(since 9/20/93) -2.49% -7.11% -- --
Share value NAV POP NAV
...................................................................................................................
7/31/93 -- -- $ 15.50
9/20/93 Inception of Class
A Shares $15.88 $16.67 --
7/31/94 14.67 15.40 14.68
In excess of
Capital Capital
Distribution(2) No. Income gains gains Total
...................................................................................................................
Class A 11 $0.725101 -- $0.098 $0.823101
Class B 13 0.734428 -- 0.098 0.832428
Current return NAV POP NAV
...................................................................................................................
(end of period)
Current dividend rate(3) 5.70% 5.43% 5.06%
Taxable equivalent(4) 9.44 8.99 8.38
Current 30-day
SEC yield(5) 5.54 5.27 4.89
Taxable equivalent(4) 9.17 8.73 8.10
</TABLE>
Performance data represent past results and will differ for each share class.
For performance over longer periods, see pages 8 and 9. POP assumes 4.75%
maximum sales charge. CDSC assumes 5% maximum contingent deferred sales
charge. (1)The fund began offering class A shares on
9/20/93. (2)Capital gains, if any, are taxable and income from the fund may
be subject to the Alternative Minimum Tax and/or state and local taxes.
(3)Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period. (4)Assumes a 39.60% federal tax rate. Results for
investors subject to lower tax rates would not be as advantageous. (5)Based
only on investment income, calculated using SEC guidelines.
<PAGE>
From the Chairman
Photo of George Putnam
(c) Karsh, Ottawa
Dear Shareholder:
The municipal bond market, like most other fixed-income markets, continued to
enjoy a sustained rise as Putnam Tax-Free Insured Fund began the fiscal year
that ended on July 31, 1994, only to see much of the gain evaporate during
the year in the wake of a rise in interest rates.
Although rising rates can mean ongoing market volatility in the short run,
inflation is likely to remain in check as the Federal Reserve Board stands
firm in its resolve on this policy. Fixed-income markets traditionally have
reacted positively over the long term to inflation-free growth.
Investors, already feeling the impact of higher taxes, can only anticipate
more of the same at all levels of government. In response, increasing numbers
of them are looking to municipal bonds for tax relief.
At the same time, supplies may be become tighter as municipalities curtail
refinancing activity and become more cautious in floating new debt. Thus, the
expectation of tighter supply and sustained demand bodes well for your fund's
prospects as it enters fiscal 1995, although there can be no assurance that
our expectations will prove correct.
Respectfully yours,
(Signature of George Putnam)
George Putnam
Chairman of the Trustees
September 14, 1994
<PAGE>
Report from the fund manager
Richard P. Wyke
Putnam Tax-Free Insured Fund found the municipal market a rather inhospitable
place throughout much of the fiscal year ended July 31, 1994. This was
attributable to the culmination of a three-year bull market for bonds, which
occurred in mid- October 1993. Signs of an accelerating economy in 1993's
fourth quarter led investors to take profits in anticipation of rising
interest rates. Those fears came to fruition on February 4, 1994, when the
Federal Reserve Board made the first in a series of increases in short-term
interest rates--in an attempt to restrict what some considered an overly
stimulative monetary policy.
Although anticipated, the increases nonetheless sent U.S. financial markets
into a tailspin. Municipal securities reached the bottom of the past year's
cycle in early April. Since that time, the fund's share price has started to
recover. Our relatively defensive position throughout the fiscal year helped
cushion declines in value during 1994's market volatility. Consequently, the
fund's class B share total return at net asset value for the year ended July
31, 1994, is essentially at a break-even level. Additionally, class A shares,
because of their shorter performance period, showed a modestly negative
return. Moreover, the fund's AAA-rated portfolio continued to deliver an
attractive tax-free income stream. (Please refer to the table on page 2 for
details.)
CAPITALIZING ON SUPPLY AND DEMAND VARIATIONS
Much has been said about the potential for improvement in the municipal bond
supply and demand scenario. The issuance of new securities has dropped
dramatically from 1993, while we believe demand is likely to increase due to
higher tax rates and the relative yield advantage that municipals offer over
many taxable alternatives.
Putnam Management has applied these big-picture dynamics to capitalize on
what might be called intramarket supply and demand imbalances. The key to
success with this approach is to identify specific states or sectors of the
market that are experiencing a temporary oversupply, relative to other areas
of the
national market. When there is excess supply in a particular state, for
example, bond prices there will tend to come down and yields will move up.
This enables the fund to purchase securities at temporarily depressed prices.
If the supply later diminishes, which can happen for many reasons, prices may
appreciate--enabling us to sell the bonds at a profit.
This strategy can be especially advantageous in two groups of states. The
first are what we call "specialty states." These tend to have consistently
strong demand because of high state income tax rates, higher-than-average
population growth, or generally strong patronage of local bond issues. New
Jersey, New York, and California are three examples.
The second group are states that tend to be relatively infrequent issuers of
municipal securities, such as Minnesota or Missouri. Our approach in these
markets is to try to purchase bonds when they are first issued and hold them
until the available supply becomes low. Assuming constant demand, a security
in low supply will attract a higher selling price. Timing and patience are
critical for successful execution of this strategy.
(Tabular representation of line graph)
Federal Funds Rate Versus Muni Bond Prices
Federal Municipal
funds bond
rate prices+
J 1.00 1.00
A 1.02 1.01
S 0.96 1.02
O 0.98 1.01
N 1.00 1.00
D 0.96 1.01
J 1.12 1.01
F 1.12 0.98
M 1.16 0.93
A 1.28 0.94
M 1.48 0.94
J * 0.93
J 1.40 0.94
(end of graph)
*The federal funds rate for 6/30/94 was not plotted because, at 10.0%, it
represented abnormally high borrowing activity.
+Source: Lehman Brothers Municipal Bond Index
<PAGE>
DISCOUNT AND NONCALLABLE BONDS INCREASED
One of the tactics that we have employed since the market's sell-off has been
to sell bonds that are priced at or near their par value--usually $1,000 per
bond--and replace them with bonds that are priced below par (discount bonds).
In addition, we've added more noncallable bonds to the portfolio. The goal
with both of these moves is to be positioned for the market's next upward
cycle.
In a rising market, discount bonds offer greater appreciation potential than
either par bonds or premium bonds (those with prices above par value). The
par value of a municipal bond is generally listed as 100, indicating 100% of
the face value, or $1,000. When a bond's price reaches or exceeds par value,
its appreciation tends to slow. Thus, a bond with a listed price of $940 has
much more appreciation potential than one with a price of $990 or $1,010, all
other factors being equal.
In a similar fashion, noncallable bonds tend to perform well in an improving
market. Many municipal securities have 10-year call provisions. This means
that they may be redeemed by the issuer prior to maturity 10 or more years
after the issue date. These bonds tend to behave as if they have 10-year
actual maturities. Since, given any type of interest rate movement, a
longer-maturity bond will respond to a greater degree than one with a shorter
maturity, noncallable bonds generally provide more appreciation potential in
a rising market. As of fiscal year's end, about 21% of the portfolio was in
noncallable bonds.
