Putnam
Tax-Free
Insured
Fund
[picture of book]
ANNUAL REPORT
July 31, 1995
[Putnam logo]
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Performance highlights
* "Those investors who are more agnostic in their beliefs about the ultimate
rewards from stocks can realize much the same in the here and now from a
rather more mundane medium, municipal bond funds. Many yield the equivalent
of the 10% returns promised by equities, after taxes are taken into
account."
--Barron's, August 7, 1995
FISCAL 1995 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C> <C> <C> <C> <C>
Total return: NAV POP NAV CDSC
....................................................................................................
(change in value during
period plus reinvested
distributions)
12 months ended 7/31/95 7.21% 2.13% 6.53% 1.53%
Class A Class B Class M
Share value: NAV POP NAV NAV POP
....................................................................................................
7/31/94 $14.67 $15.40 $14.68 -- --
6/1/95 -- -- -- $15.11 $15.62
7/31/95 14.86 15.60 14.87 14.86 15.36
Short-term
Distributions: No. Income capital gains(1) Total
....................................................................................................
Class A 13 $0.818128 $0.005 $0.823128
Class B 13 0.725191 0.005 0.730191
Class M 2 0.117894 -- 0.117894
Current return: NAV POP NAV
....................................................................................................
End of period
Current dividend rate(2) 5.43% 5.17% 4.78%
Taxable equivalent(3) 8.99 8.56 7.91
Current 30-day
SEC yield(4) 5.30 5.05 4.62
Taxable equivalent(3) 8.77 8.36 7.65
</TABLE>
Performance data represent past results and will differ for each share class.
For performance over longer periods, see pages 9 and 10. POP assumes 4.75%
maximum sales charge for class A shares and 3.25% for class M shares, which
became effective 6/1/95. CDSC for class B shares assumes 5% maximum
contingent deferred sales charge. Performance for class M shares is not shown
because of the brevity of the reporting period. (1)Capital gains are taxable
for federal and in most cases state tax purposes. For some investors,
investment income may also be subject to the federal alternative minimum tax.
Investment income may be subject to state and local taxes. (2)Income portion
of most recent distribution, annualized and divided by NAV or POP at end of
period. (3)Assumes maximum 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.
2
<PAGE>
From the Chairman
[photo of George Putnam]
(C)Karsh, Ottawa
Dear Shareholder:
So far in 1995, the bond market has amply rewarded investors who chose to
stay the course last year. Virtually all fixed-income investments took
substantial steps toward a recovery from 1994's declines. However, while
taxable bonds have shown continuing strength over the past few months,
municipal bonds have made little headway since early April.
It is important to keep in mind, though, that while debate in Washington over
tax reform has caused some uncertainty in the municipal-bond market, it has
also created opportunities. Values of tax-free bonds, relative to their
taxable counterparts, are extremely attractive at present. The Federal
Reserve Board's willingness in July to lower its target for the federal funds
rate was also a sign that a bond-friendly environment of moderate growth with
low inflation may continue over the near term. There can be no assurance, of
course, against changes in the economic landscape later in 1995.
In the following report, Richard Wyke, fund manager of Putnam Tax-Free
Insured Fund, reviews the fund's performance during the fiscal year ended
July 31, 1995, and presents his views on the fiscal year ahead.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
September 15, 1995
3
<PAGE>
Report from the fund manager
Richard P. Wyke
The inhospitable market environment that greeted Putnam Tax-Free Insured Fund
at the outset of fiscal 1995 gave way to much more favorable conditions as
the period progressed. Over the first half of the fiscal year, returns for
class A shares were modestly positive: 0.64% at net asset value. But by July
31, 1995, the fund was able to close fiscal 1995 with much stronger results:
gains of 7.21% for class A shares and 6.53% for class B shares, both at net
asset value. The dramatic turnaround in the municipal market may bring to
mind the popular expression, "It's not over 'til the fat lady sings."
* EXTENDED RALLY ENABLED MUNICIPALS TO RECOUP LOSSES
The signs of hope that kept us cautiously optimistic during the municipal
market's tumult last fall materialized in full measure this past spring.
Sentiment toward fixed-income investing began to change visibly in January as
investors regained confidence in the Federal Reserve Board's ability to curb
inflation. As a result, February's interest rate increase--the seventh in a
year-long series--caused barely a ripple in the market.
Additionally, the long-anticipated supply/demand imbalance finally emerged as
issuance of new municipal bonds dwindled to the lowest levels since 1990.
These factors, along with a slowing economy, diminished inflation fears, and
sustained demand for tax relief, combined to fuel one of the most impressive
municipal bond market rallies in recent memory--effectively erasing all the
losses sustained in 1994.
* FLAT-TAX, ORANGE COUNTY WOES KEEP RALLY IN CHECK
Municipal-bond prices, however, have not quite kept pace with high-flying
U.S. Treasury bonds recently. Although the broad fixed-income market soared
to new heights prior to--and on the heels of--the Fed's 0.25% interest-rate
cut in July, municipal-
4
<PAGE>
bond price appreciation remained low relative to that of Treasuries.
In our opinion, this lagging performance does not reflect any deterioration
in the fundamental characteristics of the municipal-bond market. Instead, we
attribute it to two intangible influences. The first was a growing lack of
investor confidence in municipalities' ability to meet their obligations, a
result of the lingering effects of the Orange County, California, bankruptcy.
The second was the adverse investor reaction to the perceived effects of the
flat-tax proposal now headed for debate in Washington. A flat tax, which is
just one of many tax-reform proposals that will be considered by Congress,
would deprive municipal bonds of their tax advantage over other investments.
While we recognize that the current uncertainty may be somewhat justified, it
is our opinion that investors seem to be overlooking some critical points:
most municipalities' finances are not in the same desperate condition as
Orange County's, nor is the passage of a flat tax a certainty. We believe
that any overhaul of the income-tax system most likely will not occur until
after the 1996 election and, if enacted at all, will probably bear little
resemblance to current proposals.
[typeset representation of bar chart]
TOP FIVE STATE CONCENTRATIONS*
California 15.6%
New York 11.6%
Florida 9.2%
Texas 7.9%
Pennsylvania 7.4%
*As a percentage of net assets on 7/31/95.
Holdings will vary over time.
5
<PAGE>
* FUND PERFORMANCE DRIVEN BY SEVERAL STRATEGIES
One of the driving forces behind your fund's 1995 comeback was its relatively
long average duration--approximately 8-1/2 years at period's end. Duration is
a mathematical formula used to assess a portfolio's price volatility; the
longer the duration, the greater the price appreciation when interest rates
decline, as they did over the past several months. When interest rates
increase, prices decline.
Although in our semiannual report we discussed taking a more defensive stance
by shortening duration, we did not follow through with this approach. We
realized the then-fledgling rally promised to be one of the strongest we've
seen in some time and opted to take greater advantage of the opportunities it
offered.
