Putnam
Tax-Free
Insured
Fund
ANNUAL REPORT
July 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "A massive amount of reinvestment money is flowing into the muni
market -- with nearly $60 billion resulting from bond calls, interest
payments and redemptions."
--The Wall Street Journal, June 25, 1996
* "Once investors realized that the tax-advantaged status of municipal
bonds was not likely to change over the near term, they bid up bond
prices, giving the rally a second wind."
--Richard P. Wyke, Manager
Putnam Tax-Free Insured Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
14 Portfolio holdings
21 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
Putnam Tax-Free Insured Fund's most recent fiscal year, the 12 months
ended July 31, 1996, was marked by volatility born of concern over the
possible implications of a flat tax on municipal bonds and worry that
economic growth would touch off a new round of inflation.
During the year's first half, the flat-tax issue kept municipals from
participating fully in the continuing bond market rally. Just as
prospects for any early passage of a flat tax began to dim, concern over
renewed inflation stopped the bond market rally in its tracks. Because
the market had already significantly discounted tax-exempts over the
flat-tax issue, they gave back less ground than their taxable
counterparts.
Throughout this blustery fiscal year, fund manager Rick Wyke maintained
the fund's current dividend while positioning the portfolio for what he
expects will be somewhat calmer waters in the months ahead. His report
on the fund's performance and prospects follows.
Respectfully yours,
/S/ George Putnam
George Putnam
Chairman of the Trustees
September 18, 1996
Report from the Fund Manager
Richard P. Wyke
With flat-tax proposals, budget talks, and an unsettled fixed-income
market, municipal-bond investing was no walk in the park during the 12
months ended July 31, 1996. However, Putnam Tax-Free Insured Fund's
solid performance over the fiscal year clearly demonstrated its ability
to take such events in stride. During the 12 months ended July 31, 1996,
returns at net asset value for class A, class B, and class M shares
equaled 6.06%, 5.44%, and 5.74%, respectively. Returns at maximum public
offering price were 1.03% and 2.30% for class A and class M shares,
respectively, and 0.44% for class B shares after factoring in the
contingent deferred sales charge. See pages 8, 9, and 10 for longer-term
performance information.
* MUNICIPALS REBOUND FROM MARKET SETBACKS
As your fund began its fiscal year in August 1995, proposed flat tax and
its implications already had posed a key concern for municipal bond
investors. The proposed flat tax would have deprived municipal bonds of
their tax advantage over other investments. These concerns reduced
demand, and the resulting oversupply caused the municipal market to lag
the Treasury market for most of the first half of the fund's fiscal
year.
By the end of calendar 1995, interest in the flat tax had declined as
most of the talk out of Washington began to center on the potential for
balancing the federal budget. This, combined with perceptions of slowing
growth in the economy, helped renew investors' interest in bonds and
sparked rallies throughout the fixed-income universe.
As Steve Forbes' short-lived presidential campaign focused more
attention on the details of a flat tax, what became even more apparent
was that any sort of definitive action along these lines is still a long
way off. Once investors realized that the tax-advantaged status of
municipal bonds was not likely to change over the near term, they bid up
bond prices, giving the rally a second wind.
During the second half of fiscal 1996, the fund operated in an
environment of rising interest rates and generally challenging
conditions for fixed-income investors. The bond market began calendar
1996 both overbought and overvalued -- primarily the result of
investors' reactions to the backdrop of benign inflation, slow economic
growth, and an easing Federal Reserve Board policy. Interest rates rose
dramatically in April 1996, bringing the 10-month bond market rally to
an abrupt halt.
* FUND PERFORMANCE DRIVEN BY SEVERAL STRATEGIES
Two of the most important components of your fund's strategy are the
management of portfolio duration and positioning along the yield curve.
Duration is a mathematical formula used to assess a portfolio's
sensitivity to interest-rate changes; the longer the duration, the
greater the price appreciation when interest rates decline. However, in
a rising-rate environment, a long duration makes the portfolio's value
more vulnerable to declines.
[GRAPHIC OMITTED: Horizontal bar chart DIVERSIFICATION BY STATE*]
California 16.7%
Florida 10.9%
Texas 10.4%
New York 9.1%
Pennsylvania 4.8%
Footnote reads:
*Based on net assets as of 7/31/96. Allocations will vary over time.
