<PAGE>
Putnam
Tax-Free
High Yield
Fund
ANNUAL REPORT
July 31, 1994
[LOGO APPEARS HERE]
BOSTON * LONDON * TOKYO
<PAGE>
PERFORMANCE HIGHLIGHTS
Morningstar awarded Putnam Tax-Free High Yield Fund four stars out of a
possible five stars as of July 31, 1994.*
Performance should always be considered in light of a fund's investment
strategy. Putnam Tax-Free High Yield Fund is designed for investors seeking
high current income free from federal income tax through higher-yielding
lower-rated tax-exempt securities.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A Class B
Total return NAV POP NAV CDSC
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 months ended 7/31/94
(change in value during
period plus reinvested
distributions) -- -- 1.36% (3.38%)
---------------------------------------------------------------------------------------------
Life of class A (9/20/93) (0.99%) (5.67%) -- --
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Class A Class B
Share value NAV POP NAV
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7/31/93 -- -- $15.01
---------------------------------------------------------------------------------------------
9/20/93 (inception of
class A shares) $15.34 $16.10 --
---------------------------------------------------------------------------------------------
7/31/94 14.24 14.95 14.24
---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Capital gains
In excess Short- In excess of
Distributions/1/ No. Income of income term short-term Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 11 $0.83 $0.02 $0.05 $0.05 $0.95
--------------------------------------------------------------------------------------------
Class B 13 $0.85 $0.03 $0.05 $0.05 $0.98
--------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Current return NAV POP NAV
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(end of period)
Current dividend rate/2/ 6.65% 6.33% 5.99%
--------------------------------------------------------------------------------------------
Taxable equivalent/3/ 11.01 10.48 9.92
--------------------------------------------------------------------------------------------
Current 30-day SEC yield/4/ 6.40 6.10 5.77
--------------------------------------------------------------------------------------------
Taxable equivalent/3/ 10.60 10.10 9.55
--------------------------------------------------------------------------------------------
</TABLE>
Performance data represent past results. 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/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. /2/Income portion of most recent
distribution, annualized and divided by NAV or POP at end of period.
/3/Assumes maximum 39.6% federal 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.
* Morningstar, an independent rating agency, rates a fund in relation to
other funds with similar investment objectives based on risk-adjusted
medium- and long-term total return, as applicable, adjusted for sales
charges. A four-star rating puts the fund in the top 32.5%. Ratings are
updated monthly. For the 3- and 5-year periods, the fund received 5 and 4
stars, respectively. Past performance is not indicative of future results.
2
<PAGE>
From the Chairman
[PHOTO APPEARS HERE]
(c)Karsh, Ottawa
Dear Shareholder:
The municipal bond market, like most other fixed-income markets, continued to
enjoy a sustained advance as Putnam Tax-Free High Yield Fund began the fiscal
year that ended on July 31, 1994, only to see much of the gain evaporate
during the second half in the wake of a rise in interest rates.
Although rising rates can mean ongoing market volatility in the short run, we
believe 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 are growing tighter as, with higher rates,
municipalities curtail refinancing activity and become more cautious in
floating new debt. Thus, although there can never be any assurance, the
expectation of tighter supply and sustained demand bode well for your fund's
prospects as it enters fiscal 1995.
Respectfully yours,
George Putnam
Chairman of the Trustees
September 14, 1994
3
<PAGE>
REPORT FROM THE FUND MANAGER
TRIET NGUYEN
The 12 months ended July 31, 1994, were marked by both a strong economy
and, more recently, rising interest rates. Although both trends represented
disheartening news for most fixed-income investments, they proved to be
less of a concern for investors in Putnam Tax-Free High Yield Fund during
the period encompassing its most recent fiscal year.
All municipal bond funds and most fixed-income investments were affected to
some degree when the Federal Reserve Board raised short-term interest rates
in the spring. However, your fund's portfolio composition and focus on
higher-yielding lower-rated bonds enabled it to outperform most higher-
quality municipal bond funds.
A HIGH-YIELD, TAX-FREE PLAY ON THE RECOVERY
High-yield municipal bonds tend to perform well on a relative basis when
compared to investment-grade bonds -- which have higher credit ratings --
during periods of economic strength. That's because they offer higher
coupon rates, or interest rates, in order to compensate investors for the
increased risk inherent in a lower-rated investment. Traditionally, the
reason for including these bonds in a fund's portfolio is to increase
current income. However, as the economy has strengthened, many of your
fund's lower-rated bonds have experienced credit upgrades. As a result,
some of these bonds may actually have appreciated in value at a time when
most other income investments have declined.
Furthermore, because lower ratings can make an investment less readily
marketable, high-yield bonds were not as seriously affected by this
spring's sell-off in the municipal bond market. When many investors,
anticipating further rate increases, liquidated large holdings of
investment-grade tax-free bonds, these higher-quality bonds declined in
value more than higher-yielding bonds.
4
<PAGE>
The outcome: Your fund's high-yield bond holdings helped protect the
portfolio's value when compared with funds having investment-grade
holdings. Put another way, focusing on what is typically regarded as a
higher-risk investment actually helped reduce volatility.
Putnam's in-depth credit research is essential to the fund's success in
maximizing benefits from its high-yield bond investments. It is no
coincidence that the credit ratings of many of the bonds we purchased were
later raised; while no assurances can be made, we believe our research
allows us to identify bonds with the greatest potential for upgrades --
which often translate into price increases.
SUPPLY SHORTAGES COULD FUEL A GROWING DEMAND
The past two years have brought about an oversupply of tax-exempt bonds as
municipalities have taken advantage of some of the lowest interest rates in
years to refinance older, higher-yielding debt. We expect this trend to
change dramatically over the next few months.
For a while now, we have predicted a major increase in demand for tax-free
investments. While this demand has not yet materialized, we believe this is
because recent market volatility and resulting
[BAR GRAPH APPEARS HERE]
* Represent 44.9% of portfolio holdings as a percentage of net assets as of
7/31/94. Holdings will vary over time.
5
<PAGE>
uncertainties have kept investors from focusing on fixed-income
investments.
Even with no increase in demand, a decline in supply of the scope we expect
could help increase the value of existing bonds. And if we should
experience a rebirth of interest in tax-free investments -- especially by
investors in the higher income tax brackets -- the benefits to the fund
could be even greater. Of course, there can be no assurance that our
prediction will come to pass. Bond prices are affected by many other
factors, not the least of which are changes in interest rates. A rise in
interest rates, for example, could upset a favorable supply/demand
balance.
A SHIFT TO CYCLICAL, COMMODITY-RELATED SECTORS
Going into fiscal 1994, we deployed a significant portion of the fund's
assets in "cyclical" sectors of the municipal bond marketplace; these
include bonds issued by municipalities, but whose principal and interest
payments are secured by private companies. Generally, these are companies
whose fortunes are tied directly to the health of the economy, companies
that tend to perform particularly well during economic recoveries. At these
times, consumers begin to spend more money and these cyclical companies
profit by increasing their output to meet the rising demand for their
products.
During the first half of fiscal '94, the so-called early cyclicals, such as
transportation and the "green" or environmental services sectors, performed
well. We believe current holdings in environmental services -- a sector
that had been depressed, largely by the recession -- could strengthen along
with the economy.
Currently, we are pursuing a sector strategy more typical of a corporate
bond fund than a municipal bond fund. Almost 25% of the portfolio, for
example, is now invested in industrial revenue bonds issued on behalf of
companies from sectors such as steel, paper, and chemicals.
Taking gains realized from the transportation sector, specifically the
airlines industry, we have shifted the fund's holdings to more commodity-
related sectors. Geographically, we have moved some of the fund's holdings
out of New York and Massachusetts and into California, which we feel is
poised to make an economic comeback.
6
<PAGE>
TOP 10 HOLDINGS (7/31/94)
Denver, Colorado, City and County Airport
Revenue bonds
Denver, Colorado, City and County Airport
Special facilities revenue bonds (United Airlines project)
Massachusetts Municipal Wholesale Electric Co.
Power supply system revenue bonds
Massachusetts State Industrial Finance Agency
Resource Recovery/Southeastern Massachusetts
Clark County, Nevada, Industrial Development
Certificate of participation (Nevada Power Co. project)
Detroit, Michigan, Finance Authority
Tax increment revenue bonds
Hernando County, Florida, Industrial Development
Revenue bonds (Florida Crushed Stone Co.)
Southeast Texas Housing Finance Corp.
Multi-family housing revenue bonds
San Joaquin Hills, California, Transportation Corridor Agency
Toll road revenue bonds
California State Public Works Board
Lease revenue bonds
These holdings represent 19.1% of the fund's net assets. Portfolio holdings
are subject to change.
OUTLOOK: STRENGTH DESPITE MORE VOLATILITY
In general, we are taking a more defensive stand on health care-related
issues. We have reduced the fund's holdings in hospitals, which we believe
may not benefit from health care reform. We are looking with greater
interest at such areas as health maintenance organizations, with their
emphasis on managed care and the inherent cost efficiencies it can offer.
In our view, these could be among the beneficiaries of any health care
package eventually enacted.
As your fund enters fiscal 1995, we believe the municipal bond market will
continue to struggle with concern over inflation, interest rates, and a
slower pace of economic growth. If, as we expect, reduced supply and
increased demand help support municipal bond prices, your fund may well
prove to be a good vehicle to weather the storm.
7
<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 in 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
NAV POP NAV CDSC Bond Index CPI
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year -- -- 1.36% (3.38%) 1.87% 2.77%
- ------------------------------------------------------------------------------------------------------
5 years -- -- 42.03 40.04 46.63 19.29
Annual average -- -- 7.27 6.97 7.96 3.59
- ------------------------------------------------------------------------------------------------------
Life of class A
(since 9/20/93) (0.99%) (5.67%) -- -- (1.33) 2.27
- ------------------------------------------------------------------------------------------------------
Life of class B
(since 9/9/85) -- -- 117.44 117.44 126.22 37.41
Annual average -- -- 9.13 9.13 9.62 3.64
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 6/30/94
(most recent calendar quarter)
Class A Class B
NAV POP NAV CDSC
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year -- -- 0.18% (4.50%)
- ------------------------------------------------------------------------------------------------------
5 years 41.02 39.05
Annual average -- -- 7.12 6.82
- ------------------------------------------------------------------------------------------------------
Life of class A
(since 9/20/93) (2.52%) (7.12%) -- --
- ------------------------------------------------------------------------------------------------------
Life of class B
(since 9/9/85) -- -- 114.22 114.22
Annual average -- -- 9.03 9.03
- ------------------------------------------------------------------------------------------------------
</TABLE>
The fund began investment operations on 9/9/85, offering shares now known
as class B. On 9/20/93, the fund began offering class A shares. Performance
of share classes 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.