We did, however, sell some of the fund's intermediate-term and longest-term
holdings in order to regroup assets into bonds with maturities ranging
between 15 and 25 years. Bonds in this maturity range tend to enjoy better
sponsorship in the market during periods of reduced liquidity, such as we
have experienced this summer.
Another strategy that fueled performance involved increasing the fund's
exposure to states experiencing a near-term oversupply of bonds. New York is
one example. Confident that demand would once again exceed supply in the
longer term, we increased the portfolio's allocation of New York bonds to
11.6% of net assets by the end of the fiscal year, up from 6.8% last July.
The recent outperformance of New York insured municipal bonds relative to
other state-insured bonds shows that this approach has merit.
Lastly, the portfolio's allocation to yield-enhancing industry sectors
continues to help the fund. Worth mentioning are two pockets of emphasis:
prerefunded bonds and housing bonds, composing approximately 12% and 10% of
your fund's net assets, respectively, at fiscal year end. We continue to
favor prerefunded bonds because they tend to boost the fund's yield potential
while contributing to the overall consistency of performance throughout an
interest-rate cycle. Housing bonds hold their appeal despite their prepayment
risk--which we believe is acceptable for a portion of the fund--because they
function as the portfolio's yield core.
6
<PAGE>
[typeset representation of line chart]
YIELD CURVES OF TAXABLE AND TAX-FREE BONDS
AAA-rated U.S. Treasury Taxable-equivalent
Year Municipal Bonds securities municipal bond yield
1 3.7 5.66 6.13
2 3.9 5.88 6.46
3 4.1 6.02 6.79
4 4.25 6.08 7.04
5 4.4 6.15 7.28
7 4.65 6.27 7.7
10 4.96 6.43 8.21
15 5.51 6.54 9.12
20 5.77 6.64 9.55
25 5.85 6.75 9.69
30 5.87 6.86 9.72
Chart compares yields of taxable U.S. Treasury securities and tax-free
AAA-rated municipal bonds of varying maturities on 7/31/95. The
taxable-equivalent for municipal bonds assumes the maximum 39.6% federal
income tax rate. Returns would not be as advantageous for investors in lower
tax brackets. No assurance can be made that the fund will attain any
particular yield. Unlike municipal bonds, principal and interest payments on
U.S. Treasury securities are backed by the full faith and credit of the U.S.
government; market prices and investment returns will vary and are not
guaranteed. Source: Bloomberg.
* VALUE TO BE FOUND IN MUNICIPAL BONDS
As we begin fiscal 1996, moderate economic growth, low inflation, and low
interest rates characterize the investment environment. We believe the
disinflationary forces in the global market today are powerful enough to keep
interest rates at current market levels, enabling fixed-income securities to
offer attractive real rates of return. graphic
We believe municipal bonds, in particular, offer the greatest relative value,
although there can be no assurance of this. Because municipal bonds have not
experienced the same magnitude of price appreciation as 30-year Treasury
bonds, they are currently yielding approximately 90% of Treasury
yields--before taxes are taken into account (see chart above). In addition,
nearly $50 billion worth of municipal bonds were called or redeemed in June
and July, further contracting supply. Although the cash flow generated by the
redemptions has not yet found its way back into the municipal market, we
believe that if and when it does the renewed demand may push prices higher.
7
<PAGE>
The big unknown going forward is how tax-reform will unfold and how it will
impact municipal-bond investors psychologically. Rest assured, however, we
will keep a watchful eye on all developments and take into consideration the
possible effects of any reform when mapping out our investment strategy.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 7/31/95, there is no guarantee the fund will continue to hold
these securities in the future.
8
<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.
Performance should always be considered in light of a fund's investment
strategy. Putnam Tax-Free Insured Fund is for investors seeking high current
income free from federal income tax through investments primarily in insured
investment-grade tax-exempt securities.
TOTAL RETURN FOR PERIODS ENDED 7/31/95
Class A Class B
NAV POP NAV CDSC
- --------------------------------------------------------
1 year 7.21% 2.13% 6.53% 1.53%
- --------------------------------------------------------
3 years -- -- 13.99 11.09
Annual average -- -- 4.46 3.57
- --------------------------------------------------------
5 years -- -- 38.31 36.31
Annual average -- -- 6.70 6.39
- --------------------------------------------------------
Life-of-class 4.55 -0.41 119.13 119.13
Annual average 2.42 -0.22 8.26 8.26
- --------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/95
(most recent calendar quarter)
Class A Class B
NAV POP NAV CDSC
- ---------------------------------------------------------
1 year 8.28% 3.15% 7.66% 2.66%
- ---------------------------------------------------------
3 years -- -- 17.28 14.31
Annual average -- -- 5.46 4.56
- --------------------------------------------------------
5 years -- -- 39.65 37.65
Annual average -- -- 6.91 6.60
- --------------------------------------------------------
Life-of-class 3.78 -1.14 117.79 117.79
Annual average 2.11 -0.64 8.26 8.26
- --------------------------------------------------------
Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions. The fund began investment operations on
9/9/85, offering shares now known as class B. Class A shares were offered as
of 9/20/93 and class M shares as of 6/1/95. Performance for class M shares is
not shown because of the brevity of the reporting period. Data shown
represent past results, will differ for each share class, and are not
indicative of future performance. Investment returns and principal value will
fluctuate so an investor's shares, when sold, may be worth more or less than
their original cost.
9
<PAGE>
[typeset representation of line chart]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000
investment since 9/9/85 (commencement of operations)
Lehman
Fund's Bros.
Class B Municipal Consumer
shares at Bond Price
CDSC Index Index
9/9/85 10,000 10,000 10,000
7/31/86 11,734 11,781 10,139
7/31/87 12,357 12,850 10,537
7/31/88 13,252 13,753 10,972
7/31/89 15,016 15,428 11,519
7/31/90 15,841 16,497 12,074
7/31/91 16,917 17,938 12,611
7/31/92 19,222 20,402 13,009
7/31/93 20,568 22,206 13,370
7/31/94 20,569 22,622 13,741
7/31/95 21,913 24,403 14,120
Past performance is no assurance of future results. A $10,000 investment in
the fund's class A shares at inception on 9/20/93 would have been valued at
$10,455 at net asset value on 7/31/95 ($9,959 at the maximum 4.75% sales
charge).
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.
Class M shares have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance figures
shown here assume the maximum 4.75% sales charge for class A shares and 3.25%
for class M shares.
10
<PAGE>
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year to
1% during the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE INDEX RETURNS FOR PERIOD ENDED 7/31/95
Lehman Bros.
Consumer Municipal Bond
Price Index Index
- ----------------------------------------------------------
1 year 2.76% 7.87%
- --------------------------------------------------------
3 years 8.54 19.61
Annual average 2.77 6.15
- -------------------------------------------------------
5 years 16.95 47.92
Annual average 3.18 8.15
- -------------------------------------------------------
Life of class A 5.10 6.44
Annual average 2.71 3.41
- -------------------------------------------------------
Life of class B 41.20 144.03
Annual average 3.55 9.44
- -------------------------------------------------------
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.