DEFENSIVE CHARACTERISTICS MAINTAINED
We have balanced our approach by keeping the fund's coupon structure higher
than the market average while keeping portfolio duration somewhat shorter
than average. (The coupon is the stated amount of interest payable on a bond,
expressed as a percentage rate.) If interest rates continue to rise,
higher-coupon bonds should provide greater relative stability than lower-
coupon securities. This is because the bonds' higher income
<PAGE>
stream remains attractive to investors, providing at least a temporary floor
under the bonds' prices.
(Bar chart showing top 5 state concentrations*)
California 12.0%
Florida 9.8%
Texas 9.4%
New York 6.8%
Pennsylvania 6.4%
*As a percentage of net assets as of 7/31/94.
Holdings will vary over time.
Keeping the fund's duration slightly shorter than the market average also
adds a measure of defensiveness in the event of rising rates. Duration is a
mathematical formula that indicates the degree to which bond prices will move
up or down with each percentage-point shift in interest rates. Like maturity,
with which it is often confused, duration is measured in years. The shorter
the duration, the less volatility you can generally expect from the
portfolio. In a rising interest rate environment, keeping the portfolio's
duration relatively short can be instrumental in protecting its value.
A BALANCED STRATEGY
We are encouraged by the municipal market's recently improved performance
relative to other fixed-income sectors. In light of these developments, we
are beginning to position the fund for an improving market while also taking
steps to protect it should market volatility continue. If this approach is
successful, fiscal 1995's performance could well prove more rewarding than
that of fiscal 1994.
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares changed
over time, assuming you held the shares through the entire period and
reinvested all distributions back into the fund. We show total return in two
ways: on a cumulative long- term basis and on average how the fund might have
grown each year over varying periods. For comparative purposes, we show how
the fund performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED 7/31/94
<TABLE>
<CAPTION>
Lehman Bros.
Class A Class B Municipal Bond
NAV POP NAV CDSC Index CPI
<S> <C> <C> <C> <C> <C> <C>
1 year -- -- 0.00% -4.74% 1.87% 2.77%
5 years -- -- 36.99 35.00 46.63 19.29
Annual average -- -- 6.50 6.19 7.96 3.59
Life of class A
(since 9/20/93) -2.49% -7.11% -- -- -1.33 2.27
Life of class B
(since 9/9/85) -- -- 105.71 105.71 126.22 37.41
Annual average -- -- 8.45 8.45 9.62 3.64
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 6/30/94
(most recent calendar quarter)
<TABLE>
<CAPTION>
Class A Class B
NAV POP NAV CDSC
<S> <C> <C> <C> <C>
1 year -- -- -1.89% -6.54%
5 years -- -- 36.01 34.04
Annual average -- -- 6.34 6.03
Life of class A
(since 9/20/93) -4.15% -8.70% -- --
Life of class B
(since 9/9/85) -- -- 102.31 102.31
Annual average -- -- 8.33 8.33
</TABLE>
Performance data do not take into account any adjustment for taxes payable on
reinvested distributions. Effective 9/20/93 the fund began offering class A
shares. Performance of each share class will differ. Performance data
represent past results. Investment returns and net asset value will fluctuate
so an investor's shares, when sold, may be worth more or less than their
original cost.
<PAGE>
(Tabular representation of line graph)
Growth of a $10,000 Investment
Cumulative total return of a $10,000 investment
since 9/9/85 (commencement of operations)
Lehman Bros. Fund Consumer
Municipal class B shares Price
Bond Index at CDSC Index
9/9/85 $10000 $10000 $10000
7/31/86 11781 11734 10139
7/31/87 12850 12357 10537
7/31/88 13753 13252 10972
7/31/89 15428 15016 11519
7/31/90 16497 15841 12074
7/31/91 17938 16917 12611
7/31/92 20402 19222 13009
7/31/93 22206 20568 13370
7/31/94 22622 20569 13741
(end of graphic)
Past performance is no indication of future results. A $10,000 investment in
the fund's class A shares at inception on 9/20/93 would have been valued at
$9,751 by 7/31/94 ($9,289 with redemption at the end of the period).
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. Consumer Price Index (CPI) is a commonly used
measure of inflation; it does not represent an investment return.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 4.75% sales charge.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of 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.
<PAGE>
Report of Independent Accountants
For the fiscal year ended July 31, 1994
To the Trustees and Shareholders of
Putnam Tax-Free Insured Fund
(a series of Putnam Tax-Free Income Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings), and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of Putnam Tax-Free Insured Fund (the "fund") (a series of Putnam
Tax- Free Income Trust) at July 31, 1994, and the results of its operations,
the changes in its net assets, and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of portfolio positions at July 31, 1994 by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
September 15, 1994
<PAGE>
Portfolio of investments owned
July 31, 1994
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (99.7%)(a)
PRINCIPAL AMOUNT RATINGS(b) VALUE
<S> <C> <C> <C>
Alaska (0.1%)
$790,000 AK Hsg. Fin. Corp. Home Mtge. Rev. Bonds, Ser. A,
Government National Mortgage Assn. (GNMA) Coll.,
8-3/8s, 12/1/16 AAA $ 818,637
Arizona (4.3%)
AZ Muni. Fin. Program Certif. of Participation
(COP), Bond Investors Guaranty Insurance Co. (BIGI),
1,000,000 Ser. 31 7-1/4s, 8/1/09 AAA 1,126,250
5,700,000 Ser. 34, 7-1/4s, 8/1/09 AAA 6,419,625
16,000,000 Pima Cnty., Indl. Dev. Auth. Rev. Bonds (Tucson
Elec. Pwr. Co. Irvington Project), Ser. A, Financial
Security Assurance Inc. (FSA), 7-1/4s, 7/15/10(c) AAA 17,280,000
24,825,875
California (12.0%)
3,850,000 CA Hlth. Fac. Fin. Auth. Insd. Rev. Bonds Ser. B,
American Municipal Bond Assurance Corp. (AMBAC), 5s,
7/1/21 AAA 3,176,250
3,500,000 CA Hsg. Fin. Agcy. Rev. Bonds, Ser. A, Municipal
Bond Insurance Assn. (MBIA), 7.8s, 2/1/25 AAA 3,657,500
8,000,000 CA State General Obligation (G.O.) Bonds, FSA,
5-1/2s, 3/1/20 AAA 7,220,000
3,110,000 CA State Pub. Works Board Lease Rev. Bonds (Dept. of
Corrections-State Prisons), Ser. A, AMBAC, 5s,
12/1/19 AAA 2,616,287
3,000,000 CA Statewide Cmntys. Dev. Auth. Step-Up Recovery
Floater COP (Motion Picture & TV), AMBAC, 5.35s,
1/25/95 AAA 2,651,250
3,090,000 LA Cnty., Cap. Asset Leasing Corp., Floating Rate
Rev. Bonds, AMBAC, 3.85s, 12/1/08 AAA 3,066,825
3,250,000 LA Cnty., Convention & Exhibition Ctr. Auth. Lease
Rev. Bonds, Ser. A, MBIA, 5-3/8s, 8/15/18
LA Cnty., Trans. Comm. Sales Tax Rev. Bonds, Ser. A AAA 2,916,875
2,500,000 Financial Guaranty Insurance Corp. (FGIC), 6-3/4s,
7/1/20 AAA 2,771,875
4,000,000 (Proposition C), MBIA, 6-3/4s, 7/1/19 AAA 4,450,000
3,455,000 (Proposition C), MBIA, 6-1/2s, 7/1/20 AAA 3,787,544
5,000,000 LA Cnty., Waste Wtr. Syst. Rev. Bonds, Ser. D, FGIC,
6s, 11/1/14 AAA 4,956,250
5,000,000 Sacramento, Muni. Util. Dist. Elec. Rev. Refunded
(Rfdg.) Bonds, Ser. Y, MBIA, 6-3/4s, 9/1/19 AAA 5,556,250
5,000,000 San Diego, Regl. Bldg. Auth. Lease Residual Interest
Bonds (RIBS), MBIA, 3.81s, 5/1/23 AAA 4,706,250
<PAGE>
California (continued)
$5,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds (Police
Admin. & Hldg. Fac.), Ser. A, MBIA, 6-1/4s, 7/1/17 AAA $ 5,814,900
6,300,000 U. of CA, Rev. Bonds (Multi-Purpose Projects), Ser.