8
<PAGE>
[GRAPH APPEARS HERE]
Past performance is no assurance of future results. A $10,000 investment in
the fund's class A shares at inception, 9/20/93, would have been valued at
$9,901 at NAV and $9,433 at POP on 7/31/94.
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.
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in the
fund, and may pose different risks than the fund.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
9
<PAGE>
THE PUTNAM FUND SELECTOR /TM/
The Putnam Fund Selector shows the many opportunities for investors within
every investment strategy. All investors should first accumulate a base of
conservative, cash-equivalent investments. Then, with the help of your
investment advisor, diversify your portfolio by investing in the Putnam
Family of Funds.
PUTNAM
GROWTH FUNDS
------------
PUTNAM GROWTH
AND INCOME FUNDS
RISK/REWARD -------------------------
PUTNAM INCOME OR TAX-FREE
INCOME FUNDS
-----------------------------
MOST CONSERVATIVE INVESTMENTS
--------------------------------------
10
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
Investors Fund
Natural Resources Fund*
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
PUTNAM GROWTH
AND INCOME FUNDS
Convertible Income-Growth Trust
Dividend Growth Fund
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Managed Income Trust
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Balanced Government Fund
Corporate Asset Trust
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE INCOME FUNDS
Intermediate Tax Exempt Fund
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds/+/
Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Ohio, and Pennsylvania
LIFESTAGE/SM/ FUNDS
Putnam Asset Allocation Funds -- three
investment portfolios that spread your money
across a variety of stocks, bonds, and money
market investments to help maximize your
return and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE INVESTMENTS/++/
Putnam money market funds:
Money Market Fund /(S)/
California Tax Exempt Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts**
* Formerly Putnam Energy-Resources Trust.
/+/ Not available in all states.
/++/ Relative to above.
/(S)/ Formerly Putnam Daily Dividend Trust.
** Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
Please call your financial advisor or Putnam to obtain a prospectus
for any Putnam fund. It contains more complete information, including
charges and expenses. Read it carefully before you invest or send money.
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended July 31, 1994
TO THE TRUSTEES AND SHAREHOLDERS OF
PUTNAM TAX-FREE HIGH YIELD 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 Putnam Tax-Free High Yield 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 16, 1994
12
<PAGE>
Portfolio of investments owned
July 31, 1994
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES(98.7%)(a)
PRINCIPAL AMOUNT RATINGS(b) VALUE
Alabama(0.5%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$5,000,000 Anniston, Indl. Dev. Rev.
Bonds (Hoover Group Inc. Project),
8 1/2s, 9/1/10 B/P $ 4,993,750
5,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. Tax
Antic. Rev. Bonds, 7 7/8s, 5/1/19 BB/P 5,081,250
----------
10,075,000
Alaska(0.4%)
- ----------------------------------------------------------------------------------------------
Valdez, Marine Term. Rev. Bonds
5,050,000 (Amerada Hess Pipeline Corp.), 6.1s, 2/1/24 BB/P 4,696,500
3,000,000 (BP Pipelines Inc.), Ser. A, 5.85s, 8/1/25 AA 2,711,250
----------
7,407,750
Arizona(1.1%)
- ----------------------------------------------------------------------------------------------
10,500,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(St. Luke's Hosp. Syst.),
Ser. A, 10 1/8s, 11/1/15 Ba 11,051,250
4,000,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Christian Care Retirement Apts.),
Ser. A, 10 1/4s, 1/1/18 B/P 4,230,000
Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.)
1,875,000 Ser. A, 8 1/8s, 12/1/22 BB/P 1,980,469
3,625,000 Ser. B, 8 1/8s, 12/1/22 BB/P 3,828,906
----------
21,090,625
Arkansas(0.7%)
- ----------------------------------------------------------------------------------------------
12,890,000 Pope Cnty., Poll. Control Rev. Bonds
(AR Pwr. & Lt. Co. Project), 11s, 12/1/15 Baa 14,114,550
California(18.0%)
- ----------------------------------------------------------------------------------------------
6,500,000 Alameda Cnty., Certif. of Participation
(COP)(Santa Rita Jail Project),
Municipal Bond Insurance Assn.
(MBIA), 5s, 12/1/15 AAA 5,573,750
3,500,000 Berkeley, Hlth. Fac. Rev. Bonds
(Alta Bates Med. Ctr.), Ser. A, 6.55s, 12/1/22 Baa 3,338,125
3,000,000 Brea, Redev. Agcy. Tax Alloc. Rev. Bonds
(Redev. Project), Ser. AB, MBIA, 5 3/4s, 8/1/23 AAA 2,812,500
14,795,000 CA Hlth. Fac. Auth. Rev. Bonds
(Valley Presbyterian Hosp. Project),
Ser. A, 9s, 5/1/12 B 14,979,938
155,000 CA Hlth. Fac. Fin. Auth. Variable Rate Demand
Notes (VRDN) (St. Joseph Hlth. Syst.),
Ser. A 2.65s, 7/1/13 VMIG1 155,000
CA State General Obligation (G.O.) Bonds
15,000,000 Financial Security Assurance, Inc. (FSA),
5 1/2s, 3/1/20 AAA 13,537,500
2,300,000 MBIA, 5 1/2s, 4/1/10 AAA 2,190,750
10,000,000 MBIA, 5 1/2s, 4/1/09 AAA 9,587,500
7,000,000 FSA 4 3/4s, 9/1/18 AAA 5,652,500
15,000,000 FSA 4 3/4s, 9/1/13 AAA 12,637,500
CA State Pub. Works Board Lease Rev. Bonds
5,000,000 (U. of CA Projects), Ser. A, 6.6s, 12/1/22 AAA 5,531,250
8,500,000 (Dept. of Corrections-CA State Prison),
Ser. B, MBIA, 5 3/8s, 12/1/19 AAA 7,596,875
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
California(continued)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CA State Pub. Works Board Lease Rev. Bonds
$13,850,000 (Dept. of Corrections-State Prisons), Ser. A,
American Municipal Bond Assurance Corp.
(AMBAC), 5s, 12/1/19 AAA $11,651,313
20,000,000 CA State Rev. Antic. Wts. (RAW) Notes,
Ser. C, 5 3/4s, 4/25/96 MIG1 20,337,500
Carson, Redev. Agcy. Rev. Bonds
(Redev. Project Area 2)
2,000,000 6s, 10/1/13 Baa 1,837,500
3,000,000 5 7/8s, 10/1/09 Baa 2,763,750
Central Valley, Fin. Auth. Rev. Bonds
(Carson Ice-Cogeneration Project),
18,400,000 6.2s, 7/1/20 BBB 16,997,000
4,000,000 6.1s, 7/1/13 BBB 3,755,000
3,500,000 Cerritos, Pub. Fin. Auth. Rev. Bonds
(Los Coyotes Redev. Project),
Ser. A, AMBAC, 5 3/4s, 11/1/22 AAA 3,298,750
9,000,000 Concord, Redev. Agcy. Tax Alloc. Rev.
Bonds (Central Concord Redev. Project),
Ser. SR, AMBAC, 5 1/4s, 7/1/19 AAA 7,942,500
6,000,000 Corona, COP (Vista Hosp. Syst.),
Ser. B, 9 1/2s, 7/1/20 BB/P 6,307,500
10,000,000 La Habra, COP (Friendly Hills Hlth. Care
Foundation), Ser. A, 7.15s, 7/1/23 BB/P 9,950,000
5,000,000 Los Angeles Cnty., Metro. Trans. Auth.
Sales Tax Rev. Bonds, Ser. B, AMBAC,
4 3/4s, 7/1/18 AAA 4,081,250
10,720,000 Los Angeles Cnty., Pub. Works Fin. Auth.
Lease Rev. Bonds (Multi-Cap. Fac. Project IV),
MBIA, 4 3/4s, 12/1/10 AAA 9,259,400
4,500,000 Los Angeles Cnty., Sanitation Dist. Fin. Auth.
Rev. Bonds (Capital Project),
Ser. A, 5s, 10/1/23 AA 3,723,750
4,500,000 Los Angeles, Dept. of Wtr. & Pwr. Elec. Plant
Rev. Bonds, 4 3/4s, 11/15/19 AA 3,583,125
Los Angeles, Regl. Arpt. Impt. Corp.
Lease Rev. Bonds
4,870,000 (United Air Lines, Inc.-Los Angeles Intl.),
6 7/8s, 11/15/12 Baa 4,699,550
8,500,000 (Western Air Lines, Inc.-Delta Air Lines, Inc.),
11 1/4s, 11/1/25 (c) Ba 9,350,000
5,000,000 Los Angeles, Wastewater Syst. Residual Interest
Bonds (RIBS) Financial Guaranty Insurance
Co. (FGIC),
7.196s, 11/1/06 (acquired 11/08/93, cost
$5,417,200)(d) AAA 4,775,000
Los Angeles, Wastewater Syst. Rev. Bonds,
FGIC Ser. D
5,000,000 4.7s, 11/1/19 AAA 4,031,250
19,500,000 4.7s, 11/1/17 AAA 15,868,125
4,750,000 Northern CA Pwr. Agcy. Pub. Pwr. Rev.
Bonds (Geothermal Project No. 3),
Ser. A, 5.8s, 7/1/09 A 4,595,625
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
California(continued)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 4,500,000 Ontario, Redev. Fin. Auth. Rev. Bonds
(Ontario Redev. Project No. 1),
MBIA, 5 1/2s, 8/1/18 AAA $ 4,140,000
Redondo Beach, Redev. Agcy. Multi-Fam.