11
<PAGE>
Report of Independent Accountants
For the fiscal year ended July 31, 1995
To the Trustees and Shareholders of Putnam Tax-Free Insured
Fund (a series of Putnam Tax-Free Income Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings), and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of Putnam Tax-Free Insured Fund (the "fund") (a series of Putnam
Tax-Free Income Trust) at July 31, 1995, 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, 1995 by correspondence with
the custodian, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
September 14, 1995
12
<PAGE>
Portfolio of investments owned
July 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investor Guaranty Insurance
CGIC -- Capital Guaranty Insurance Corporation
COP -- Certificate of Participation
FGIC -- Federal Guaranty Insurance Corporation
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
GNMA Coll. -- Government National Mortgage Association Collateralized
IFB -- Inverse Floating Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
</TABLE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.2%)*
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Alaska (0.1%)
- ----------------------------------------------------------------------------------------
$ 275,000 AK Hsg. Fin. Corp. Home Mtge. Rev. Bonds
Ser. A, GNMA, Coll. 8-3/8s, 12/1/16 AAA $ 286,000
Arizona (1.4%)
- ----------------------------------------------------------------------------------------
AZ State Muni. Fin. Program COP
1,000,000 Ser. 31, BIGI, 7-1/4s, 8/1/09 AAA 1,148,750
5,700,000 Ser. 34, BIGI, 7-1/4s, 8/1/09 AAA 6,547,875
-------------
7,696,625
California (15.6%)
- ---------------------------------------------------------------------------------------
8,000,000 CA State G.O. Bonds, FSA 5-1/2s, 3/1/20 AAA 7,350,000
3,000,000 CA Statewide Cmntys. Dev. Auth. Step-Up
Recovery Floater COP (Motion Picture &
TV), AMBAC, 5.35s, 1/1/24 AAA 2,726,250
LA Cnty. Tran. Comm. Sales Tax Rev. Bonds
2,500,000 Ser. A, FGIC, 6-3/4s, 7/1/20 AAA 2,834,375
3,000,000 Ser. B, AMBAC, 6-1/2s, 7/1/13 AAA 3,116,250
LA Cnty. Tran. Comm. Sales Tax Rev. Bonds
(Proposition C), Ser. A, MBIA
4,000,000 6-3/4s, 7/1/19 AAA 4,575,000
3,455,000 6-1/2s, 7/1/20 AAA 3,899,831
5,000,000 Los Angeles, Dept. Wtr. & Pwr. Elec. Plant
Rev. Bonds (2nd Issue Electric Plant),
MBIA, 5-1/4s, 11/15/26 AAA 4,450,000
10,000,000 Orange Cnty., Recvy. Rev. Bonds Ser. A,
MBIA, 5-3/4s, 6/1/15 AAA 9,375,000
20,000,000 Paramount Redev. Agcy. Tax Allocation Rev.
Bonds MBIA, 6-1/4s, 8/1/23 AAA 20,200,000
5,000,000 Sacramento, Muni. Util. Dist. Elec. Rev.
Bonds Ser. Y, MBIA, 6-3/4s, 9/1/19 AAA 5,681,250
8,000,000 San Bernardino Cnty., COP (Med. Ctr. Fin.
Project), Ser. A, MBIA, 5-1/2s, 8/1/15 AAA 7,370,000
5,000,000 San Diego, Regl. Bldg. Auth. Lease Rev.
Bonds MBIA, 6.9s, 5/1/23 AAA 5,006,250
13
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
California (continued)
--------------------------------------------------------------------------------------
$ 3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds
(Police Admin. & Hldg. Fac.) Ser. A, MBIA,
6-1/4s, 7/1/17 AAA $ 3,776,600
6,300,000 U. of CA, Rev. Bonds (Multi-Purpose
Projects), Ser. A, MBIA, 6-7/8s, 9/1/16 AAA 7,268,625
-------------
87,629,431
Colorado (1.9%)
--------------------------------------------------------------------------------------
4,224,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty.
Provider Pooled Loan Program), Ser. A,
CGIC, 7-1/4s, 7/15/17 AAA 4,546,080
6,055,000 El Paso Cnty., Home Mtge. Rev. Bonds Ser.
A, GNMA Coll., 8s, 3/1/21 AAA 6,342,613
-------------
10,888,693
Delaware (1.0%)
--------------------------------------------------------------------------------------
5,000,000 DE State Econ. Dev. Auth. Poll. Control
Rev. Bonds (Delmarva Pwr.), Ser. B, FGIC,
7.15s, 7/1/18 AAA 5,431,250
Florida (9.2%)
--------------------------------------------------------------------------------------
900,000 Dade Cnty., Hlth. Fac. Auth. Hosp. Rev.
Bonds (North Shore Med. Ctr. Project),
AMBAC, 9-1/8s, 10/1/13 AAA 925,875
4,965,000 FL Hsg. Fin. Agcy. Home Ownership Rev.
Bonds 1987 G2--Cl. B, GNMA Coll., 8.595s,
11/1/18 AAA 5,306,344
13,675,000 Hernando Cnty., Rev. Bonds (Criminal
Justice Complex Fin. Project), FGIC,
7.65s, 7/1/16 AAA 16,768,969
5,500,000 Orange Cnty., Hlth. Fac. Auth. IFB Ser.
91-C, MBIA, 8.259s, 10/29/21 AAA 5,885,000
Orange Cnty., Hlth. Fac. Rev. Bonds (Pooled
Hosp. Loan Project)
150,000 Ser. A, FGIC, 7-7/8s, 12/1/25 AAA 159,375
10,850,000 Ser. B, BIGI, 7-7/8s, 12/1/25 AAA 11,528,125
5,000,000 Orlando & Orange Cnty. Expwy. Auth. Rev.
Bonds (Expwy. Rev.), FGIC, 8-1/4s, 7/1/14 AAA 6,387,500
4,000,000 Sumter Cnty., School Dist. Rev. Bonds
(Multi Dist. Loan Program), CGIC, 7.15s,
11/1/15 AAA 4,625,000
-------------
51,586,188
Georgia (3.3%)
--------------------------------------------------------------------------------------
GA Muni. Elec. Auth. Pwr. Rev. Bonds.
7,500,000 Ser. B, AMBAC, 6-1/4s, 1/1/12 AAA 7,865,625
10,000,000 Ser. B, BIGI, zero %, 1/1/08 AAA 5,025,000
5,500,000 GA Muni. Elec. Auth. Special Obligation
Rev. Bonds (Crossover Ser. Project One),
AMBAC, 6.4s, 1/1/13 AAA 5,830,000
-------------
18,720,625
Idaho (0.1%)
--------------------------------------------------------------------------------------
500,000 ID Hlth. Fac. Auth. Rev. Bonds (Kootenai
Med. Ctr. Project), MBIA, 9-1/8s, 8/1/15 AAA 510,000
14
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Illinois (4.0%)
--------------------------------------------------------------------------------------
$ 950,000 Aurora, Hosp. Fac. Rev. Bonds (Mercy Ctr.