A, MBIA, 6-7/8s, 9/1/16 AAA 7,071,750
4,700,000 Vallejo, Rev. Bonds (Wtr. Impt. Project), Ser. B,
FGIC, 6-1/2s, 11/1/14 AAA 4,846,875
69,266,681
Colorado (2.1%)
4,225,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider
Pooled Loan Program), Ser. A, Capital Guarantee
Insurance Co. (CGIC), 7-1/4s, 7/15/17 AAA 4,652,781
6,895,000 El Paso Cnty., Home Mtge. Rev. Bonds, Ser. A, GNMA
Coll., 8s, 3/1/21 AAA 7,274,225
11,927,006
Connecticut (0.2%)
1,000,000 CT Hlth. & Edl. Fac. Auth. Rev. Bonds (Hosp. of St.
Raphael), Ser. H, AMBAC, 6-1/2s, 7/1/13 AAA 1,058,750
Delaware (0.9%)
5,000,000 DE Econ. Dev. Auth. Poll. Rfdg. Rev. Bonds (Delmarva
Pwr.), Ser. B, FGIC, 7.15s, 7/1/18 AAA 5,450,000
Florida (9.8%)
900,000 Dade Cnty., Hlth. Fac. Auth. Hosp. Rev. Bonds (North
Shore Med. Ctr. Project), AMBAC, 9-1/8s, 10/1/13 AAA 969,750
13,675,000 Hernando Cnty., Rev. Bonds (Criminal Justice
Complex), FGIC, 7.65s, 7/1/16 AAA 16,427,094
5,500,000 Orange Cnty., Hlth. Fac. Auth. RIBS
Ser. 91-C, MBIA, 9.425s, 10/29/21 AAA 5,568,750
Orange Cnty., Hlth. Fac. Auth. Rev. Bonds
(Pooled Hosp. Loan Project)
150,000 Ser. A, FGIC, 7-7/8s, 12/1/25 AAA 155,438
10,910,000 Ser. B, BIGI, 7-7/8s, 12/1/25 AAA 11,305,488
5,000,000 Orlando & Orange Cnty. Expressway Auth. Rev. Bonds,
FGIC, 8-1/4s, 7/1/14 AAA 6,250,000
16,495,000 Plantation, Wtr. & Swr. Auth. Rev. Bonds, zero %,
MBIA, 3/1/07 AAA 7,979,456
4,000,000 Sumter Cnty., School Dist. Rev. Bonds
(Multi Dist. Loan Program), CGIC, 7.15s, 11/1/15 AAA 4,505,000
3,000,000 Tampa, Wtr. & Swr. Auth RIBS, Ser. A-2, FGIC,
8.311s, 10/1/12 AAA 3,063,750
56,224,726
<PAGE>
Georgia (3.1%)
GA Muni. Elec. Auth. Pwr. Rev. Bonds
$7,500,000 Ser. B, AMBAC, 6-1/4s, 1/1/12 AAA $ 7,696,875
10,000,000 Ser. B. BIGI, zero %, 1/1/08 AAA 4,537,500
5,500,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds
(Project One), AMBAC, 6.4s, 1/1/13 AAA 5,754,375
17,988,750
Idaho (0.1%)
500,000 ID Hlth. Fac. Auth. Rev. Bonds (Kootenai Med. Ctr.
Project), MBIA, 9-1/8s, 8/1/15 AAA 532,500
Illinois (4.3%)
950,000 Aurora, Hosp. Fac. Rev. Bonds (Mercy Ctr. Hlth. Care
Svcs.), Ser. A, AMBAC, 9-5/8s, 10/1/09 AAA 1,026,000
2,600,000 Chicago, Central Pub. Library Rev. Bonds, Ser. B,
AMBAC, 6.85s, 1/1/17 AAA 2,892,500
6,780,000 Chicago, Pub. Bldg. Rev. Bonds (Cmnty. Bldg.), Ser.
A, MBIA, 7s, 1/1/20 AAA 7,466,475
5,000,000 Chicago, Res. Mtge. Rev. Bonds, Ser. B, MBIA, zero
%, 10/1/09 AAA 1,712,500
2,000,000 Chicago, School Fin. Auth. Rev. Rfdg. Bonds, FGIC,
8-3/4s, 6/1/09 AAA 2,118,750
2,000,000 Cook Cnty., Rev. Bonds, MBIA, 7-1/4s, 11/1/07 AAA 2,255,000
5,000,000 Metro. Pier & Exposition Auth. Tax Rev. Bonds, Ser.
A, FGIC, zero %, 6/15/17 AAA 1,168,750
5,000,000 Regional Trans. Auth. Bonds, Ser. A, AMBAC, 8s,
6/1/17 AAA 6,131,250
24,771,225
Indiana (2.5%)
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds (Columbus
Regl. Hosp.), CGIC, 7s, 8/15/15 AAA 8,146,875
5,000,000 Marion Cnty., Hosp. Auth. Fac. Rev. Bonds (Cmnty.