Hsg. Rev. Bonds (Heritage Point Project)
3,130,000 Ser. B, 8 1/2s, 9/1/23 BB/P 3,173,038
5,100,000 Ser. A, 6 1/2s, 9/1/23 BB/P 5,119,125
5,500,000 Sacramento, Muni. Util. Dist. Elec. Rev. Bonds,
Ser. E, MBIA, 5 3/4s, 5/15/22 (e) AAA 5,163,125
7,000,000 San Bernardino Cnty., COP, Medical Ctr. Fin.
Project, 5s, 8/1/26 Baa 5,311,250
2,000,000 San Bernardino, Hosp. Rev. Bonds
(San Bernardino Cmnty. Hosp.),
7 7/8s, 12/1/08 Ba 2,027,500
10,000,000 San Diego, Regl. Bldg. Auth. Lease
RIBS, MBIA, 3.81s, 5/1/23 AAA 9,412,500
San Joaquin Hills, Trans. Corridor Agcy. Toll
Rd. Rev. Bonds
13,495,000 5s, 1/1/33 BB/P 9,699,531
7,895,000 zero %, 1/1/10 BBB 4,628,444
12,295,000 zero %, 1/1/08 BBB 7,207,944
6,000,000 zero %, 1/1/06 BBB 3,547,500
8,500,000 San Jose, Redev. Agcy. Tax Alloc. Rev. Bonds
(Merged Area Redev. Project),
MBIA, 4 3/4s, 8/1/24 AAA 6,725,625
7,665,000 San Mateo Cnty., Jet Pwr. Fin. Auth. Lease
Rev. Bonds (San Mateo Cnty. Hlth. Care Ctr.),
Ser. A, FSA, 5 3/4s, 7/15/22 AAA 7,109,288
5,345,000 Santa Ana, Fin. Auth. Lease Rev. Bonds
(Police Admin. & Hldg. Fac.),
Ser. A, MBIA, 6 1/4s, 7/1/16 AAA 5,465,263
5,000,000 Santa Clara, COP, Ser. A, MBIA,
4 3/4s, 2/1/14 AAA 4,181,250
3,000,000 Southern CA Pub. Pwr. Auth. RIBS
(Transmission Project), 8.925s, 7/1/12 AA 2,947,500
2,715,000 U. of CA Rev. Bonds (Multiple Purpose
Projects), Ser. B, MBIA, 4 3/4s, 9/1/21 AAA 2,178,788
8,500,000 Vallejo, COP (Marine World Foundation),
8.1s, 2/1/21 BBB/P 8,861,250
10,000,000 Valley Hlth. Syst. COP (Refunding Project),
6 7/8s, 5/15/23 BB/P 9,450,000
-----------
<CAPTION> 338,749,997
Colorado(6.1%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
42,860,000 CO Hlth. Auth. Retirement Fac. Rev.
Bonds (Liberty Heights),
Ser. B, zero %, 7/15/24 AAA 4,714,600
Denver, City & Cnty. Arpt. Rev. Bonds
34,400,000 Ser. A, 8 3/4s, 11/15/23 Baa 36,636,000
8,000,000 Ser. A, 8 1/2s, 11/15/23 Baa 8,360,000
15,140,000 Ser. D, 7s, 11/15/25 Baa 14,061,275
4,235,000 Ser. C, 6 3/4s, 11/15/13 Baa 3,912,081
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Colorado(continued)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$50,865,000 Denver, City & Cnty. Arpt. Special Fac. Rev.
Bonds (United Air Lines, Inc. Project),
Ser. A, 6 7/8s, 10/1/32 Baa $ 46,986,544
-----------
114,670,500
<CAPTION>
Connecticut(2.0%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,720,000 CT State Dev. Auth. 1st Mtge. Rev. Bonds
(Gladeview Hlth. Care Project),
9 3/4s, 12/15/16 BB/P 1,945,750
6,495,000 (East Hill Woods), 8 3/4s, 7/1/19 B/P 6,706,070
CT State Dev. Auth. Hlth. Care Rev. Bonds
6,500,000 (Alzheimer Resource Ctr.),
10s, 8/15/21 BB/P 8,385,000
4,000,000 (AHF/Windsor Inc. Project),
9 1/2s, 1/1/22 B/P 4,165,000
2,000,000 (AHF/Windsor Inc. Project),
7 1/4s, 8/15/21 BB/P 2,002,500
4,625,000 (Alzheimers Resource Ctr.),
Ser. A, 7 1/8s, 8/15/14 BB/P 4,630,781
2,290,000 (AHF/Windsor Inc. Project),
7s, 8/15/09 BB/P 2,292,863
CT State Dev. Auth. Rev. Bonds
125,000 8 3/4s, 7/1/19, (7/1/99, Mandatory Sinking
Fund Redemption (MSFR)) B/P 145,469
105,000 8 3/4s, 7/1/19, (7/1/98, MSFR) B/P 119,634
100,000 8 3/4s, 7/1/19, (7/1/97, MSFR) B/P 111,313
90,000 8 3/4s, 7/1/19, (7/1/96, MSFR) B/P 97,144
85,000 8 3/4s, 7/1/19, (7/1/95, MSFR) B/P 88,506
2,825,000 CT State Dev. Auth. Solid Waste & Elec.
Rev. Bonds (Ogden Martin Syst. Bristol, Inc.),
10s, 7/1/14 BBB 3,026,281
5,000,000 CT State Hlth. & Edl. Fac. Auth. RIBS, (Yale U.),
8.323s, 6/10/30 AAA 4,737,500
-----------
38,453,811
<CAPTION>
District of Columbia(0.4%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
District of Columbia, Natl. Pub. Radio
Rev. Bonds
4,400,000 7.7s, 1/1/23 BB/P 4,680,500
2,500,000 7 5/8s, 1/1/18 BB/P 2,643,750
-----------
7,324,250
<CAPTION>
Florida(4.3%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9,260,000 Brevard Cnty., Hlth. Fac. Auth. Rev. Bonds
(Courtenay Springs Village), 7 3/4s, 11/15/24 BB/P 9,051,650
25,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 B/P 26,281,250
9,300,000 Hillsborough Cnty., Aviation Auth. Special
Purpose Fac. Rev. Bonds (US Air, Inc. Project),
8.6s, 1/15/22 B 9,160,500
1,130,000 Jacksonville, Hlth. Fac. Auth. Rev. Bonds
(Mental Hlth. Ctr.), 9 1/8s, 10/15/19 B/P 1,169,550
3,280,000 Levy Cnty., Indl. Dev. Rev. Bonds
(Natl. Med. Assn. Inc. Project), 10s, 7/1/19 B/P 3,157,000
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Florida(continued)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Miami, Hlth. Fac. Auth. Rev. Bonds
(Cedars Med. Ctr.) Ser. A, Prerefunded
$7,750,000 8 3/8s, 10/1/17 AAA/P $ 8,718,750
2,000,000 8.3s, 10/1/07 AAA/P 2,245,000
Orange Cnty., Hlth. Fac. Auth. 1st. Mtge.
Rev. Bonds
8,000,000 (Princeton Hosp.), 9s, 7/1/21 B/P 8,520,000
2,000,000 Orange Cnty., Hlth. Fac. Auth. RIBS
Ser. 91-C, MBIA, 9.425s, 10/29/21 AAA 2,025,000
7,000,000 Palm Beach Cnty., Solid Waste Indl. Dev.
Rev. Bonds (Okeelanta Pwr. & Lt. Project),
Ser. A, 6.7s, 2/15/15 BB/P 6,807,500
3,485,000 Palm Beach Cnty., Student Hsg. Rev. Bonds
(Palm Beach Cmnty. College),
Ser. A, 8 1/2s, 3/1/23 BB/P 3,393,519
-----------
80,529,719
<CAPTION>
Georgia(5.8%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6,000,000 Atlanta, Special Fac. Rev. Bonds
(Delta Air Lines, Inc. Project),
Ser. B, 7.9s, 12/1/18 Ba 6,120,000
De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds
(Briarcliff Park Apts. Project),
8,000,000 Ser. B, 10s, 4/1/17 BB/P 8,280,000
5,900,000 Ser. A, 7 1/2s, 4/1/17 A/P 6,003,250
9,500,000 Forsyth Cnty., Dev. Auth. Indl. Rev. Bonds
(Hoover Group, Inc. Project), 8 1/2s, 12/1/05 Baa 9,535,625
6,480,000 Fulton Cnty., Res. Elderly Care Fac. Auth.
Rev. Bonds (Lenbrook Sq. Foundation Inc.
Project), 9 3/4s, 1/1/17 B/P 6,706,800
3,900,000 GA Med. Ctr. Hosp. Auth. Rev. Antic. Variable
COP Inverse Rate Floater (I/F)
(Columbus Regl. Hlth. Care Syst.),
Ser. B, MBIA 9.358s, 8/1/10 AAA 4,119,375
GA Muni. Elec. Auth. Pwr. Rev. Bonds,
Ser. EE, AMBAC,
5,000,000 7 1/4s, 1/1/24 AAA 5,806,250
8,370,000 5 1/2s, 1/1/26 AAA 7,679,475
22,000,000 GA Muni. Elec. Auth. Pwr., COP,
Ser. Z, MBIA, 5 1/2s, 1/1/20 AAA 20,322,500
8,500,000 Monroe Cnty., Dev. Auth. Poll. Control
Rev. Bonds (GA Pwr. Co.-Plant Scherer
Project), 10 1/2s, 9/1/15 A 9,180,000
55,260,000 Richmond Cnty., Dev. Auth. Rev. Bonds,
Ser. C, zero %, 12/1/21 Aaa 7,667,325
Rockdale Cnty., Dev. Auth. Solid Waste
Disp. Rev. Bonds (Visay Paper Inc. Project)
6,875,000 7 1/2s, 1/1/26 B/P 6,857,813
12,000,000 7.4s, 1/1/16 B/P 11,970,000
-----------
110,248,413
<CAPTION>
Illinois(1.7%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2,245,000 Chicago, O'Hare Intl. Arpt. Special Fac.
Rev. Bonds (United Air Lines, Inc.),
Ser. 84A, 8.85s, 5/1/18 Baa 2,475,113
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Illinois(continued)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$5,000,000 IL Dev. Fin. Auth. Retirement Hsg. Rev.