Hlth. Care Svcs.), Ser. A, AMBAC, 9-5/8s,
10/1/09 AAA $ 977,313
2,600,000 Chicago, Central Pub. Library Rev. Bonds
Ser. B, AMBAC, 6.85s, 1/1/17 AAA 2,954,250
6,780,000 Chicago, Pub. Bldg. Comm. Bldg. Rev. Bonds
(Cmnty. Bldg.), Ser. A, MBIA, 7s, 1/1/20 AAA 7,788,525
5,000,000 Chicago, Res. Mtge. Rev. Bonds Ser. B.,
MBIA, zero %, 10/1/09 AAA 1,862,500
5,000,000 IL Dev. Fin. Auth. Sch. Dist. Rev. Bonds
(PG-Cmnty. High Sch. #155), MBIA, zero %,
12/1/13 AAA 1,612,500
5,000,000 Metro. Pier & Exposition Auth. Tax Rev.
Bonds, Ser. A, FGIC, zero %, 6/15/17 AAA 1,262,500
5,000,000 Regional Trans. Auth. Rev. Bonds Ser. A,
AMBAC, 8s, 6/1/17 AAA 6,200,000
-------------
22,657,588
Indiana (1.9%)
--------------------------------------------------------------------------------------
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds
(Columbus Regl. Hosp.), CGIC, 7s, 8/15/15 AAA 8,296,875
2,435,000 Marion Cnty., Hosp. Auth. Fac. Rev. Bonds
(Cmnty. Hosp.), MBIA, 9s, 5/1/08 AAA 2,514,138
-------------
10,811,013
Kentucky (0.1%)
--------------------------------------------------------------------------------------
425,000 KY Hsg. Corp. Multi-Fam. Mtge. Rev. Bonds
Ser. A, BIGI, 8-7/8s, 7/1/19 AAA 434,031
Louisiana (0.9%)
--------------------------------------------------------------------------------------
2,861,907 East Baton Rouge, Mtge. Fin. Auth.
Single-Fam. Mtge. Rev. Bonds, Ser. B, GNMA
Coll., 8-1/4s, 2/25/11 AAA 3,030,044
LA Hsg. Fin. Agcy. Single Fam. Mtge. Rev.
Bonds
480,000 Ser. 85A, FGIC, 9-3/8s, 2/1/15 AAA 498,000
1,310,000 GNMA Coll., 9-1/8s, 11/1/18 AAA 1,373,863
-------------
4,901,907
Massachusetts (2.0%)
--------------------------------------------------------------------------------------
5,000,000 MA Muni. Wholesale. Elec. Co. Pwr. Supply.
Syst. Rev. Bonds, Ser. A, AMBAC, 5s,
7/1/17 AAA 4,368,750
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,000,000 (Metro. West Health Inc.) Ser. C, AMBAC,
6.4s, 11/15/11 AAA 2,115,000
5,000,000 (Baystate Med. Ctr.), Ser. D, FGIC, 6s,
7/1/15 AAA 5,025,000
-------------
11,508,750
Michigan (3.1%)
--------------------------------------------------------------------------------------
800,000 Kent Hosp. Fin. Auth. Hosp. Fac. Rev. Bonds
(Pine Rest Christian Hosp. Assn.), FGIC,
9s, 11/1/10 AAA 826,000
15
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Michigan (continued)
--------------------------------------------------------------------------------------
MI State Hsg. Dev. Auth. Multi-Fam. Rev.
Bonds Ser. A, FGIC
$ 800,000 8-7/8s, 7/1/17 AAA $ 823,000
3,000,000 8-3/8s, 7/1/19 AAA 3,195,000
MI Strategic Fund Ltd. Oblig. Rev. Bonds
(Detroit Edison Project)
4,000,000 Ser. BB, AMBAC, 7s, 5/1/21 AAA 4,555,000
2,750,000 Ser. AA, FGIC, 6.95s, 5/1/11 AAA 3,076,563
4,735,000 MI Trunk Line Rev. Bonds Ser. A, AMBAC,
zero %, 10/1/11 AAA 1,811,138
3,500,000 West Bloomfield, School Dist. Rev. Bonds
MBIA, 5-1/8s, 5/1/14 AAA 3,141,250
-------------
17,427,951
Missouri (1.1%)
--------------------------------------------------------------------------------------
MO, State Hlth. & Ed. Fac. Auth. Rev. Bonds
2,500,000 (Heartland Hlth. Syst. Project), AMBAC,
6.35s, 11/15/17 AAA 2,575,000
4,000,000 (St. Luke's Health Syst.), MBIA, 5.1s,
11/15/13 AAA 3,645,000
-------------
6,220,000
Nebraska (1.7%)
--------------------------------------------------------------------------------------
3,000,000 NE Investment Fin. Auth. Hosp. IFB MBIA,
8.726s, 11/15/16 AAA 3,228,750
900,000 NE Investment Fin. Auth. Single Fam. Mtge.
IFB Ser. B, GNMA, 10.557s, 3/15/22 AAA 1,006,875
5,045,000 NE Investment Fin. Auth. Single Fam. Mtge.
Rev. Bond Ser. 1, MBIA, 8-1/8s, 8/15/38 AAA 5,265,719
-------------
9,501,344
Nevada (0.9%)
--------------------------------------------------------------------------------------
4,500,000 Clark Cnty., School Dist. G.O. Bonds Ser.
A, MBIA, 7s, 6/1/10 AAA 5,062,500
New Hampshire (0.5%)
--------------------------------------------------------------------------------------
2,500,000 NH State Tpk. Sys. IFB, FGIC, 9.119s,
11/1/17 AAA 2,871,875
New Jersey (6.0%)
--------------------------------------------------------------------------------------
3,000,000 Middlesex Cnty., Utils. Auth. Swr. IFB Ser.
A, MBIA, 7.494s, 8/15/10 AAA 3,176,250
5,925,000 NJ Econ. Dev. Auth. Mkt. Transition Fac.
Rev. Bonds Sr.-Lien, Ser A, MBIA, 5-7/8s,
7/1/11 AAA 5,947,219
6,000,000 NJ Econ. Dev. Auth. Wtr. Facs. Rev. Bonds
(Hackensack Water), MBIA, 5.9s, 3/1/24 AAA 5,797,500
Salem Cnty, Ind. Poll. Control Fin. Auth.
Rev. Bonds (Pub. Svc. Elec. & Gas Co.
Project),
10,000,000 Ser. C, MBIA, 6.2s, 8/1/30 AAA 10,100,000
10,000,000 Ser. A, MBIA, 5.45s, 2/1/32 AAA 8,925,000
-------------
33,945,969
16
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
New Mexico (0.9%)
--------------------------------------------------------------------------------------
$ 4,150,000 Los Alamos Cnty., Util. Syst. Rev. Bonds
Ser. A, FSA, 6s, 7/1/15 AAA $ 4,191,500
1,030,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev.