Hosp. Project), MBIA, 9s, 5/1/08 AAA 5,275,000
1,000,000 Vigo Cnty., Hosp. Auth. Rev. Bonds (Union Hosp.),
AMBAC, 9.3s, 5/1/11 AAA 1,059,375
14,481,250
Kansas (0.8%)
4,500,000 Kansas City, Util. Syst. Rev. Rfdg. & Impt. Bonds,
FGIC, 6-1/4s, 9/1/14 AAA 4,590,000
Kentucky (0.1%)
645,000 KY Hsg. Corp. Multi-Fam Mtge. Rev. Bonds Ser. A,
BIGI, 8-7/8s, 7/1/19 AAA 663,544
<PAGE>
Louisiana (1.3%)
$3,275,270 East Baton Rouge, Fin. Auth. Single-Fam. Mtge.
Bonds, Ser. B, GNMA Coll., 8-1/4s, 2/25/11 AAA $ 3,467,692
LA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
565,000 Ser. 85A, FGIC, 9-3/8s, 2/1/15 AAA 586,188
1,310,000 GNMA Coll., 9-1/8s, 11/1/18 AAA 1,382,050
1,700,000 New Orleans, Intl. Arpt. Rev. Bonds, MBIA, 9s,
8/1/15 AAA 1,831,750
7,267,680
Maryland (0.2%)
1,055,000 Baltimore, Pub. Impt. Rev. Bonds, Ser. A, MBIA, 7s,
10/15/09 AAA 1,171,050
Massachusetts (4.3%)
5,000,000 MA Hlth. & Edl. Fac. Auth. Rev. Bonds (Baystate Med.
Ctr.), Ser. D, FGIC, 6s, 7/1/15 AAA 4,931,250
995,000 MA Hsg. Fin. Agcy. Multi-Fam. Hsg. Rev. Bonds, Ser.
A, MBIA, 8-7/8s, 7/1/18 AAA 1,038,531
5,200,000 MA Hsg. Fin. Agcy. Rev. Rfdg. Bonds (Hsg. Projects),
Ser. A, AMBAC, 5.95s, 10/1/08 AAA 5,167,500
MA Muni. Wholesale Elec. Co. Pwr. Supply Svcs. Rev.
Bonds,
9,500,000 Ser. E. MBIA, 6s, 7/1/11 AAA 9,191,250
5,000,000 Ser. A. AMBAC, 5s, 7/1/17 AAA 4,231,250
24,559,781
Michigan (3.7%)
800,000 Kent Cnty., Hosp. Fin. Auth. Fac. Rev. Bonds (Pine
Rest Christian Hosp. Assn.), FGIC, 9s, 11/1/10 AAA 864,000
MI Hsg. Dev. Auth. Multi-Fam. Rev. Bonds, Ser. A,
FGIC
800,000 8-7/8s, 7/1/17 AAA 832,000
3,000,000 8-3/8s, 7/1/19 AAA 3,157,500
MI Strategic Fund Ltd. Oblig. Rev. Bonds (Detroit
Edison Co. Project),
4,000,000 Ser. BB, AMBAC, 7s, 5/1/21 AAA 4,430,000
2,750,000 Ser. AA, FGIC, 6.95s, 5/1/11 AAA 3,018,125
4,500,000 MI Strategic Fund Ltd. Oblig. Rev. Bonds (Consumers
Pwr. Co. Project), Capital Market Assurance Corp.
(CMAC), 5.8s, 6/15/10 AAA 4,398,750
4,735,000 MI Trunk Line Rev. Bonds, Ser. A, AMBAC, zero %,
10/1/11 AAA 1,633,575
3,500,000 West Bloomfield, School Dist. Rev. Bonds, MBIA,
5-1/8s, 5/1/14 AAA 3,084,375
21,418,325
<PAGE>
Missouri (0.6%)
$4,000,000 Missouri Hlth. & Ed. Fac. Auth. Rev. Bonds (St.
Luke's Health Syst.), MBIA, 5.1s, 11/15/13 AAA $ 3,570,000
Montana (2.3%)
12,000,000 Forsythe, Poll. Control Rev. Rfdg. Bonds (Puget
Sound Pwr. & Lt. Project), AMBAC, 6.8s, 3/1/22 AAA 12,615,000
500,000 Missoula, Hosp. Fac. Rev. Bonds (Sisters of
Charity-St. Patrick), AMBAC, 9.4s, 9/1/12 AAA 538,750
13,153,750
Nebraska (1.9%)
3,000,000 NE Investment Fin. Auth. Hosp. Rev. RIBS, MBIA,
9.943s, 11/15/16 AAA 3,150,000
900,000 NE Investment Fin. Auth. Single Fam. Mtge. RIBS,
Ser. B, GNMA Coll. 11.845s, 3/15/22 AAA 1,005,750
6,585,000 NE Investment Fin. Auth. Single Fam. Mtg. Rev.
Bonds, Ser. 1, GNMA Coll., MBIA, 8-1/8s, 8/15/38 AAA 6,914,250
11,070,000
Nevada (1.5%)
3,500,000 Clark Cnty., Poll. Control Rev. Rfdg. Bonds (NV Pwr.
Co. Project), Ser. B, FGIC, 6.6s, 6/1/19 AAA 3,644,375
4,500,000 Clark Cnty., School Dist. G.O. Bonds, Ser. A, MBIA,
7s, 6/1/10 AAA 4,933,125
8,577,500
New Hampshire (0.5%)
2,500,000 NH State Tpk. Syst. RIBS, FGIC, 10.367s, 11/1/17 AAA 2,750,000
New Jersey (3.1%)
3,000,000 Middlesex Cnty., Utils. Auth. Swr. RIBS, Ser. A,
MBIA, 8.546s, 8/15/10 AAA 3,026,250
5,925,000 NJ Econ. Dev. Auth. Mkt. Transition Fac. Rev. Bonds,
Ser. A, MBIA, 5-7/8s, 7/1/11 AAA 5,873,156
105,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds (Bayshore
Cmnty. Hosp.), Issue A, MBIA, zero %, 7/1/08 AAA 45,675
10,000,000 Salem Cnty, Ind. Poll. Control Fin. Auth. Rev. Bonds
(Pub. Svc. Elec. & Gas Co. Project), Ser. A, MBIA,
5.45s, 2/1/32 AAA 8,812,500
17,757,581
<PAGE>
New Mexico (1.6%)
$8,000,000 Los Alamos Cnty., Util. Sys. Rev. Rfdg. Bonds, Ser.