Bonds (Regency Park-Lincolnwood),
Ser. A, 10 1/4s, 4/15/19 (f) B/P $ 3,500,000
IL Dev. Fin. Auth. Rev. Bonds (Cmnty.
Rehab. Providers Fac.)
1,450,000 8 3/4s, 7/1/11 BBB/P 1,488,063
2,975,000 8 1/4s, 8/1/12 BBB/P 2,948,969
3,065,000 Ser. A, 7 1/2s, 3/1/14 BB/P 2,919,413
1,105,000 Ser. A, 7 1/4s, 3/1/04 BB/P 1,077,375
IL Hlth. Fac. Auth. Rev. Bonds
4,000,000 (Grant Hosp. of Chicago), 7 1/2s, 6/1/13 BB 4,345,000
5,000,000 (Cmnty. Provider Pooled Loan Program),
Ser. A, 8s, 8/15/17 BB/P 4,756,250
1,270,000 Kane Cnty., 1st Mtge. Rev. Bonds
(Mercy Hsg. Project), 9 3/4s, 10/1/19 BB/P 1,284,288
6,050,000 Lansing, Tax Increment Rev. Bonds
(Landing Redev. Project), Prerefunded 10s, 4/1/07 AAA/P 6,586,938
----------
31,381,409
<CAPTION>
Indiana(1.5%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
9,455,000 Burns Harbor, Indl. Solid Waste Disp. Fac.
Rev. Bonds (Bethlehem Steel Corp. Project),
8s, 4/1/24 B/P 9,892,294
7,000,000 East Chicago, Poll. Control Rev. Bonds
(Inland Steel Co. Project No. 11),
7 1/8s, 6/1/07 Ba 7,105,000
7,470,080 Hammond, Indl. Port Auth. COP,
9.65s, 6/1/14 BB/P 7,768,883
2,325,000 Mishawaka, Indl. Rev. Bonds (Stone
Container Corp. Project), 9 1/4s, 2/1/97 B/P 2,365,688
1,780,394 Westfield, Econ. Dev. Rev. Bonds
(Westfield Village Hlth. Care Ctr.), Federal
Housing Authority (FHA) Insd., 12s, 5/15/14 BBB/P 2,043,002
----------
29,174,867
<CAPTION>
Iowa(0.6%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11,500,000 IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Mercy Hlth. Initiatives Project), 9.95s, 7/1/19 BB/P 11,500,000
215,000 Marion, 1st Mtge. Rev. Bonds (AHF Kentucky
Iowa, Inc. Project), 10 1/4s, 1/1/20 B/P 209,894
----------
11,709,894
<CAPTION>
Kentucky(0.9%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5,000,000 Jefferson Cnty., Hosp. I/F
(Alliant Hlth. Syst. Project), MBIA, 9.648s,
10/23/14 AAA 5,206,250
1,285,000 Lexington-Fayette Urban Cnty., Govt. 1st
Mtge. Rev. Bonds (AHF Kentucky Iowa, Inc.
Project), 10 1/4s, 1/1/20 B/P 1,338,006
3,795,000 Muhlenberg Cnty., Hosp. Rev. Bonds
(Muhlenberg Cmnty. Hosp. Project),
9 1/2s, 8/1/10 BB/P 4,160,269
2,015,000 Owensboro, Hosp. Rev. Bonds
(Children's Psychiatric Hosp.), 13s, 11/1/10 B/P 2,027,594
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Kentucky(continued)
- ----------------------------------------------------------------------------------------------------
<S> <C>
$ 5,000,000 Perry Cnty., Solid Waste Disp. Rev. Bonds
(TJ Intl. Project), 7s, 6/1/24 BB/P $ 5,006,250
----------
17,738,369
<CAPTION>
Louisiana(5.2%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beauregard Parish, Rev. Bonds
(Boise Cascade Corp. Project)
2,900,000 7 3/4s, 6/1/21 Baa 3,030,500
3,000,000 6 1/8s, 3/1/23 Baa 2,640,000
12,000,000 Beauregard Parish, Solid Waste Disp. Rev.
Bonds (Boise Cascade Corp. Project),
6.3s, 8/1/23 Baa 10,860,000
9,085,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 9,516,538
LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
2,441,361 (Emily Morten Foundation), 10 1/4s, 5/1/19 B/P 2,603,101
2,000,000 (St. James Place Project), 10s, 11/1/21 B/P 2,167,500
23,115,000 Lake Charles, Harbor & Term. Dist. Port
Fac. Rev. Bonds (Trunkline Co. Project),
7 3/4s, 8/15/22 Ba 24,617,475
Port of New Orleans, Indl. Dev. Rev.
Bonds (Continental Grain Co. Project)
3,700,000 Ser. A, 14 1/2s, 2/1/02 BB 4,259,625
4,500,000 14 1/2s, 1/1/02 BB 5,175,000
5,000,000 7 1/2s, 7/1/13 BB 5,025,000
5,000,000 St. Charles Parish, Poll. Control Rev. Bonds
(Union Carbide Project), 7.35s, 11/1/22 Baa 5,175,000
13,000,000 St. James Parish, Solid Waste Disp. Rev.
Bonds (Kaiser Aluminum Project),
7 3/4s, 8/1/22 B/P 13,552,500
9,500,000 West Feliciana Parish, Poll. Control Rev.
Bonds (Gulf States Util. Co. Project), Ser. D,
12s, 5/1/14 Baa 10,010,625
----------
98,632,864
<CAPTION>
Maine(0.8%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8,900,000 ME Fin. Auth. Solid Waste Disp. Rev. Bonds
(Boise Cascade Corp. Project), 7.9s, 6/1/15 BB 9,356,125
5,000,000 ME Fin. Auth. Solid Waste Recycling Fac.
Rev. Bonds (Great Northern Paper Project),
7 3/4s, 10/1/22 B/P 5,356,250
----------
14,712,375
<CAPTION>
Maryland(0.3%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2,500,000 Baltimore Cnty., Poll. Control Rev. Bonds
(Bethlehem Steel Corp. Project), Ser. A,
7.55s, 6/1/17 B/P 2,575,000
3,000,000 Denton, 1st Mtge. Rev. Bonds
(Wesleyan Hlth. Care Ctr. Project), 10 1/4s,
4/1/20 Baa 3,000,000
----------
5,575,000
<CAPTION>
Massachusetts(8.0%)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
4,435,000 Boston, Wtr. & Swr. Rev. Bonds,
Ser. A, 5 3/4s, 11/1/13 A 4,202,163
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Massachusetts(continued)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 2,300,000 MA Bay Trans. Auth. Rev. Bonds
Ser. B, 6.2s, 3/1/16 A $ 2,317,250
18,450,000 MA Bay Trans. Auth. RIBS
Ser. B, MBIA 7.62s, 3/1/22 (acquired
$15,000,000 on 12/14/93, cost
$15,075,000: $3,450,000 on 2/2/94,
cost $3,505,614)(d) A 14,898,375
MA Muni. Wholesale Elec. Co. Pwr. Supply
Syst. Rev. Bonds
12,605,000 Ser. A, Prerefunded, 8 3/4s, 7/1/18 AAA 14,227,894
7,470,000 Ser. B, Prerefunded, 6 3/4s, 7/1/17 AAA 8,282,363
4,000,000 Ser. A, AMBAC, 5.1s, 7/1/08 AAA 3,700,000
7,000,000 Ser. A, AMBAC, 5s, 7/1/10 AAA 6,212,500
5,650,000 Ser. B, MBIA, 4 3/4s, 7/1/11 AAA 4,816,625
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,485,000 (Summerfield Nursing Home),
Ser. A, 9 1/2s, 7/1/14 B/P 2,714,863
3,000,000 (Cooley Dickinson Hosp.), Ser. A, 7 1/8s,
11/15/18 BB/P 3,086,250
MA State Hlth. & Edl. Facs. Auth. RIBS
2,000,000 (Boston U.), Ser. L, MBIA, 10.004s, 10/1/31 AAA 2,100,000
5,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.97s, 8/15/21 AAA 5,318,750
5,600,000 (Beth Israel Hosp.), AMBAC, 9.181s, 7/1/25 AAA 5,194,000
2,500,000 MA State Indl. Fin. Agcy. 1st Mtge. Rev. Bonds
(Berkshire Retirement), 9 7/8s, 7/1/18 AAA/P 2,846,875
MA State Indl. Fin. Agcy. Resource Recvy.
Rev. Bonds (Southeastern MA Project)
4,000,000 Ser. B, 9 1/4s, 7/1/15 BB/P 4,490,000
27,350,000 Ser. A, 9s, 7/1/15 BB/P 30,563,625
MA State Indl. Fin. Agcy. Rev. Bonds
2,000,000 (Atlanticare Med. Ctr.) Ser. A, 10 1/8s, 11/1/14 BB/P 2,242,500
6,200,000 (Atlanticare Med. Ctr.) Ser. B, 10 1/8s, 11/1/14 BB/P 6,951,750
6,000,000 (Orchard Cove Inc.), 9s, 5/1/22 BB/P 6,780,000
2,285,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s,
7/1/11 Aaa 2,693,444
2,435,000 MA State Indl. Fin. Agcy. Tunnel Rev. Bonds
(MA Tpk.), 9s, 10/1/20 Baa/P 2,593,275
MA State Wtr. Resource Auth. Rev. Bonds
7,500,000 Ser. C, 5 1/4s, 12/1/15 A 6,609,375
4,000,000 Ser. B, 5s, 3/1/22 A 3,270,000
4,000,000 Worcester, Mtge. Rev. Bonds
(Briarwood Issue), 9 1/4s, 12/1/22 BB/P 4,140,000
------------
150,251,877
<CAPTION>
Michigan(6.7%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2,640,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig.
Rev. Bonds (Glacier Hills Inc. Project),
10 3/8s, 1/15/19 B/P 2,679,600
22,040,000 Detroit, Dev. Fin. Auth. Tax Increment Rev.
Bonds, Ser. A, 9 1/2s, 5/1/21 BBB/P 27,329,600
18,762,000 Detroit, Hosp. Fac. Fin. Auth. Rev. Bonds
(MI Hlth. Care Corp.), 10s, 12/1/20 B 19,700,100
8,875,000 Greater Detroit Resource Recvy. Auth. Rev.