Bonds Ser. C, FGIC, 8-1/2s, 7/1/07 AAA 1,071,200
-------------
5,262,700
New York (11.6%)
--------------------------------------------------------------------------------------
635,000 Erie Cnty., Wtr. Auth. Rev. Rfdg. Bonds
(Fourth Resolution), AMBAC, zero %,
12/1/17 AAA 127,794
NY City Muni. Wtr. Fin. Auth. Wtr. & Swr.
Syst. Rev. Bonds
7,265,000 Ser. B, FGIC, 7-1/2s, 6/15/11 AAA 8,509,131
2,735,000 Refunded, Ser. B, FGIC, 7-1/2s, 6/15/11 AAA 3,244,394
1,000,000 NY City Muni. Wtr. Fin. Auth. VRDN
Ser. G, FGIC, 3.85s, 6/15/24 VMIG1 1,000,000
10,000,000 NY City Muni. Wtr. Fin. Auth. Rev. Bonds
MBIA, 5.678s, 6/15/19 AAA 9,512,500
5,500,000 NY State Dorm. Auth. Rev. Bonds (Mt. Sinai
Medical School), Ser. A, MBIA, 5s, 7/1/21 AAA 4,771,250
3,000,000 NY State Energy Research & Dev. Auth. IFB
MBIA, 7.234s, 7/8/26 AAA 2,512,500
9,750,000 NY State Energy Res. & Dev. Auth. Poll.
Control Rev. Bonds
(Niagara Mohawk Pwr. Corp.) Ser. A, FGIC,
7.2s, 7/1/29 AAA 10,859,063
NY State Med. Care Fac. Fin. Agcy. Rev.
Bonds (Mental Hlth. Svcs.)
10,000,000 Ser A, AMBAC, 5.8s, 8/15/22 AAA 9,712,500
5,870,000 Ser. A, FGIC, 5-1/2s, 8/15/21 AAA 5,466,438
4,350,000 Ser. F, FSA, 5-1/4s, 2/15/21 AAA 3,898,688
6,000,000 Suffolk Cnty., Wtr. Auth. Wtrwks. Rev.
Bonds MBIA, 5s, 6/1/17 AAA 5,317,500
-------------
64,931,758
North Carolina (1.3%)
--------------------------------------------------------------------------------------
8,000,000 NC Muni. Pwr. Agcy. Rev. Bonds (No. 1
Catawba Electric), MBIA, 5.6s, 1/1/20 AAA 7,440,000
Ohio (3.6%)
--------------------------------------------------------------------------------------
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev.
Bonds
3,149,000 Ser. B, GNMA Coll., 8-1/4s, 12/15/19 AAA 3,302,514
6,420,000 Ser. C, GNMA Coll., 8-1/8s, 3/1/20 AAA 6,765,075
12,124,355 Ser. 85-A, FGIC, zero %, 1/15/15 AAA 1,848,964
4,300,000 OH Muni. Elec. Generation Agcy. Jt. Venture
Rev. Bonds, AMBAC, 5-3/8s, 2/15/24 AAA 3,939,875
4,000,000 OH State Air Quality Dev. Auth. Rev. Bonds
(Poll. Ctl. OH Edison), Ser. B, AMBAC,
5-5/8s, 11/15/29 AAA 3,825,000
210,000 OH State Wtr. Dev. Auth. Rev. Bonds AMBAC,
9-3/8s, 12/1/18 AAA 218,663
-------------
19,900,091
17
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Oklahoma (1.1%)
--------------------------------------------------------------------------------------
$5,850,000 OK Hsg. Fin. Agcy. Single Fam. Rev. Bonds
Ser. A, GNMA Coll., 8-1/4s, 12/1/20 AAA $ 6,069,375
Pennsylvania (7.4%)
--------------------------------------------------------------------------------------
5,000,000 Hazleton Area Sch. Dist. Rev. Bonds Ser. A,
FGIC, 6s, 3/1/16 AAA 5,025,000
4,000,000 Keystone Oaks, School Dist. Rev. Bonds
Ser. C, AMBAC, 5.829s, 9/1/16 AAA 3,920,000
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. Rev. Bonds
(Sacred Heart Hosp. Norristown), Ser. A,
BIGI, 6.8s, 2/1/13 AAA 2,022,500
9,000,000 PA Inter-Governmental Coop Auth. Rev. Bonds
(Special Tax-City of Philadelphia Funding
Program), MBIA, 5-5/8s, 6/15/23 AAA 8,426,250
5,000,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 AAA 4,375,000
4,500,000 PA State Higher Edl. Facs. Auth. Rev. Bonds
(Hahnemann U. Project), MBIA, 7.2s, 7/1/19 AAA 4,831,875
Philadelphia, Muni. Auth. Rev. Bonds, FGIC
620,000 7.8s, 4/1/18 AAA 687,425
6,045,000 7.8s, 4/1/18 AAA 6,898,856
3,000,000 Philadelphia, Regl. Port Auth. Lease IFB
(Kidder Mvrics), MBIA, 7.93s, 9/1/13 AAA 3,101,250
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev.
Bonds Ser. A, FGIC, 7-1/8s, 6/1/13 AAA 2,217,500
-------------
41,505,656
Puerto Rico (1.6%)
--------------------------------------------------------------------------------------
3,700,000 Cmnwlth. of Puerto Rico G.O. Bonds
MBIA, 5-1/4s, 7/1/18 AAA 3,413,250
6,000,000 Cmnwlth. of Puerto Rico, IFB, FSA, 7.382s,
7/1/20 AAA 5,782,500
-------------
9,195,750
Rhode Island (0.8%)
--------------------------------------------------------------------------------------
4,315,000 RI Depositors Econ. Protection Corp.
Special Oblig. Rev. Bonds, Ser. A, MBIA,
7-1/4s, 8/1/21 AAA 4,541,538
Texas (7.9%)
--------------------------------------------------------------------------------------
3,505,000 Bexar Cnty. Hlth. Facs. Dev. Corp. Hosp.
Corp. Rev. Bonds, Baptist Memorial Hosp.
Sys. Project), MBIA, 6-1/2s, 2/15/15 AAA 3,645,200
312,000 Dallas Cnty, Hsg. Fin. Corp. Single Fam.
Mtge. Rev. Bonds, MBIA 10s, 10/1/07 AAA 321,750
15,000 Dallas Cnty, Hsg. Fin. Corp. Single Fam.
Mtge. Rev. Bonds (Lomas & Nettleton Co.)
FGIC, 9.2s, 7/1/06 AAA 15,506
5,000,000 Harris Cnty., Hosp. Dist. Mtge. Rev. Rfdg.