A, FSA, 6s, 7/1/15 AAA $ 7,840,000
1,125,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds,
Ser. C. FGIC, 8-1/2s, 7/1/07 AAA 1,148,906
8,988,906
New York (6.8%)
635,000 Erie Cnty., Wtr. Auth. Rev. Rfdg. Bonds, AMBAC,
zero%, 12/1/17 AAA 119,063
2,070,000 Metro. Trans. Auth. of NY, Rev. Bonds, (Commuter
Fac.) Ser. A, MBIA, 6-3/8s, 7/1/18 AAA 2,106,225
5,930,000 Metro Trans. Auth. of NY, Rev. Bonds,
(Trans. Fac.) Ser. O, MBIA, 6-3/8s, 7/1/20 AAA 6,033,775
NY City, Muni. Wtr. Fin. Auth. Rev. Bonds
7,265,000 Ser. B, FGIC, 7-1/2s, 6/15/11 AAA 8,291,181
2,735,000 Rfdg. Refunded, Ser. B, FGIC, 7-1/2s, 6/15/11 AAA 3,148,669
4,400,000 NY City, Mun. Wtr. Fin. Auth. Variable Rate Demand
Notes (VRDN), Ser. G, FGIC, 2.65s 6/15/24 VMIG1 4,400,000
6,750,000 NY State Dorm. Auth. Rev. Bonds
(Mt. Sinai Med. School), Ser. A, MBIA, 5s, 7/1/21 AAA 5,745,938
NY State Med. Care Fac. Fin. Agcy. Rev. Bonds
(Mental Hlth. Svcs. Fac.)
7,390,000 Ser. A, AMBAC, 5.8s, 8/15/22 AAA 7,038,975
2,850,000 Ser. F, FSA, 5-1/4s, 2/15/21 AAA 2,490,188
39,374,014
Ohio (4.4%)
7,390,000 Cleveland, Waterworks 1st Mtge. Rev. Bonds, Ser.
F-92A, AMBAC, 6-1/2s, 1/1/21 AAA 8,073,575
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
3,659,000 Ser. B. GNMA Coll., 8-1/4s, 12/15/19 AAA 3,805,360
15,225,000 Ser. 85-A, FGIC, zero %, 1/15/15 AAA 2,226,656
7,790,000 Ser. C, GNMA Coll., 8-1/8s, 3/1/20 AAA 8,257,400
OH State Wtr. Dev. Auth. Rev. Bonds AMBAC
315,000 9-3/8s, 12/1/18 AAA 335,869
1,020,000 Rfdg. 9-3/8s, 12/1/18 AAA 1,095,863
1,400,000 Summit Cnty., Various Purpose Rev. Bonds, AMBAC,
6-5/8s, 12/1/12 AAA 1,478,750
25,273,473
Oklahoma (1.2%)
6,685,000 OK Hsg. Fin. Agcy. Single Fam. Rev. Bonds, Ser. A,
GNMA Coll., 8-1/4s, 12/1/20 AAA 6,960,756
<PAGE>
Pennsylvania (6.4%)
$5,000,000 Delaware Cnty., Hlth. Care Auth. Rev. Bonds (Mercy
Hlth. Corp. Southeastern), Connie Lee Insd., Ser. A,
5-1/8s, 11/15/12 AAA $ 4,462,500
3,000,000 Falls Township, Hosp. Auth. Rev, Bonds (Delaware
Valley Med. Ctr. Project), Federal Housing
Administration (FHA) Insd., 6.9s, 8/1/11 AAA 3,262,500
4,000,000 Keystone Oaks, School Dist. Rev. Bonds, Ser. C,
AMBAC, 5.829s, 9/1/16 AAA 3,740,000
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (Sacred Heart Hosp.- Norristown), Ser. A,
BIGI, 6.8s, 2/1/13 AAA 1,985,000
5,000,000 PA State, COP, Ser. A, AMBAC, 5s, 7/1/15 AAA 4,318,750
4,500,000 PA State Higher Edl. Fac. Auth. Rev. Bonds (Hahneman
U. Project), MBIA, 7.2s, 7/1/19 AAA 4,865,625
Philadelphia, Muni. Auth. Rfdg. Rev. Bonds, FGIC
620,000 7.8s, 4/1/18 AAA 692,850
6,045,000 7.8s, 4/1/18 AAA 6,868,631
3,000,000 Philadelphia, Regl. Port Auth. Lease RIBS, MBIA,
9.04s, 9/1/13 AAA 3,063,750
3,000,000 Philadelphia, Wtr. & Swr. Linked Floater Annuity,
FGIC, 4.8s, 6/15/05(d) AAA 1,462,500
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7-1/8s, 6/1/13 AAA 2,260,000
36,982,106
Puerto Rico (0.6%)
3,700,000 Cmnwlth. of Puerto Rico, Rfdg. Rev. Bonds, MBIA,
5-1/4s, 7/1/18 AAA 3,316,125
Rhode Island (0.8%)
4,315,000 RI Depositors Econ. Protection Corp. Special Oblig.,
Bonds, Ser. A, MBIA, 7-1/4s, 8/1/21 AAA 4,638,625
Tennessee (0.2%)
900,000 Metro. Nashville Arpt. Auth. Rev. Bonds, FGIC,
9-3/4s, 7/1/15 AAA 958,500
Texas (9.4%)
25,000 Bell Cnty., Hsg. Fin. Corp. Single Fam. Mtge. Rev.
Bonds, FGIC, 9.2s, 12/1/10 AAA 26,718
Dallas Cnty, Hsg. Fin. Corp. Single Fam. Mtge. Rev.
Bonds (Lomas & Nettleton Co), FGIC
387,000 10s, 10/1/07 AAA 401,512
20,000 9.2s, 7/1/06 AAA 20,850
<PAGE>
Texas (continued)
$5,000,000 Harris Cnty., Hosp. Dist. Mtge. Rev. Rfdg. Bonds,
AMBAC, 7.4s, 2/15/10 AAA $ 5,712,500
2,520,000 Harris Cnty., Toll Rd. Rev. Bonds, Ser. B, Rfdg.,
FGIC, 6-5/8s, 8/15/11 AAA 2,705,850
480,000 Ser. B, FGIC, 6-5/8s, 8/15/11 AAA 490,200
4,000,000 Ser. A, Rfdg. AMBAC, 6-1/2s, 8/15/17 AAA 4,375,000
750,000 Ser. A AMBAC, 6-1/2s, 8/15/17 AAA 765,938
Houston, Wtr. & Swr. Syst. Rev. Rfdg. Bonds, FGIC
2,310,000 9-3/8s, 12/1/13 AAA 2,512,125
390,000 9-3/8s, 12/1/13 AAA 424,125
7,000,000 Lockhart, Correctional Fac. Fin. Corp. Rev. Bonds,
MBIA, 6-5/8s, 4/1/12 AAA 7,245,000
10,000,000 Lower Colo. River Auth. Rev. Rfdg. Jr. Lien Bonds,
FSA, 5-5/8s, 1/1/17 AAA 9,325,000
4,630,000 Lubbock, Hsg. Fin. Corp. Single-Fam. Mtge. Rev.