Bonds, Ser. A, 9 1/4s, 12/13/08 BBB 9,462,969
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Michigan(continued)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5,790,000 Highland Park, Hosp. Fin. Auth. Fac. Rev.
Bonds (MI Hlth. Care Corp. Project), Ser. A,
9 7/8s, 12/1/19 B $ 6,007,125
8,000,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Detroit Macomb Hosp. Corp.), Ser. A,
7.4s, 6/1/13 B 7,800,000
12,000,000 MI State Strategic Fund Solid Waste Disp.
Rev. Bonds (Genesee Pwr. Station Project),
7 1/2s, 1/1/21 BB/P 11,850,000
MI State Strategic Fund Ltd. Oblig. Rev.
Bonds
3,800,000 (Mercy Svcs. for Aging Project), 9.4s, 5/15/20 BBB/P 4,085,000
12,500,000 (Blue Water Fiber Project), 8s, 1/1/12 B/P 12,375,000
945,000 (MI Hlth. Care Corp. Project), 9.1s, 12/1/14 B/P 942,638
9,500,000 Midland Cnty., Econ. Dev. Corp. Poll.
Control Rev. Bonds, Ser. B, 9 1/2s, 7/23/09 B/P 10,545,000
5,390,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Centerbury Hlth. Care), 8 3/8s, 7/1/23 BB/P 5,524,750
6,900,000 Wayne Charter Cnty., Special Arpt. Fac.
Rev. Bonds (Republic Airlines Inc. Project),
Ser. C, 10 3/8s, 12/1/15 B/P 7,365,750
------------
125,667,532
<CAPTION>
Minnesota(0.5%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3,000,000 Chaska, Indl. Dev. Rev. Bonds (Lifecore
Biomedical Inc. Project), 10 1/4s, 9/1/20 BB/P 3,457,500
Minneapolis, Cmnty. Dev. Agcy. Multi-Fam.
Hsg. Rev. Rental Bonds (Lindsay Bros. Project)
1,850,000 Ser. A, 9 1/2s, 12/1/07 B/P 1,896,250
1,200,000 Ser. B, 1 1/2s, 12/1/07 B/P 361,500
3,200,000 Shakopee, Multi-Fam. Rev. Bonds,
8 1/2s, 12/1/08 (f) B/P 3,292,000
------------
9,007,250
<CAPTION>
Mississippi(1.7%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Claiborne Cnty., Poll. Control Rev. Bonds
5,000,000 (Middle South Energy, Inc.)
Ser. C, 9 7/8s, 12/1/14 BBB/P 5,831,250
10,000,000 (Middle South Energy, Inc.)
Ser. A, 9 1/2s, 12/1/13 BBB/P 11,512,500
4,620,000 (Syst. Energy Resources Inc.), 9 1/2s, 4/1/16 Baa 5,035,800
1,100,000 Jackson Cnty. Poll. Control VRDN
(Chevron U.S.A. Inc. Project),
2.65s, 12/1/16 P-1 1,100,000
2,250,000 Lee Cnty., Indl. Rev. Bonds (Great Southern
Box Co. Inc. Project), 9.55s, 5/1/97 B/P 2,300,625
4,000,000 MS Hosp. Equip. & Fac. Auth. Rev.
Bonds (MS Methodist Hosp & Rehab.),
Ser. 1, 9 3/8s, 5/1/12 BB/P 4,705,000
5,000,000 MS Hsg. Fin. Corp. Single-Fam. Mtge. Rev.
Bonds, zero %, 6/1/15 Aaa 1,206,250
------------
31,691,425
<CAPTION>
Montana(0.2%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3,000,000 Missoula Cnty., Rev. Bonds
(Cmnty. Med. Ctr. Inc.), Ser. B, 9s, 6/1/18 BBB 3,243,750
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Nebraska(1.2%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 2,000,000 NE Investment Fin. Auth. Hosp. Rev. RIBS,
MBIA, 9.943s, 11/15/16 AAA $ 2,100,000
NE Investment Fin. Auth. Single Fam.
Mtge. RIBS
3,300,000 Ser. 2, Government National Mortgage Association
(GNMA) Coll., 11.886s, 9/10/30 AAA 3,720,750
2,400,000 Ser. B, GNMA Coll., 11.845s, 3/15/22 AAA 2,682,000
2,000,000 Ser. B, GNMA Coll., 10.632s, 9/19/23 AAA 2,095,000
2,050,000 GNMA Coll. 10.022s, 9/15/24 AAA 2,091,000
12,100,000 Ser. D, GNMA Coll. 8.477s, 3/10/20 AAA 10,133,750
------------
22,822,500
<CAPTION>
Nevada(1.7%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clark Cnty., Indl. Dev. Rev. Bonds
9,000,000 (Nevada Power Co. Project), Ser. C,
AMBAC, 7.2s, 10/1/22 AAA 9,630,000
4,750,000 (Southwest Gas Corp.) Ser. B, 7 1/2s, 9/1/32 BBB 4,981,563
18,000,000 (Southwest Gas Corp.) Ser. A, 6 1/2s, 12/1/33 BBB 17,212,500
------------
31,824,063
<CAPTION>
New Hampshire(0.9%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
2,945,000 (Havenwood/Heritage Heights), 9 3/4s,
12/1/19 B/P 3,173,238
2,475,000 (Franklin Regl. Hosp.), 8 3/4s, 9/1/19 BBB/P 2,598,750
5,500,000 (River Woods at Exeter), 8s, 3/1/00 B/P 5,658,125
6,750,000 (Wentworth-Douglass Hosp.),
MBIA, 5 3/8s, 1/1/15 AAA 6,091,875
------------
17,521,988
<CAPTION>
New Jersey(1.8%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5,000,000 Camden Cnty. Impt. Auth. Rev. Bonds,
8.4s, 4/1/24 BB/P 5,231,250
7,000,000 NJ Econ. Dev. Auth. Elec. Energy Fac. Rev.
Bonds (Vineland Cogeneration L.P. Project),
7 7/8s, 6/1/19 BB/P 7,463,750
6,000,000 NJ Econ. Dev. Auth. Mkt. Transition Fac. Sr.
Lien Rev. Bonds, Ser. A, MBIA, 5.8s, 7/1/09 AAA 5,932,500
NJ Econ. Dev. Auth. Rev. Bonds
2,700,000 (Stolt Terminals Project), 10 1/2s, 1/15/18 BB/P 3,088,125
4,700,000 (Holt Hauling Co.), Ser. D, 10 1/4s, 9/15/14 BB/P 5,205,250
5,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Baa 5,412,500
2,000,000 NJ State Hsg. & Mtge. Fin. Agcy. COP,
RIBS, Ser. 1, 8.852s, 11/1/07 (acquired
2/11/93, cost $2,073,120)(d) A/P 2,040,000
------------
34,373,375
<CAPTION>
New York(6.1%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8,250,000 Metro. Trans. Auth. Svcs. Contract Fac. Rev.
Bonds (Trans. Fac.), Ser. O, 5 3/4s, 7/1/13 Baa 7,765,313
NY State Dorm. Auth. Rev. Bonds
14,500,000 (State U. Edl. Facs.), Ser. C, 7 3/8s, 5/15/10 Baa 16,167,500
5,000,000 (State U. Edl. Facs.), Ser. A, FGIC, 5 1/2s, 5/15/10 AAA 4,768,750
2,000,000 (State U. Edl. Facs.), Ser. B, 5s, 5/15/18 Baa 1,647,500
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
New York(continued)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NY State Dorm. Auth. Rev. Bonds
$ 7,750,000 (City U.), Ser. F, 5s, 7/1/14 Baa $ 6,432,500
1,500,000 NY State Energy Research & Dev. Auth.
Poll. Control VRDN (Niagara Mohawk Power),
Ser A, 2.65s, 7/1/15 A-1 1,500,000
15,000,000 NY State Env. Fac. Corp. Poll. Control Rev.
Bonds, 5 3/4s, 6/15/10 Aa 14,643,750
2,375,000 NY State Hsg. Fin. Agcy. Svcs. Contract
Oblig. Rev. Bonds, Ser. A, 7 1/4s, 9/15/12 Baa 2,481,875
NY State Local Govt. Asst. Corp. G.O. Bonds
8,000,000 Ser. C, 5 1/2s, 4/1/17 A 7,280,000
2,225,000 Ser. E, 5 1/4s, 4/1/16 A 1,963,563
4,000,000 Ser. C, 5s, 4/1/21 A 3,310,000
NY State Med. Care Fac. Fin. Agcy. Rev.
Bonds (Mental Hlth. Svcs. Fac.)
3,650,000 Ser. A, Prerefunded, 7 1/2s, 2/15/01 AAA 4,192,938
2,660,000 Ser. D, 7.4s, 2/15/18 Baa 2,872,800
9,750,000 Ser. D, 5 1/4s, 8/15/23 Baa 8,116,875
9,830,000 Ser. F, 5 1/4s, 2/15/19 Baa 8,306,350
NY State Urban Dev. Corp. Rev. Bonds
7,000,000 (State Fac.), 7 1/2s, 4/1/20 Baa 7,647,500
4,000,000 (Correctional Fac.), 5 1/2s, 1/1/15 Baa 3,600,000
13,575,000 (Correctional Fac.), Ser. 4, 5 3/8s, 1/1/23 Baa 11,555,719
------------
114,252,933
<CAPTION>
North Carolina(0.6%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NC Eastern Muni. Pwr. Agcy. Serv. Rev. Bonds, Ser. B,
6,500,000 6 1/8s, 1/1/09 A 6,435,000
3,210,000 6s, 1/1/26 A 3,005,363
2,500,000 6s, 1/1/22 A 2,346,875
------------
11,787,238
<CAPTION>
Ohio(1.5%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7,200,000 Dayton, Special Fac. Rev. Bonds (Emery
Air Freight Corp.), Ser. A, 12 1/2s, 10/1/09 B/P 8,361,000
2,500,000 Lorain Cnty., Fac. Rev. Bonds
(Laurel Lake Project), 7 1/8s, 12/15/18 BB/P 2,481,250
5,700,000 OH State Air Quality Dev. Auth. Poll. Control
Rev. Bonds (Cincinnati Gas & Elec.),
10 1/8s, 12/1/15 Baa 6,213,000
7,000,000 OH State Wtr. Dev. Auth. Poll. Control Facs.