Bonds AMBAC, 7.4s, 2/15/10 AAA 5,718,750
Harris Cnty. Toll Rd. Rev. Bonds
2,520,000 Ser. B, FGIC, 6-5/8s, 8/15/11 AAA 2,693,250
4,000,000 Ser. A, AMBAC, 6-1/2s, 8/15/17 AAA 4,485,000
18
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
Texas (continued)
--------------------------------------------------------------------------------------
Houston, Wtr. & Swr. Sys. Rev. Rfdg. Bonds,
FGIC
$ 2,310,000 9-3/8s, 12/1/13 AAA $ 2,399,513
390,000 9-3/8s, 12/1/13 AAA 405,113
7,000,000 Lockhart, Correctional Fac. Fin. Corp. Rev.
Bonds MBIA, 6-5/8s, 4/1/12 AAA 7,280,000
10,000,000 Lower Colo. Riv. Auth. Rev. Rfdg. Jr. Lien
Bonds, FSA, 5-5/8s, 1/1/17 AAA 9,512,500
4,630,000 Lubbock, Hsg. Fin. Corp. Single-Fam. Mtge.
Rev. Bonds Ser. A, GNMA Coll., zero %,
11/25/17 AAA 810,250
1,500,000 North Central Hlth. Fac. Dev. Corp. Rev.
Bonds (Methodist Hosp.-Dallas), Ser. A,
BIGI, 9-1/2s, 10/1/15 AAA 1,543,125
5,000,000 Rio Grande Hlth. Facs. Dev. Corp. Hosp. IFB
(Baptist Med. Ctr.), Ser. B, MBIA, 6.824s,
8/1/12 AAA 5,225,000
-------------
44,054,957
Utah (1.1%)
--------------------------------------------------------------------------------------
6,400,000 Intermountain Pwr. Agcy. Pwr. Supply Rev.
Bonds Ser. A, AMBAC, 5.6s, 7/1/21 AAA 5,904,000
Virginia (1.9%)
--------------------------------------------------------------------------------------
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac.
IFB FGIC, 8.607s, 8/15/23 AAA 10,750,000
Washington (1.9%)
--------------------------------------------------------------------------------------
WA State Pub. Pwr. Supply Syst. Rev. Bonds
3,400,000 (Nuclear Project No. 2), Ser. C, FGIC,
7-3/8s, 7/1/11 AAA 3,901,500
6,000,000 (Nuclear Project No. 3), Ser. B, MBIA,
7-1/8s, 7/1/16 AAA 6,795,000
-------------
10,696,500
West Virginia (--%)
--------------------------------------------------------------------------------------
65,000 WV Hsg. Dev. Auth. Home Ownership Mtge.
Rev. Bonds Ser. A., FGIC, 9.1s, 1/1/14 AAA 66,706
Wisconsin (1.4%)
--------------------------------------------------------------------------------------
2,000,000 Superior, Ltd. Oblig. Rev. Bonds (Midwest
Energy Resources), Ser. E, FGIC, 6.9s,
8/1/21 AAA 2,232,500
5,000,000 WI Hlth. Fac. Auth. Rev. Bonds (Meriter
Hosp. Inc.), FGIC, 8-3/8s, 12/1/09 AAA 5,562,500
-------------
7,795,000
Wyoming (0.9%)
--------------------------------------------------------------------------------------
5,000,000 Laramie Cnty., Indl. Dev. Rev. Bonds
(Cheyene Lt., Fuel & Pwr. Co.), Ser. A,
AMBAC, 7-1/4s, 9/1/21 AAA 5,237,494
- ----------- ------------------------------------------- -------- -------------
Total Investments (cost $523,457,045)*** $551,443,265
=============
</TABLE>
19
<PAGE>
NOTES
* Percentages indicated are based on net assets of $561,700,523, which
correspond to a net asset value per class A, class B and class M shares
of $14.86, $14.87 and $14.86, respectively.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at July 31, 1995 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,
1995. Ratings are not covered by the Report of Independent Accountants.
*** The aggregate identified cost for federal income tax purposes is
$523,623,186, resulting in gross unrealized appreciation and depreciation
of $31,058,653 and $3,238,574, respectively, or net unrealized
appreciation of $27,820,079.
The rates shown on IFBs, which are securities paying variable interest
rates that vary inversely to changes in the market interest rates, and
VRDNs are the current interest rates at July 31, 1995, which are subject
to change based on the terms of the security.
The fund had the following insurance concentration greater than 10% of
net assets at July 31, 1995:
MBIA 37.2%
FGIC 21.7
AMBAC 16.6
The fund had the following industry group concentrations greater than 10%
of net assets at July 31, 1995:
Utilities 20.9%
Hospitals/ Health Care 14.5
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of assets and liabilities
July 31, 1995
<TABLE>
<CAPTION>
Assets
-------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (identified cost $523,457,045) (Note 1) $551,443,265
-------------------------------------------------------------------------------------------
Cash 286,839
-------------------------------------------------------------------------------------------
Interest receivable 8,350,369
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,257,018
-------------------------------------------------------------------------------------------
Receivable for securities sold 2,637,039
-------------------------------------------------------------------------------------------
Total assets 563,974,530
-------------------------------------------------------------------------------------------
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 998,876
-------------------------------------------------------------------------------------------
Payable for Trustees fees (Note 2) 162
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 544,206
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 282,193
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 79,058
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,195
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 305,611
-------------------------------------------------------------------------------------------
Other accrued expenses 62,706
-------------------------------------------------------------------------------------------
Total liabilities 2,274,007
-------------------------------------------------------------------------------------------
Net assets $561,700,523
-------------------------------------------------------------------------------------------
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 3) $541,634,539
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (524,841)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investment and futures transactions
(Note 1) (7,395,395)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 27,986,220
-------------------------------------------------------------------------------------------
Total--Representing net assets applicable
to capital shares outstanding $561,700,523
-------------------------------------------------------------------------------------------
Net asset and redemption price of class A shares
($184,240,545 divided by 12,400,211 shares) $14.86
-------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $14.86)* $15.60
-------------------------------------------------------------------------------------------
Net asset value and offering price of class B share
($377,442,691 divided by 25,380,060 shares)+ $14.87
-------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($17,287 divided by 1,163 shares) $14.86
-------------------------------------------------------------------------------------------
Offering price per share (100/96.75 of $14.86)** $15.36
-------------------------------------------------------------------------------------------
</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.
** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Statement of operations
Year ended July 31, 1995
Tax exempt interest income $36,690,228
---------------------------------------------------------------------
Expenses:
---------------------------------------------------------------------
Compensation of Manager (Note 2) 3,286,811
---------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 331,359
---------------------------------------------------------------------
Compensation of Trustees (Note 2) 20,081
---------------------------------------------------------------------
Reports to shareholders 37,342
---------------------------------------------------------------------
Auditing 35,129
---------------------------------------------------------------------
Legal 12,751
---------------------------------------------------------------------
Postage 17,052
---------------------------------------------------------------------
Administrative services (Note 2) 14,290
---------------------------------------------------------------------
Registration fees 76,414
---------------------------------------------------------------------
Distribution fees--Class A (Note 2) 327,934
---------------------------------------------------------------------
Distribution fees--Class B (Note 2) 3,344,389
---------------------------------------------------------------------
Distribution fees--Class M (Note 2) 5
---------------------------------------------------------------------
Other 11,593
---------------------------------------------------------------------
Total expenses 7,515,150
---------------------------------------------------------------------
Net investment income 29,175,078
---------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (611,056)
---------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (421,263)
---------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,341,408)
---------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts during the year 8,753,042
---------------------------------------------------------------------
Net gain on investment transactions 6,379,315
---------------------------------------------------------------------
Net increase in net assets resulting from operations $35,554,393
---------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended
July 31
----------------------------
1995 1994
----------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
----------------------------------------------------------------------------------
Operations:
----------------------------------------------------------------------------------
Net investment income $ 29,175,078 $ 29,208,200
----------------------------------------------------------------------------------
Net realized gain (loss) on investments (2,373,727) 10,055
----------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments 8,753,042 (29,129,498)
----------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 35,554,393 88,757
----------------------------------------------------------------------------------
Distributions to shareholders:
----------------------------------------------------------------------------------
From net investment income
----------------------------------------------------------------------------------
Class A (9,224,293) (7,004,732)
----------------------------------------------------------------------------------
Class B (19,697,447) (22,142,492)
----------------------------------------------------------------------------------
Class M (41) --
----------------------------------------------------------------------------------
From net realized gain
----------------------------------------------------------------------------------
Class A -- (2,495)
----------------------------------------------------------------------------------
Class B -- (7,560)
----------------------------------------------------------------------------------
In excess of net realized gain
----------------------------------------------------------------------------------
Class A (50,968) (932,962)
----------------------------------------------------------------------------------
Class B (140,286) (2,827,335)
----------------------------------------------------------------------------------
Increase (decrease) from capital share transactions
(Note 4) (20,715,061) 36,144,510
----------------------------------------------------------------------------------
Total increase (decrease) in net assets (14,273,703) 3,315,691
Net assets
----------------------------------------------------------------------------------
Beginning of year $575,974,226 $572,658,535
----------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $524,841 and $778,138,
respectively) $561,700,523 $575,974,226
----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Financial Highlights
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
For the period
June 1, 1995 For the period
(commencement September 20, 1993
of operations) (commencement
to Year ended of operations) to
July 31 July 31 July 31
-----------------------------------------------------------------------------------------------------------------
1995 1995 1994
-----------------------------------------------------------------------------------------------------------------
Class M Class A
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $15.11 $14.67 $15.88
-----------------------------------------------------------------------------------------------------------------
Investment operations
-----------------------------------------------------------------------------------------------------------------
Net investment income .12 .83 .73
-----------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (.25) .19 (1.12)
-----------------------------------------------------------------------------------------------------------------
Total from investment operations (.13) 1.02 (.39)
-----------------------------------------------------------------------------------------------------------------
Less distributions:
-----------------------------------------------------------------------------------------------------------------
From net investment income (.12) (.82) (.72)
-----------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
-----------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- (.01) (.10)
-----------------------------------------------------------------------------------------------------------------
Total distributions (.12) (.83) (.82)
-----------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.86 $14.86 $14.67
-----------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%) (b) (0.87)(a) 7.21 (2.49)(a)
-----------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $17 $184,241 $143,079
-----------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) .14(a) .89 .80(a)
-----------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%) .73(a) 5.68 4.73(a)
-----------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 37.62 37.62 47.72
-----------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Year ended July
31
- ------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$14.68 $15.50 $15.42 $14.38 $14.25
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
.73 .74 .75 .76 .79
- ------------------------------------------------------------------------
.20 (.73) .28 1.14 .14
- ------------------------------------------------------------------------
.93 .01 1.03 1.90 .93
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
(.73) (.73) (.75) (.77) (.80)
- ------------------------------------------------------------------------
-- -- (.20) (.09) --
- ------------------------------------------------------------------------
(.01) (.10) -- -- --
- ------------------------------------------------------------------------
(.74) (.83) (.95) (.86) (.80)
- ------------------------------------------------------------------------
$14.87 $14.68 $15.50 $15.42 $14.38
- ------------------------------------------------------------------------
6.53 0.00 7.00 13.63 6.79
- ------------------------------------------------------------------------
$377,443 $432,895 $572,659 $466,135 $359,465
- ------------------------------------------------------------------------
1.54 1.53 1.74 1.79 1.68
- ------------------------------------------------------------------------
5.05 4.81 4.88 5.16 5.60
- ------------------------------------------------------------------------
37.62 47.72 42.01 66.18 54.69
- ------------------------------------------------------------------------
</TABLE>
(a) Not annualized.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
25
<PAGE>
Notes to financial statements
July 31, 1995
Note 1
Significant accounting policies
The fund is a series of Putnam Tax-Free Income Trust (the "Trust") which is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The fund pursues its
objective of seeking high current income exempt from federal income tax by
investing in tax exempt securities that are covered by insurance guaranteeing
the timely payment of principal and interest, are rated AAA or Aaa, or are
backed by the U.S. government.
The fund offers class A, class B and class M shares. The fund commenced its
public offering of class M shares on June 1, 1995. 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. Class M shares are sold
with a maximum front-end sales charge of 3.25% and an ongoing distribution
fee that is higher than class A shares and lower than class B shares.
Expenses of the fund are borne pro-rata by the shareholders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund if the
fund were liquidated.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which
uses information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures The fund may purchase and sell financial futures contracts to
hedge against changes in the values of tax-exempt municipal securities the
fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units
of a particular index or a certain amount of a U.S. Government 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. 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.
26
<PAGE>
When the contract is closed, the fund records a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed.
The potential risk to the fund is that the change in value of futures
contracts primarily corresponds with the value of underlying instruments
which may not correspond to the change in value of the hedged instruments. In
addition, there is a risk that the fund may not be able to close out its
futures positions due to an illiquid secondary market.
D) Option accounting principles The fund may, to the extent consistent with
its investment objectives and policies, seek to increase its current returns
by writing covered call and put options on securities it owns or in which it
may invest. When a fund writes a call or put option, an amount equal to the
premium received by the fund is included in the fund's "Statement of assets
and liabilities" as an asset and an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market
value of an option written. The current market value of an option is the last
sale price or, in the absence of a sale, the last offering price. If an
option expires on its stipulated expiration date, or if the fund enters into
a closing purchase transaction, the fund realizes a gain (or loss if the cost
of a closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is
extinguished. If a written call option is exercised, the fund realizes a gain
or loss from the sale of the underlying security and the proceeds of the sale
are increased by the premium originally received. If a written put option is
exercised, the amount of the premium originally received reduces the cost of
the security that the fund purchases upon exercise of the option.
The risk in writing a call option is that the fund relinquishes the
opportunity to profit if the market price of the underlying security
increases and the option is exercised. In writing a put option, the fund
assumes the risk of incurring a loss if the market price of the underlying
security decreases and the option is exercised. In addition, there is the
risk the fund may not be able to enter into a closing transaction because of
an illiquid secondary market.