Bonds, Ser. A, GNMA Coll., zero %, 11/25/17 AAA 758,163
1,500,000 North Central Hlth. Fac. Dev. Corp. Rfdg. Rev. Bonds
(Methodist Hosp.-Dallas), Ser. A, BIGI, 9-1/2s,
10/1/15 AAA 1,618,125
5,000,000 North Central Hlth. Fac. Dev. Corp. VRDN
(Presbyterian Med. Ctr.), Ser. C, MBIA, 2.8s,
12/1/15 VMIG-1 5,000,000
5,000,000 Rio Grande Valley Hlth. Fac. Dev. Corp. Hosp. RIBS,
(Baptist Med. Ctr.), Ser. B, MBIA, 8.531s, 8/1/12 AAA 5,062,500
4,500,000 TX Dept. of Hsg. & Cmnty. Affairs Home Mtge. RIBS,
Ser. A, GNMA Coll., 10.424s, 7/18/23 AAA 4,545,000
3,260,000 Travis Cnty., Hsg. Fin. Corp. Single Fam. Mtg. Rev.
Rev. Bonds, Ser. B, GNMA/Federal National Mortgage
Association Coll., 6.95s, 4/1/14 AAA 3,365,950
54,354,556
Vermont (0.5%)
3,000,000 VT Edl. & Hlth. Bldg. Fin. Agcy. I/F, FGIC, 9.969s,
9/1/13 AAA 2,865,000
Virginia (4.0%)
5,000,000 Fairfax Cnty., Redev. & Hsg. Auth. Multi.-Fam. Hsg.
Rev. Bonds, Ser. A, FHA Insd., 7s, 5/1/26 AAA 5,231,250
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Facs. RIBS,
FGIC, 9.975s, 8/15/23 AAA 10,487,500
3,000,000 Roanoke Cnty., Wtr. Sys. Rev. Bonds, FGIC, 6-1/2s,
7/1/21 AAA 3,285,000
4,000,000 Roanoke, Indl. Dev. Auth. Hosp. RIBS (Roanoke
Memorial Hosp.), Ser. B, MBIA, 8.38s, 7/1/20 AAA 4,000,000
23,003,750
<PAGE>
Washington (1.8%)
WA State Pub. Pwr. Supply Syst. Rev. Bonds
$3,400,000 (Nuclear Project No. 2), Ser. C, FGIC, 7-3/8s,
7/1/11 AAA $ 3,859,000
6,000,000 (Nuclear Project No. 3), Ser. B, MBIA, 7.12s,
7/1/16 AAA 6,615,000
10,474,000
West Virginia (-%)
210,000 WV Hsg. Dev. Auth. Home Ownership Mtge. Rev. Bonds,
Ser. A, FGIC, 9.1s, 1/1/14 AAA 216,825
Wisconsin (1.4%)
2,000,000 Superior, Ltd. Oblig. Rev. Rfdg. Bonds (Midwest
Energy Resources), Ser. E, FGIC, 6.9s, 8/1/21 AAA 2,215,000
5,000,000 WI Hlth. Fac. Auth. Rev. Bonds (Meriter Hosp. Inc.),
FGIC, 8-3/8s, 12/1/09 AAA 5,650,000
7,865,000
Wyoming (0.9%)
5,000,000 Laramie Cnty., Indl. Dev. Rev. Bonds (Cheyenne Lt. &
Fuel & Pwr. Co.), Ser. A, AMBAC, 7-1/4s, 9/1/21 AAA 5,268,750
Total Investments (cost $554,461,194) (e) $574,434,997
</TABLE>
<PAGE>
NOTES
(a) Percentages indicated are based on net assets of $575,974,226, which
correspond to a net asset value per class A and class B share of $14.67 and
$14.68, respectively.
(b) The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at July 31, 1994 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 July 31, 1994. Securities rated
by Putnam are indicated by "/P" and are not publicly rated. Ratings are not
covered by the Report of Independent Accountants.
(c) A portion of this security was pledged to cover margin requirements for
futures contracts at July 31, 1994. The market value of the security
segregated with the custodian for transactions in futures contracts is
$7,560,000 or 1.3% of net assets.
(d) Linked Floater Annuities represent the right to receive monthly interest
payments on the underlying Municipal Bond. No payments on principal are
passed on to the Linked Floater Annuity holders.
(e) The aggregate identified cost for federal income tax purposes is
$554,627,335, resulting in gross unrealized appreciation of $26,836,560 and
$7,028,898, respectively, or net unrealized appreciation of $19,807,662.
The rates shown on Residual Interest Bonds (RIBS), Inverse Rate Floaters
(I/F) and Linked Floater Annuities, which are securities paying variable
interest rates that vary to changes in market interest rates, Floating Rate
Notes and Variable Rate Demand Notes (VRDN) are the current interest rates at
July 31, 1994, which are subject to change based on the terms of the
security.
The Fund had the following industry group concentrations greater than 10% on
July 31, 1994
(as a percentage of net assets):
Utilities 21.8%
Hospitals/Health Care 20.1
Housing 13.0
The fund has the following insurance concentrations greater than 10% on July
31, 1994 (as a percentage of net assets):
MBIA 30.3%
FGIC 23.9
AMBAC 17.9
U.S. Treasury Futures Outstanding at July 31, 1994
<TABLE>
<CAPTION>
Total Aggregate Expiration Unrealized
Value Face Value Date Depreciation
<S> <C> <C> <C> <C>
U.S. Treasury Bond Futures (Sell) $31,434,375 $30,693,750 Sept/94 ($740,625)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
July 31, 1994
<TABLE>
<S> <C>
Assets
Investments in securities, at value (identified cost $554,461,194) (Note 1) $574,434,997
Interest receivable 8,388,230
Receivable for shares of the fund sold 856,392
Receivable for securities sold 5,884,713
Total assets 589,564,332
Liabilities
Payable to subcustodian (Note 2) 130,520
Payable for securities purchased 10,962,442
Distributions payable to shareholders 1,070,939
Payable for shares of the fund repurchased 140,676
Payable for compensation of Manager (Note 2) 284,932
Payable for investor servicing and custodian fees (Note 2) 6,459
Payable for administrative services (Note 2) 4,836
Payable for variation margin on open futures contracts 533,898
Payable for distribution fees (Note 2) 334,139
Other accrued expenses 121,265
Total liabilities 13,590,106
Net assets $575,974,226
Represented by
Paid-in capital (Notes 1, 4 and 5) $562,349,600
Distributions in excess of net investment income (Notes 1 and 5) (778,138)
Accumulated net realized loss on investment and futures transactions
(Notes 1 and 5) (4,830,414)
Net unrealized appreciation of investments and futures contracts 19,233,178
Total--Representing net assets applicable
to capital shares outstanding $575,974,226
Computation of net asset value and offering price
Net asset value and redemption price of class A shares ($143,079,329 divided
by 9,751,110 shares) $ 14.67
Offering price per class A share (100/95.25 of $14.67)* $ 15.40
Net asset value and offering price of class B shares
($432,894,897 divided by 29,482,448 shares)** $ 14.68
</TABLE>
* On single retail sales of less than $25,000. On sales of $25,000 or more
and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
Year ended July 31, 1994
Tax exempt interest income $ 37,486,128
Expenses:
Compensation of Manager (Note 2) 3,451,352
Investor servicing and custodian fees (Note 2) 324,131
Compensation of Trustees (Note 2) 19,692
Reports to shareholders 79,462
Auditing 29,654
Legal 21,325
Postage 103,929
Administrative services (Note 2) 15,951
Registration fees 9,710
Distribution fees--class A (Note 2) 294,037
Distribution fees--class B (Note 2) 3,910,073
Other 18,612
Total expenses 8,277,928
Net investment income 29,208,200