Rev. Bonds (Toledo Edison Co.), Ser. A,
7.55s, 6/1/23 Ba 7,157,500
4,000,000 OH State Wtr. Dev. Auth. Rev. Bonds
(Mid-American Waste Syst. Inc. Project),
7 3/4s, 9/1/07 BBB/P 4,030,000
------------
28,242,750
<CAPTION>
Oklahoma(0.8%)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6,000,000 Tulsa, Indl. Auth. Hosp. Rev. Bonds
(Tulsa Regl. Med. Ctr.), Ser. A, 7 5/8s, 6/1/17 BBB 6,232,500
8,200,000 Tulsa, Muni. Arpt. Rev. Bonds
(American Air Lines, Inc.), 7 3/8s, 12/1/20 Baa 8,169,250
------------
14,401,750
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Pennsylvania(4.5%)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$8,535,000 Allegheny Cnty., Airport Rev. Bonds
(Pittsburgh Intl. Arpt.), Ser. C, MBIA,
8 1/4s, 1/1/16 AAA $ 9,463,181
Allegheny Cnty., Indl. Dev. Auth. Arpt.
Special Fac. Rev. Bonds (U.S. Air, Inc. Project)
2,000,000 Ser. A, 8 7/8s, 3/1/21 B 2,040,000
7,450,000 Ser. B, 8 1/2s, 3/1/21 B 7,450,000
1,650,000 Allegheny Cnty., Indl. Dev. Auth. Rev.
Bonds (Southwestern Arpt. Cargo Fac.),
8 3/4s, 2/15/09 BB/P 1,751,063
11,575,000 Allentown Redev. Auth. Multi-Fam. Hsg.
VRDN (Oxford Project), 3.45s, 11/1/06 A-1 11,575,000
Beaver Cnty., Indl. Dev. Auth. Poll.
Control Rev. Bonds
3,420,000 (Toledo Edison Co.-Beaver Valley), Ser. B,
12 1/4s, 9/15/15 Ba 3,732,075
2,500,000 (OH Edison Co.-Beaver Valley), Ser. A,
10 1/2s, 10/1/15 Baa 2,696,875
5,000,000 (Cleveland Elec. Illuminating Co.),
10 1/2s, 9/1/15 Ba 5,325,000
2,000,000 Fayette Cnty., Indl. Dev. Auth. Rev. Bonds
(Beverly Enterprises Project), 6 1/2s, 6/1/13 BB/P 1,920,000
Montgomery Cnty., Higher Edl. & Hlth.
Auth. Hosp. Rev. Bonds (United Hosp.
Inc. Project)
3,745,000 8 1/2s, 11/1/17 Ba 3,913,525
5,300,000 Ser. A, 8 3/8s, 11/1/11 Ba 5,571,625
6,000,000 Montgomery Cnty., Indl. Dev. Auth. Poll.
Control Rev. Bonds (Philadelphia Elec. Co.),
Ser. A, 10 1/2s, 5/15/15 Baa 6,427,500
3,250,000 Northampton Cnty., Indl. Dev. Auth. Poll.
Control Rev. Bonds (Bethlehem Steel),
7.55s, 6/1/17 B/P 3,306,875
2,750,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 AAA 2,375,313
2,500,000 PA State Higher Edl. Assistance Agcy. Student
Loan RIBS, AMBAC, 10.291s, 9/3/26 AAA 2,631,250
5,300,000 Philadelphia, Muni. Auth. Rev. Bonds
(Justice Lease) Ser. C., Rfdg., 8 5/8s, 11/15/16 AAA 6,466,000
Philadelphia, Wtr. & Wastewater
4,760,000 Linked Floater Annuity, FGIC, 4.8s, 6/15/05 (g) AAA 1,832,600
4,760,000 Linked Forward, FGIC, 5.2s, 6/15/05 AAA 4,605,300
1,000,000 WA Cnty., Indl. Dev. Auth. Rev. Bonds
(Beverly Enterprises Project), 6.55s, 4/15/05 BB/P 991,250
----------
84,074,432
<CAPTION>
Puerto Rico(1.5%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cmnwlth. of Puerto Rico, G.O. Bonds
3,220,000 AMBAC, 7s, 7/1/10 AAA 3,533,950
8,000,000 stepped-coupon, zero %, (8s, 7/1/96) 7/1/02 (h) Baa 8,060,000
4,000,000 Cmnwlth. of Puerto Rico, RIBS
MBIA, 8.384s, 7/1/08 AAA 4,100,000
5,000,000 Cmnwlth. of Puerto Rico, Tel. Auth. I/F,
AMBAC, 7.371s, 1/1/03 AAA 4,443,750
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Puerto Rico(continued)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$8,000,000 Cmnwlth. of Puerto Rico, Tel. Auth. RIBS
MBIA, 6.844s, 1/1/05 (acquired 4/23/93,
cost $8,349,280)(d) AAA $ 7,830,000
----------
27,967,700
<CAPTION>
Rhode Island(0.6%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
11,000,000 RI Depositors Econ. Protection Corp. Rev.
Bonds, Ser. B, 10s, 7/1/07 B/P 11,233,750
<CAPTION>
South Carolina(0.6%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3,000,000 Darlington Cnty., Indl. Dev. Rev. Bonds
(Nucor Corp. Project), Ser. A, 5 3/4s, 8/1/23 AA 2,703,750
4,600,000 Lee Cnty., Indl. Rev. Bonds
(Mid-American Waste Syst. Project),
7s, 9/15/13 BBB/P 4,352,750
5,000,000 Spartansburg Cnty., Hosp. Fac. RIBS,
FSA, 9.273s, 4/13/22 AAA 5,025,000
----------
12,081,500
<CAPTION>
Tennessee(0.5%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5,200,000 McMinn Cnty., Indl. Dev. Board Solid Waste
Recycling Fac. Rev. Bonds (Calhoun Newsprint),
7.4s, 12/1/22 Baa 5,486,000
28,920,000 Metro. Nashville & Davidson Cnty., Hlth. & Edl.
Fac. Board Rev. Bonds, zero %, 6/1/21 Aaa 4,012,650
----------
9,498,650
<CAPTION>
Texas(4.7%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,995,000 Alliance Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc. Project),
7 1/2s, 12/1/29 Baa 1,997,494
Bell Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Adv. Living Tech. Inc. Project), Ser. A
1,600,000 10 1/2s, 12/1/27 B/P 1,472,000
5,500,000 10 1/2s, 6/15/18 B/P 5,060,000
4,830,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev.
Bonds (Heartway Corp.), Ser. A-1,
10 1/4s, 3/1/19 B/P 5,192,250
6,005,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev.
Bonds (Nancy Travis Memorial Hosp.
Project), 10s, 5/15/13 B/P 6,440,363
5,500,000 Harris Cnty., Cultural Ed. Fac. Fin. Corp.
Rev. Bonds (Space Center Houston Project),
9 1/4s, 8/15/15 BB/P 5,390,000
Harris Cnty., Single Fam. Hsg. Fin. Corp.
Rev. Bonds
1,135,000 Ser. 1983A, 10 3/8s, 7/15/14 B 1,135,000
215,000 10 1/2s, 10/15/09 Baa 217,419
995,000 9 7/8s, 3/15/14 BB 997,488
Harris Cnty., Indl. Dev. Corp. Arpt. Facs.
Rev. Bonds
3,099,810 (Continental Air Lines Inc.), 7.95s, 7/1/19 B/P 2,991,317
Houston, Hsg. Fin. Corp. Single Fam. Mtge.
Rev. Bonds
4,257,000 Ser. 1984 A, 10 7/8s, 2/15/16 Baa 4,379,389
2,440,000 10s, 9/15/14 Baa 2,491,850
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
Texas(continued)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Houston, Hsg. Fin. Corp. Single Fam. Mtge.
Rev. Bonds
$6,190,000 (Lomas & Nettleton Admin. Co.), Ser. B,
10 3/8s, 12/15/13 Baa $ 6,367,963
8,955,000 Lower Neches Valley Auth., TX Indl. Dev.
Corp. Poll. Control Rev. Bonds
(Neches River Treatment), 5.65s, 2/1/29 AA 8,059,500
2,000,000 Port Corpus Christi, Indl. Dev. Corp. Rev.
Bonds (Valero Refining & Marketing Co.),
Ser. A, 10 1/4s, 6/1/17 Baa 2,257,500
3,000,000 Sam Rayburn, Muni. Pwr. Supply Agcy. Rev.
Bonds, Ser. A, 6 1/2s, 10/1/08 Baa 2,906,250
Southeast TX Multi-Fam. Hsg. Fin. Corp.
Rev. Bonds
4,500,000 (Promenade Place Apts. Project),
Ser. B, 10.175s, 8/1/16 B/P 4,522,500
9,700,000 (Pavilion Place Apts. Project),
Ser. B, 9 1/2s, 7/1/16 BBB/P 9,639,375
6,000,000 (Pavilion Place Apts. Project),
Ser. A, 7.6s, 7/1/16 BBB/P 6,082,500
5,500,000 (Bayou Park Village Apt. Project), Ser. B,
10.175s, 8/1/16 B/P 5,582,500
5,000,000 Tarrant Cnty., Hlth. Facs. Dev. Corp. Hosp.
Rev. Bonds (Cmnty. Hlth. Care Foundation
Inc. Project), 10 1/8s, 4/1/21 B/P 5,281,250
----------
88,463,908
<CAPTION>
Vermont(0.2%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VT Edl. & Hlth. Bldg. Fin. Agcy. I/F, FGIC,
2,000,000 10.019s, 9/1/16 AAA 1,907,500
1,700,000 9.969s, 9/1/13 AAA 1,623,500
----------
3,531,000
<CAPTION>
Virginia(0.7%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
4,500,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac.