The fund may also, to the extent consistent with its investment objectives
and policies, buy put options to protect its portfolio holdings in an
underlying security against a decline in market value. The fund may buy call
options to hedge against an increase in the price of the securities that the
fund ultimately wants to buy. The fund may also buy and sell combinations of
put and call options on the same underlying security to earn additional
income. The premium paid by a fund for the purchase of a put or call option
is included in the fund's "Statement of assets and liabilities" as an
investment and is subsequently "marked-to-market" to reflect the current
market value of the option. If an option the fund has purchased expires on
the stipulated expiration date, the fund realizes a loss in the amount of the
cost of the option. If the fund enters into a closing sale transaction, the
fund realizes a gain or loss, depending on whether proceeds from the closing
sale transaction are greater or less than the cost of the option. If the fund
exercises a call option, the cost of securities acquired by exercising the
call is increased by the premium paid to buy the call. If the fund exercises
a put option, it realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are decreased by the premium origi-
27
<PAGE>
nally paid. The risk associated with purchasing options is limited to the
premium originally paid.
E) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is
also the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. 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. At July 31, 1995, the fund had a capital loss
carryover of approximately $1,064,000 available to offset future net capital
gain, if any, which will expire on July 31, 2003.
F) 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 the treatment of
post-October loss deferrals, losses on wash sale transactions, realized gains
and losses on certain future contracts and capital loss carryover.
G) Amortization of bond premium and discount Any premium resulting from the
purchase of securities is amortized using the effective yield to maturity
method for bonds issued after September 27, 1985, and on a straight-line
basis for bonds issued prior thereto. The premium in excess of the call
price, if any, is amortized to the call date: thereafter, the remaining
excess premium is amortized to maturity. Discount on zero-coupon and stepped
coupon bonds is accreted according to the effective yield method.
H) Expenses of the Trust Expenses directly charged or attributable to the
fund will be paid from the assets of the fund. Generally, expenses of the
Trust will be allocated and charged to the assets of each fund on a basis
that the Trustees deem fair and equitable, which may be based on the relative
assets of each fund or the nature of the services performed and relative
applicability to each fund.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Investment Management Inc. ("Putnam Management"), the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc., for
management and investment advisory services is paid quarterly based on the
average net assets of the fund for the quarter. Such fee is based on 0.60% of
the first $500 million of average net assets; 0.50% of the next $500 million;
0.45% of the next $500 million and 0.40% of any amount over $1.5 billion.
Such fees are subject to reduction, under current law, in any year to the
extent that expenses (exclusive of distribution fees, brokerage, interest and
taxes) of the fund exceed 2.5% of the first $30 million of average net
assets, 2.0% of the next $70 million and 1.5% of any amount over $100 million
and by the amount of certain brokerage commissions and fees (less expenses)
received by affiliates of the Manager of the fund's portfolio transactions.
The fund also reimburses the manager for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggre-
28
<PAGE>
gate amount of all such reimbursements is determined annually by the
Trustees.
Trustees of the fund receive an annual Trustee's fee of $1,220, 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.
During the year ended July 31, 1995, the fund adopted a Trustee Fee Deferral
Plan (the "Plan") which allows the Trustees to defer the receipt of all or a
portion of Trustees fees payable on or after July 1, 1995. The deferred fees
remain in the fund and are invested in the fund or in other Putnam funds
until distribution in accordance with the Plan.
Custodial functions are being provided to the fund by Putnam Fiduciary Trust
Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services,
a division of PFTC. Investor servicing and custodian fees reported in the
Statement of operations for the year ended July 31, 1995 have been reduced by
credits allowed by PFTC.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund at an annual
rate of 0.20%, 0.85% and 0.50% of the average net assets attributable to
class A, class B and class M shares respectively.
For the year ended July 31, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $14,530 from the sale of class A
shares and $12 for the sale of class M shares. There was $864,745 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of class
A shares purchased as part of an investment of $1 million or more. For the
year ended July 31, 1995, Putnam Mutual Funds Corp., acting as underwriter
received $24,212 on class A redemptions. There were no contingent deferred
sales charges on class M redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1995, purchases and sales of investment
securities other than short-term municipal obligations aggregated
$203,099,134 and $223,777,431, 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 written options activity during the year ended
July 31, 1995:
Number of Premiums
Contracts Received
- -----------------------------------------------------------------------------
Options opened at beginning of year -- $ --
Options written 40,400,028 966,955
Options sold (40,400,028) (966,955)
- -----------------------------------------------------------------------------
Written options outstanding at end of period -- $ --
- -----------------------------------------------------------------------------
29
<PAGE>
Note 4
Capital shares
At July 31, 1995, there was an unlimited number of shares of beneficial
interest authorized divided into class A, class B and class M shares.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
September 20, 1993
(commencement of
Year ended operations) to
July 31 July 31
---------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------
Class A Shares Amount Shares Amount
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,343,427 $ 61,969,526 10,582,170 $168,126,740
Shares issued in
connection with
reinvestment of
distributions 366,885 5,321,976 345,090 4,608,153
- --------------------------------------------------------------------------------------
4,710,312 67,291,502 10,927,260 172,734,893
Shares repurchased (2,061,211) (29,864,967) (1,176,150) (17,969,942)
- --------------------------------------------------------------------------------------
Net increase 2,649,101 $ 37,426,535 9,751,110 $154,764,951
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended July 31
---------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------------
Class B Shares Amount Shares Amount
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,875,400 $ 41,920,297 4,899,248 $ 75,602,157
Shares issued in
connection with
reinvestment of
distributions 858,519 12,416,984 1,046,236 16,046,023
- --------------------------------------------------------------------------------------
3,733,919 54,337,281 5,945,484 91,648,180
Shares repurchased (7,836,307) (112,496,308) (13,406,532) (210,268,621)
- --------------------------------------------------------------------------------------
Net decrease (4,102,388) $ (58,159,027) (7,461,048) $(118,620,441)
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
June 1, 1995
(commencement of operations) to July 31
-------------------------------------------------------
1995
- -------------------------------------------------------------------------------------
Class M Shares Amount
- -------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 1,161 $17,400
Shares issued in
connection with
reinvestment of
distributions 2 31
- -------------------------------------------------------------------------------------
1,163 17,431
Shares repurchased -- --
- -------------------------------------------------------------------------------------
Net increase 1,163 $17,431
- -------------------------------------------------------------------------------------
</TABLE>
Federal Tax Information
(unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes. The
Form 1099, you will receive in January 1996 will show the tax status of all
distributions paid to your account in calendar 1995.
30
<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
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
James E. Erickson
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free Insured
Fund. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information or to request a
prospectus, call toll free 1-800-225-1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other
agency, and involve risk, including the possible loss of principal amount
invested.
31
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- -------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -------------
19850-438/035