Net realized loss on investments (Notes 1 and 3) (846,042)
Net realized gain on futures contracts (Notes 1 and 3) 856,097
Net unrealized depreciation of investments and
futures contracts during the year (29,129,498)
Net loss on investment transactions (29,119,443)
Net increase in net assets resulting from
operations $ 88,757
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended
July 31
1994 1993
<S> <C> <C>
Increase in net assets
Operations:
Net investment income $ 29,208,200 $ 25,121,946
Net realized gain (loss) on investments (846,042) 4,446,719
Net realized gain (loss) on futures contracts 856,097 (2,317,616)
Net unrealized appreciation (depreciation) of
investments and futures contracts (29,129,498) 9,088,250
Net increase in net assets resulting from operations 88,757 36,339,299
Distributions to shareholders:
From net investment income
Class A (7,004,732) --
Class B (22,142,492) (25,410,364)
From net realized gain on investments and futures
Class A (2,495) --
Class B (7,560) (6,351,965)
In excess of net realized gain on investments
and futures
Class A (932,962) --
Class B (2,827,335) --
Increase from capital share transactions (Note 4) 36,144,510 101,946,150
Total increase in net assets 3,315,691 106,523,120
Net assets
Beginning of year 572,658,535 466,135,415
End of year (including distributions in excess of net
investment income of $778,138 and $350,114,
respectively) $575,974,226 $572,658,535
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
September 20, 1993
(commencement
of operations) to
July 31 Year ended July 31
1994 1994 1993 1992 1991
Class A Class B
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 15.88 $ 15.50 $ 15.42 $ 14.38 $ 14.25
Investment operations
Net investment income .73 .74 .75 .76 .79
Net realized and unrealized gain (loss) on
investments (1.12) (.73) .28 1.14 .14
Total from investment operations (.39) .01 1.03 1.90 .93
Less distributions:
From net investment income (.72) (.73) (.75) (.77) (.80)
From net realized gain on investments -- -- (.20) (.09) --
In excess of net realized gain on
investments (.10) (.10) -- -- --
Total distributions (.82) (.83) (.95) (.86) (.80)
Net asset value, end of period $ 14.67 $ 14.68 $ 15.50 $ 15.42 $ 14.38
Total investment return at net asset value
(%) (b) (2.49)(c) 0.00 7.00 13.63 6.79
Net assets, end of period
(in thousands) $143,079 $432,895 $572,659 $466,135 $359,465
Ratio of expenses to average net assets (%) 0.80(c) 1.53 1.74 1.79 1.68
Ratio of net investment income to average
net assets (%) 4.73(c) 4.81 4.88 5.16 5.60
Portfolio turnover (%) 47.72 47.72 42.01 66.18 54.69
</TABLE>
<TABLE>
<CAPTION>
For the period
September 9, 1985
(commencement
of operations) to
Year ended July 31 July 31
1990 1989 1988 1987 1986
Class B
<S> <C> <C> <C> <C> <C>
$ 14.79 $ 13.85 $ 13.77 $ 13.91 $ 12.57
.83 .85 .85 .84 .73(a)
(.06) .93 .11 (.10) 1.41
.77 1.78 .96 .74 2.14
(.83) (.84) (.85) (.84) (.80)
(.48) -- (.03) (.04) --
(1.31) (.84) (.88) (.88) (.80)
$ 14.25 $ 14.79 $ 13.85 $ 13.77 $ 13.91
5.49 13.31 7.24 5.31 17.33(c)
$309,050 $293,127 $268,004 $264,916 $195,386
1.63 1.61 1.58 1.61 1.42(a)(c)
5.81 6.01 6.20 5.83 5.26(a)(c)
86.29 201.21 197.29 85.49 125.36(c)
</TABLE>
(a) Reflects a waiver of a portion of the distribution plan payments during
the period. As a result of this waiver,
expenses of the fund at July 31, 1986 reflect a reduction of $0.01 per share.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Not annualized.
<PAGE>
Notes to financial statements
July 31, 1994
Note 1
Significant accounting policies
The fund is a series of Putnam Tax- Free Income Trust (the "Trust") which is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The fund pursues its
objective of seeking high current income exempt from federal income tax by
investing in tax exempt securities that are covered by insurance guaranteeing
the timely payment of principal and interest, are rated AAA or Aaa, or are
backed by the U.S. government.
The fund offers both class A and class B shares. The fund commenced its
public offering of class A shares on September 20, 1993. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares 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. Expenses of the fund are
borne pro-rata by the shareholders of both classes 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
policies are in conformity with generally accepted accounting principles.
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.
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 A futures contract is an agreement between two parties to buy and
sell a security at a set price on a future date. Upon entering into such a
contract, the fund is required to pledge to the broker an amount of cash or
securities equal to the minimum "initial margin" requirements of the
exchange. Pursuant to the contract, the fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin," and are
recorded by the fund as unrealized gains or losses. 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. The potential risk to the fund is that the change in
value of the underlying securities may not correspond to the change in value
of the futures contracts.
<PAGE>
D) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held or excise tax on
income and capital gains.
E) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gain distributions are recorded on
the ex-dividend date and paid annually, or as necessary to meet the
distribution requirements described above.
The amount and character of income and gains to be distributed are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences include treatment of losses
on wash sale transactions and realized and unrealized gain and losses on
futures contracts. Reclassifications are made to the fund's capital accounts
as necessary so that they reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For the
year ended July 31, 1994, no such reclassifications were required.
F) Amortization of bond premium and discount Any premium resulting from the
purchase of securities is amortized using the effective yield method for
bonds issued after September 27, 1985, and on a straight-line basis for bonds
issued prior thereto. The premium in excess of the call price, if any, is
amortized to the call date: thereafter, the remaining excess premium is
amortized to maturity. Discount on zero-coupon and stepped coupon bonds is
accreted according to the effective yield method.