I/F, FGIC, 9.975s, 8/15/23 AAA 4,719,375
2,000,000 Henrico Cnty., Indl. Dev. Auth. RIBS
(Bon Secours Hlth. Syst. Project),
FSA 8.501s, 8/23/27 AAA 1,830,000
3,250,000 Lynchburg, Redev. & Hsg. Auth. Multi-Fam.
Hsg. VRDN (Walden Pond III Apts.),
3.45s, 4/1/07 A-1 3,250,000
2,760,000 Roanoke, Redev. & Hsg. Auth. Multi-Fam.
Hsg. VRDN (Westwind II Apts. Project),
3.45s, 4/1/07 A-1 2,760,000
----------
12,559,375
<CAPTION>
Washington(0.8%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
6,600,000 Spokane, Regl. Solid Waste Mgt. Syst. I/F,
AMBAC, 8.4s, 12/1/10 AAA 5,238,750
WA Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear Project No. 3)
4,000,000 Ser. C, MBIA, 7 1/2s, 7/1/08 (c) AAA 4,575,000
5,000,000 Ser. B, MBIA, 7 1/8s, 7/1/16 AAA 5,512,500
----------
15,326,250
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS(b) VALUE
West Virginia(2.4%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5,425,000 Kanawha Cnty., Bldg. Cmnty. Rev. Bonds
(Kanawha Valley Memorial Hosp. Inc.), 11 1/4s,
6/1/13 AAA $ 5,845,438
Marion Cnty., Cmnty. Solid Waste Disp. Fac.
Rev. Bonds (American Pwr. Paper Recycling
Project),
5,000,000 9s, 12/1/11 (i) B/P 5,043,750
10,000,000 8 1/4s, 12/1/11 B/P 10,237,500
5,000,000 7 3/4s, 12/1/11 B/P 4,937,500
2,980,000 Mercer Cnty., Coml. Dev. Rev. Bonds
(American Hlth. Enterprises Ltd.),
12s, 12/1/15 BB/P 3,207,225
2,935,000 Preston Cnty., Bldg. Cmnty. Hosp. Rev. Bonds
(Preston Memorial Hosp. Corp.), Ser. B,
10s, 4/1/14 BB/P 3,151,456
4,045,000 WV State COP (Morris Sq. Complex),
9 1/4s, 8/15/08 B/P 3,898,369
6,115,000 WV State Hosp. Fin. Auth. Hosp. Rev.
Bonds (St. Francis Hosp.-Charleston),
7 3/4s, 8/15/13 B 6,359,600
2,750,000 Weirton, Poll. Control Rev. Bonds (Weirton
Steel Project), Ser. B, 8 5/8s, 11/1/14 B 2,856,563
-------------
45,537,401
<CAPTION>
Wisconsin(0.1%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2,300,000 WI Hsg. & Econ. Dev. Auth. RIBS
10.769s, 10/25/22 AA 2,420,750
<CAPTION>
Wyoming(0.1%)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,600,000 Uinta Cnty., Poll. Control VRDN
(Chevron USA Inc. Project), 2.65s, 8/15/20 P-1 1,600,000
- ------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $1,846,104,032)(j) $1,860,972,540
=============
</TABLE>
NOTES
(a) Percentages indicated are based on net assets of $1,884,548,761, which
correspond to a net asset value per share for both class A and class B
shareholders of $14.24.
(b) The Moody's, Standard & Poor's or Fitch 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. The ratings are not covered by the Report of Independent Accountants.
(c) A portion of these securities were pledged to cover margin requirements for
futures contracts at July 31, 1994. The market value of segregated
securities with the custodian for transactions on futures contracts is
$10,075,000 or 0.5% of net assets.
27
<PAGE>
Tax Free High Yield
Notes(continued)
(d) Restricted as to public resale. At the date of acquisition, these
securities were valued at cost. There were no outstanding unrestricted
securities of the same class as those held. The total market value of
the restricted securities owned at July 31, 1994 was $29,543,375 or
1.6% of net assets.
(e) This security valued at $5,163,125 or 0.3% of net assets has been
purchased on a "forward commitment" basis--that is, the fund has agreed
to take delivery of and make payment for this security beyond the
settlement time of five business days after the trade date and
subsequent to the date of this report. The purchase price and interest
rate of this security are fixed at the trade date, although the fund
does not earn any interest on this security until settlement date.
(f) Non-income producing security.
(g) Linked Floater Annuities represent the right to receive monthly
interest payments on the underlying municipal bond. No payments of
principal are passed on to the Linked Floater Annuity holders.
(h) The interest rate and date shown parenthetically represent the next
interest rate to be paid and the date the fund will begin receiving
interest at this rate.
(i) This security valued at $5,043,750 or 0.3% of net assets has been
purchased on a "when issued" basis--that is, the fund has agreed to
take delivery of and make payment for this new issue beyond the
settlement time of five business days after the trade date and
subsequent to the date of this report. The purchase price and interest
rate of this security are fixed at the trade date, although the fund
does not earn any interest on this security until settlement date.
(j) The aggregate identified cost for federal income tax purposes is
$1,846,190,038 resulting in gross unrealized appreciation and
depreciation of $71,361,827 and $56,579,325 respectively, or net
unrealized appreciation of $14,782,502.
U.S. Treasury Bond 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) $ 41,912,500 $ 40,581,250 Sept./94 $(1,331,250)
- --------------------------------------------------------------------------------
</TABLE>
The rates shown on Residual Interest Bonds (RIBS), Inverse Rate Floaters
(I/F), Linked Floater Annuities and Linked Forwards, which are securities
paying variable rates that vary to changes in market interest rates and
Variable Rate Demand Notes (VDRN) 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):
Hospitals/Healthcare 20.6%
Transportation 14.2
Utilities 13.7
The table below shows the percentages of the fund's investments on July 31,
1994 in securities assigned to the various rating categories by Moody's,
Standard & Poor's, Fitch and unrated securities determined by Putnam
Management to be of comparable quality.
<TABLE>
<CAPTION>
Unrated securities of
Rated securities as a comparable quality, as a
Rating percentage of fund's net assets percentage of fund's net assets
<S> <C> <C>
"AAA"/"Aaa" 22.7% 1.1%
"AA"/"Aa" 2.2 --
"A"/"A" 3.7 0.4
"BBB"/"Baa" 22.0 5.0
"BB"/"Ba" 6.1 14.5
"B"/"B" 4.1 14.7
"MIG1" 1.1 --
"P-1" 0.1 --
"A-1" 1.0 --
63.0% 35.7%
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
Statement of assets and liabilities
July 31, 1994
<TABLE>
<CAPTION>
Assets
- --------------------------------------------------------------------------------
<S> <C>
Investments, securities at value
(identified cost $1,846,104,032) (Note 1) $1,860,972,540
- --------------------------------------------------------------------------------
Cash 85,106
- --------------------------------------------------------------------------------
Interest receivable 31.049,859
- --------------------------------------------------------------------------------
Receivable for shares of the Fund sold 11,485,843
- --------------------------------------------------------------------------------
Receivable for securities sold 16,829,731
- --------------------------------------------------------------------------------
Total Assets 1,920,423,079
Liabilities
- --------------------------------------------------------------------------------
Payable for securities purchased 26,365,075
- --------------------------------------------------------------------------------
Distributions payable to shareholders 4,033,816
- --------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,069,319
- --------------------------------------------------------------------------------
Payable for variation margin on open futures contracts 712,500
- --------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 860,002
- --------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 338,037
- --------------------------------------------------------------------------------
Payable for administrative services (Note 2) 9,168
- --------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,436
- --------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,146,148
- --------------------------------------------------------------------------------
Other accrued expenses 336,817
- --------------------------------------------------------------------------------
Total Liabilities 35,874,318
- --------------------------------------------------------------------------------
Net Assets $1,884,548,761
Represented by
- --------------------------------------------------------------------------------
Paid-in capital (Notes 1, 4 and 5) $1,893,315,091
- --------------------------------------------------------------------------------
Distributions in excess of net investment income
(Notes 1 and 5) (3,464,463)
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments
and futures transactions (Notes 1 and 5) (18,839,125)
- --------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures 13,537,258
- --------------------------------------------------------------------------------
Total - Representing net assets applicable to capital
shares outstanding $1,884,548,761
Computation of net asset value and offering price
- --------------------------------------------------------------------------------
Net asset value and redemption price per class A
share ($361,593,362 divided by 25,394,226 shares) $ 14.24
- --------------------------------------------------------------------------------
Offering price per class A share (100/95.25 x $14.24)* $ 14.95
- --------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,522,955,399 divided by 106,941,561 shares)** $ 14.24
- --------------------------------------------------------------------------------
</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.