G) Expenses of the Trust Expenses directly charged or attributable to the
fund will be paid from the assets of the fund. Generally, expenses of the
Trust will be allocated and charged to the assets of each fund on a basis
that the Trustees deem fair and equitable, which may be based on the relative
assets of each fund or the nature of the services performed and relative
applicability to each fund.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management Inc. ("Putnam Management"), the
Fund's Manager, a wholly- owned subsidiary of Putnam Investments, Inc., for
management and investment advisory services is paid quarterly based on the
average net assets of the fund for the quarter. Such fee is based on 0.6% of
the first $500 million of average net assets; 0.5% of the next $500 million;
0.45% of the next $500 million and 0.4% of any amount over $1.5 billion. Such
fees are subject to reduction, under current law, in any year to the extent
that expenses (exclusive of distribution fees, brokerage, interest and taxes)
of the fund exceed 2.5% of the first $30 million of average net assets, 2.0%
of the next $70 million and 1.5% of any amount over $100 million and by the
amount of certain brokerage commissions and fees (less expenses) received by
affiliates of the Manager of the fund's portfolio transactions.
The fund also reimburses the manager 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. For the year ended
July 31, 1994, the fund paid $15,951 for these services.
<PAGE>
Trustees of the Fund receive an annual Trustee's fee of $1,270, and an
additional fee for each Trustees" meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions are being provided to the fund 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.
Fees paid for these investor servicing and custodian fees functions for the
year ended July 31, 1994 amounted to $324,131. Investor servicing and
custodian fees reported in the Statement of operations for the year ended
July 31, 1994 have been reduced by credits allowed by PFTC.
The fund has adopted a distribution plan with respect to its class A shares
(the "Class A Plan") pursuant to rule 12b-1 under the Investment Company Act
of 1940. The purpose of the Class A Plan 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 class A shares. The
Trustees have approved payment by the fund to Putnam Mutual Funds Corp. at an
annual rate of up to 0.20% of the fund's average net assets attributable to
class A shares. For the year ended July 31, 1994, the fund paid Putnam Mutual
Funds Corp. distribution fees of $294,037 for class A shares.
During the year ended July 31, 1994, Putnam Mutual Funds Corp., acting as the
underwriter, received net commissions of $34,822 from the sale of class A
shares of the fund.
A deferred sales charge of up to 1% is assessed on certain redemption of
class A shares purchased as part of an investment of $1 million or more. For
the year ended July 31, 1994, Putnam Mutual Funds Corp., acting as the
underwriter, received no monies on class A redemptions.
The fund has adopted a separate distribution plan with respect to its class B
shares (the "Class B Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The purpose of the Class B Plan is to compensate Putnam
Mutual Funds Corp. for services provided and expenses incurred by it in
distributing class B shares. The Class B Plan provides for payments by the
fund to Putnam Mutual Funds Corp. at an annual rate of up to 0.85% of the
Fund's average net assets attributable to class B shares. For the year ended
July 31, 1994, the fund paid Putnam Mutual Funds Corp. distribution fees of
$3,910,073 for class B shares.
Putnam Mutual Funds Corp. also receives the proceeds of contingent deferred
sales charges levied on class B share redemptions within four years of
purchase. The charge is based on declining rates, which begins at 5% of the
net asset value of the redeemed shares. For the year ended July 31, 1994,
Putnam Mutual Funds Corp. received contingent deferred sales charges of
$795,020 from such redemptions.
As part of the custodian contract between the subcustodian bank and PFTC, the
subcustodian bank has a lien on the securities of the fund to the extent
permitted by the fund's investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At July 31, 1994, the payable to subcustodian bank represents the amount due
for cash advanced for the settlement of a security purchased.
Note 3
Purchases and sales of securities
During the year ended July 31, 1994, purchases and sales of investment
securities other than short-term municipal obligations aggregated
<PAGE>
$281,318,996 and $272,068,815, respectively. Purchases and sales of
short-term municipal obligations aggregated $87,260,000 and $79,260,000,
respectively. In determining the net gain or loss on securities sold, the
cost of securities has been determined on the identified cost basis.
The following is a summary of futures contracts activity during the year.
Sales of Futures Contracts
Aggregate
Number of Face
Contracts Value
Contracts open at beginning of year 210 $ 23,732,146
Contracts opened 2,669 283,007,852
2,879 306,739,998
Contracts closed (2,579) (276,046,248)
Open at end of year 300 $ 30,693,750
Note 4
Capital shares
At July 31, 1994, there was an unlimited number of shares of beneficial
interest authorized divided into class A and class B shares. Transactions in
capital shares were as follows:
September 20, 1993 (commencement of operations) to July 31, 1994
Class A Shares Amount
Shares sold 10,582,170 $168,126,740
Shares issued in connection with
reinvestment of distributions 345,090 4,608,153
10,927,260 172,734,893
Shares repurchased (1,176,150) (17,969,942)
Net increase 9,751,110 $154,764,951
<TABLE>
<CAPTION>
Year ended July 31
1994 1993
Class B Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 4,899,248 $ 75,602,157 8,533,119 $129,627,042
Shares issued in
connection with
reinvestment of
distributions 1,046,236 16,046,023 1,319,439 19,989,290
5,945,484 91,648,180 9,852,558 149,616,332
Shares repurchased (13,406,532) (210,268,621) (3,133,007) (47,670,182)
Net increase
(decrease) (7,461,048) $(118,620,441) 6,719,551 $101,946,150
</TABLE>
<PAGE>
Note 5
Reclassification of Capital Accounts
Effective August 1, 1993, Putnam Tax- Free Insured Fund has adopted the
provisions of Statement of Position 93-2 "Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of
Capital Distributions by Investment Companies (SOP)." The purpose of this SOP
is to report the accumulated net investment income (loss) and accumulated net
realized gain (loss) accounts in such a manner as to approximate amounts
available for future distributions (or to offset future realized capital
gains) and to achieve uniformity in the presentation of distri- butions by
investment companies.
As a result of the SOP, the fund has reclassified $489,000 increasing
distributions in excess of net investment income, $1,012,030 reducing
accumulated net realized loss and $523,030 decreasing additional paid-in
capital.
These adjustments represent the cumulative amounts necessary to report these
balances through July 31, 1993, the close of the fund's last fiscal year-
end, for financial reporting and tax purposes.
These reclassifications which have no effect on the total net asset value of
the fund are primarily attributed to differences in computation of
distributable income and capital gains under federal income tax rules and
regulations versus generally accepted accounting principles.
Federal Tax Information
The Fund has designated all income dividends paid during the fiscal year as
exempt-interest dividends. Thus, 100% of the net investment income
distributions are exempt from federal income tax.
During the fiscal year the fund paid long-term capital gains distribution of
$0.085 and $0.085 per share and short-term capital gains of $0.013 and $0.013
on December 2, 1993 on class A and class B shares, respectively.
The Form 1099 you will receive in January 1995 will tell you the tax status
of any capital gain distributions paid to your account in calendar 1994.
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Donald S. Perkins
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
James E. Erickson
Vice President
Richard P. Wyke
Vice President
and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free Insured
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.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
438/035-13744
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