29
<PAGE>
Statement of operations
Year ended July 31, 1994
<TABLE>
<S> <C>
Tax exempt interest income $128,769,616
- --------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,498,843
- --------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,597,065
- --------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 48,000
- --------------------------------------------------------------------------------
Auditing 49,500
- --------------------------------------------------------------------------------
Legal 30,000
- --------------------------------------------------------------------------------
Postage 251,065
- --------------------------------------------------------------------------------
Reports to shareholders 139,546
- --------------------------------------------------------------------------------
Administrative services (Note 2) 30,075
- --------------------------------------------------------------------------------
Distribution fees--class A (Note 2) 582,923
- --------------------------------------------------------------------------------
Distribution fees--class B (Note 2) 12,537,981
- --------------------------------------------------------------------------------
Registration fees 151,084
- --------------------------------------------------------------------------------
Other 98,050
- --------------------------------------------------------------------------------
Total expenses 24,014,132
- --------------------------------------------------------------------------------
Net investment income 104,755,484
- --------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (15,270,226)
- --------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 2,057,543
- --------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during
the year (74,498,222)
- --------------------------------------------------------------------------------
Net loss on investments (87,710,905)
- --------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 17,044,579
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Statement of changes in net assets
Year ended July 31, 1994
<TABLE>
<CAPTION>
Year Ended July 31
-------------------------
1994 1993
- ---------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 104,755,484 $ 78,593,225
- ---------------------------------------------------------------------------------------
Net realized gain (loss) on investments (15,270,226) 9,319,512
- ---------------------------------------------------------------------------------------
Net realized gain (loss) on futures contracts 2,057,543 (1,776,751)
- ---------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments and futures (74,498,222) 31,607,334
- ---------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 17,044,579 117,743,320
Distributions to shareholders
- ---------------------------------------------------------------------------------------
From net investment income
- ---------------------------------------------------------------------------------------
Class A (18,855,987) --
- ---------------------------------------------------------------------------------------
Class B (85,899,497) (78,691,816)
- ---------------------------------------------------------------------------------------
In excess of net investment income
- ---------------------------------------------------------------------------------------
Class A (555,784) --
- ---------------------------------------------------------------------------------------
Class B (2,531,906) --
- ---------------------------------------------------------------------------------------
From net realized gain on investments and
futures
- ---------------------------------------------------------------------------------------
Class A (1,181,683) --
- ---------------------------------------------------------------------------------------
Class B (5,005,098) (3,367,783)
- ---------------------------------------------------------------------------------------
In excess of net realized gain on
investments and futures
- ---------------------------------------------------------------------------------------
Class A (1,074,658) --
- ---------------------------------------------------------------------------------------
Class B (4,551,784) --
- ---------------------------------------------------------------------------------------
Increase from capital share transactions
(Note 4) 485,625,941 449,984,489
- ---------------------------------------------------------------------------------------
Total increase in net assets 383,014,123 485,668,210
Net assets
- ---------------------------------------------------------------------------------------
Beginning of year 1,501,534,638 1,015,866,428
- ---------------------------------------------------------------------------------------
End of year (including distributions in
excess of net investment income of
$3,464,463 and $317,082, respectively) $1,884,548,761 $1,501,534,638
- ---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the period
September 20, 1993
(commencement
of operations) to
July 31
- -------------------------------------------------------------------------------------------------------------------------
1994 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $15.34 $15.01 $14.64 $13.79
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .83 .86 .95 .99
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
Gain (loss) on investments (.98) (.65) .41 .94
- -------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (.15) .21 1.36 1.93
- -------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income (.83) (.85) (.95) (.99)
- -------------------------------------------------------------------------------------------------------------------------
In excess of net investment income (.02) (.03) -- --
- -------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments (.05) (.05) (.04) (.09)
- -------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments (.05) (.05) -- --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.95) (.98) (.99) (1.08)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.24 $14.24 $15.01 $14.64
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) (.99)(c) 1.36 9.68 14.60
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $361,593 $1,522,955 $1,501,535 $1,015,866
=========================================================================================================================
Ratio of expenses to average
Net assets (%) .71(c) 1.45 1.38 1.45
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.58(c) 5.76 6.39 7.03
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 44.41 44.41 52.29 82.31
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
For the period
September 9, 1985
(commencement
of operations)
Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF PERIOD $13.87 $14.30 $13.72 $13.77 $13.91 $12.57
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .99 1.00 .98 .96 .98 .94(a)
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
Gain (loss) on investments (.07) (.43) .56 (.05) .04 1.41
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .92 .57 1.54 .91 1.02 2.35
- ------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
From net investment income (1.00) (1.00) (.96) (.96) (.98) (1.01)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- -- (.18) --
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.00) (1.00) (.96) (.96) (1.16) (1.01)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $13.79 $13.87 $14.30 $13.72 $13.77 $13.91
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) 6.98 4.20 11.71 6.96 7.48 19.24(c)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $738,113 $651,152 $635,899 $586,721 $582,023 $251,736
==============================================================================================================================
Ratio of expenses to average
Net assets (%) 1.52 1.66 1.75 1.77 1.78 1.51(a)(c)
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 7.26 7.12 7.02 7.11 6.71 6.79(a)(c)
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 49.83 46.66 96.97 101.02 132.87 148.70
- ------------------------------------------------------------------------------------------------------------------------------
</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 for the
period ended July 31, 1986 reflect a reduction of $0.02 per share.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Not annualized.
33
<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
consistent with its investment policies by investing primarily in high-
yielding, lower-rated tax exempt securities, constituting a portfolio that
Putnam Management believes does not involve undue risk to income or
principal.
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 may be 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 holders 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. Short-term
investments are stated at amortized cost, which approximates market value,
and restricted securities are stated at fair value following procedures
approved by the Trustees.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
C. FUTURES 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 futures 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
34
<PAGE>
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.
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 from wash sale
transactions, post October loss deferral, net investment losses, realized
and unrealized gains and losses on futures transactions and defaulted
interest. 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 July 31,
1994, the fund reclassified $188,545 to increase distributions in excess of
net investment income and $188,545 to increase paid-in capital.
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 amortized 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. Such fee is based on 0.65% of the first
$500 million of average net assets; 0.55% of the next $500 million; 0.50%
of the next $500 million and 0.45% of any amount over $1.5 billion. Prior
to July 1, 1994, such fee was
35
<PAGE>
based on 0.7% of the first $100 million of average net assets; 0.6% of the
next $100 million; 0.5% of the next $300 million; 0.45% of the next $500
million, and 0.425% of any amount over $1.0 billion. Both 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 excess over $100 million and by the amount
of certain brokerage commissions and fees (less expenses) received by
affiliates of the Manager on 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 $30,075 for these services.
Trustees of the fund receive an annual Trustee's fee of $2,720, 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. For the year ended July 31, 1994 the fund paid $48,000 for these
services.
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. Fees paid for these investor servicing and custodial
functions for the year ended July 31, 1994 amounted to $1,597,065. 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.
Effective September 17, 1993 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 0.20% of the fund's
average net assets attributable to class A shares. For the year ended July
31, 1994, the fund paid $582,923 in distribution fees for class A shares.
During the fiscal year ended July 31, 1994, Putnam Mutual Funds Corp.,
acting as the underwriter, received net commissions of $115,146 from the
sale of class A shares of the fund.
A deferred sales charge of up to 1.00% is assessed on certain redemptions
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 $6,066 on such redemptions.
The fund has adopted a 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
36
<PAGE>
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 $12,537,981 for class B shares.
Putnam Mutual Funds Corp. also receives the proceeds on the contingent
deferred sales charges on its class B share redemptions within six years of
purchase. The charge is based on declining rates, which begin at 5.00% of
the net asset value of the redeemed shares. For the year ended July 31,
1994, Putnam Mutual Funds Corp., acting as the underwriter, received
$2,264,594 in contingent deferred sales charges from redemptions.
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
$1,211,125,532 and $790,918,714, respectively. Purchases and sales of
short-term municipal obligations aggregated $686,113,800 and $656,590,000,
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:
<TABLE>
<CAPTION>
Sales of Future Contracts
==================================================================
Number of Aggregate
Contracts Face Value
==================================================================
<S> <C> <C>
Contracts open at
beginning of year 300 $ 34,029,070
------------------------------------------------------------------
Contracts opened 4,125 448,187,071
------------------------------------------------------------------
Contracts closed (4,025) (441,634,891)
------------------------------------------------------------------
Open at end
of period 400 $ 40,581,250
------------------------------------------------------------------
<CAPTION>
Purchases of Future Contracts
==================================================================
Number of Aggregate
Contracts Face Value
------------------------------------------------------------------
<S> <C> <C>
Contracts purchased 50 $4,471,430
------------------------------------------------------------------
Contracts closed (50) (4,471,430)
------------------------------------------------------------------
Open at end
of period -- $ --
------------------------------------------------------------------
</TABLE>
NOTE 4
CAPITAL SHARES
At July 31, 1994, there was an unlimited number of shares of beneficial
interest authorized, divided into two classes of shares, class A and class
B capital stock. Transactions in capital shares were as follows:
For the period September 20, 1993 (commencement of operations) to July 31,
1994
<TABLE>
<CAPTION>
Class A Shares Amount
==================================================================
<S> <C> <C>
Shares sold 28,874,587 $438,055,664
------------------------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 819,268 12,116,312
------------------------------------------------------------------
29,693,855 450,171,976
------------------------------------------------------------------
Shares repurchased
(4,299,629) (63,285,846)
------------------------------------------------------------------
Net increase 25,394,226 $386,886,130
------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Year ended July 31, 1994
Class B Shares Amount
- ----------------------------------------------------------
<S> <C> <C>
Shares sold 37,754,456 $564,070,574
- ----------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,332,034 49,547,834
- ----------------------------------------------------------
41,086,490 613,618,408
- ----------------------------------------------------------
Shares repurchased
(34,185,478) (514,878,597)
- ----------------------------------------------------------
Net increase 6,901,012 $ 98,739,811
- ----------------------------------------------------------
<CAPTION>
Year ended July 31, 1993
Class B Shares Amount
- ----------------------------------------------------------
<S> <C> <C>
Shares sold 34,172,255 $501,446,796
- ----------------------------------------------------------
Shares issued
in connection with
reinvestment of
distributions 2,969,034 43,517,956
- ----------------------------------------------------------
37,141,289 544,964,752
- ----------------------------------------------------------
Shares repurchased
(6,493,677) (94,980,263)
- ----------------------------------------------------------
Net increase 30,647,612 $449,984,489
- ----------------------------------------------------------
</TABLE>
NOTE 5
RECLASSIFICATION OF CAPITAL ACCOUNT
Effective August 1, 1993, Putnam Tax-Free High Yield 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 undistributed 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
distributions by investment companies.
As a result of the SOP, the fund has reclassified $128,854 reducing
distributions in excess of net investment income, $57,417 increasing
accumulated net realized gain on investments and futures transactions and
$186,271 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 most recent
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 attributable to amounts which are treated differently in
computation of distributable income and capital gains under federal income
tax rules and regulations versus generally accepted accounting principles.
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
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.
The Fund has designated all distributions from net investment income paid
during the fiscal year as exempt from federal income tax. The fund made the
following distributions:
<TABLE>
<CAPTION>
Short-term
Class Income capital gain Total
------------------------------------------------------------------------------------
<S> <C> <C> <C>
A .85 .10 .95
------------------------------------------------------------------------------------
B .88 .10 .98
------------------------------------------------------------------------------------
</TABLE>
38
<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
Gary W. Coburn
Vice President
James E. Erickson
Vice President
Triet M. Nguyen
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 High
Yield 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.
39
<PAGE>
PUTNAM INVESTMENTS ==============
Bulk Rate
THE PUTNAM FUNDS U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
==============
500/036-13750