At the beginning of the calendar year, it was our strategy to keep the
fund's portfolio duration relatively long in anticipation of a possible
market rally. Consequently, the fund slightly underperformed its Lipper
category (insured investment-grade tax-exempt funds) in the spring 1996
market selloff. In the second half of the fund's fiscal year, we
shortened the fund's duration slightly.
In terms of the yield curve, over the past year we repositioned about
10% of the fund's assets, shifting holdings out of the 30-year portion
of the yield curve into the 10- to 20-year range. This sizable move was
driven in part by what we had perceived to be the emergence of insurance
companies as marginal buyers in this portion of the market. We expect
the increased attention from insurance companies to strengthen prices
further in this market sector.
Another strategy we hope will fuel performance involves increasing the
fund's exposure to states we believe will be among the first to
participate in a possible bond rally. Those states include California,
Florida, Texas, New York, and Pennsylvania. We also keep a critical eye
on bond liquidity when selecting states in which to invest. If a state's
bonds are highly liquid, it will be easier for us to adjust the
portfolio to take advantage of mispriced opportunities.
Lastly, the portfolio's allocation to yield-enhancing industry sectors
continues to help the fund. Worth mentioning are two pockets of
emphasis: hospitals/health care and prerefunded bonds. Hospitals/health
care continued to be the largest sector, making up approximately 19.9%
of your fund's net assets at fiscal year's end. We also continue to
favor prerefunded bonds. These bonds are secured by an escrow fund of
U.S. government obligations that is sufficient to pay off the entire
issue of refunded bonds at maturity. Prerefunded bonds tend to boost the
fund's yield potential while contributing to the overall consistency of
performance throughout an interest-rate cycle.
[GRAPHIC WORM CHART: YIELD CURVE COMPARISON: TAXABLE AND TAX-FREE BONDS]
(vertical axis: max. 10%, min. 3%)
(horizontal axis: max. 30 years, min. 1 year)
(plot points)
YEARS AAA-rated U.S. Taxable-
municipal Treasury equivalent
bonds securities municipal bond yield
1 3.67 5.85 6.08
2 4.02 6.22 6.66
3 4.27 6.40 7.07
4 4.42 6.48 7.32
5 4.56 6.57 7.55
7 4.76 6.66 7.88
10 5.06 6.80 8.38
15 5.44 6.84 9.01
20 5.61 6.89 9.29
25 5.65 6.94 9.35
30 5.67 6.98 9.39
Footnote reads:
Chart compares yields (vertical axis) of taxable U.S. Treasury
securities and tax-free AAA-rated municipal bonds of varying maturities
(horizontal axis, stated in years) on 7/31/96. The taxable-equivalent
yield for municipal bonds assumes the maximum 39.6% federal income
tax rate. Returns would not be as advantageous for investors in lower
tax brackets. Shares of the fund are not insured and no assurance can be
made that the fund will attain any particular yield. 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.
* CAUTIOUSLY OPTIMISTIC OUTLOOK
Although the fund experienced a fairly volatile year and traveled
through an unusual investment environment, we see growing signs of
market stability in the months ahead. We believe modest economic growth,
low inflation risk, and a lack of sharp interest-rate movements during
the early months of the new fiscal year may generate the calmer waters
we have been expecting.
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 7/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Tax-Free Insured Fund is designed for investors seeking
high current income free from federal income tax through investments
primarily in insured investment-grade tax-exempt securities.
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.
TOTAL RETURN FOR PERIODS ENDED 7/31/96
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 6.06% 1.03% 5.44% 0.44% 5.74% 2.30%
- -----------------------------------------------------------------------
5 years -- -- 36.58 34.58 -- --
Annual average -- -- 6.43 6.12 -- --
- -----------------------------------------------------------------------
10 years -- -- 96.92 96.92 -- --
Annual average -- -- 7.01 7.01 -- --
- -----------------------------------------------------------------------
Life of class 10.88 5.62 -- -- 4.82 1.40
Annual average 3.68 1.93 -- -- 4.10 1.19
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/96
Lehman Bros. Consumer
Municipal Bond Index Price Index
- -----------------------------------------------------------------------
1 year 6.60% 2.95%
- -----------------------------------------------------------------------
5 years 45.06 15.27
Annual average 7.72 2.88
- -----------------------------------------------------------------------
10 years 120.87 43.38
Annual average 8.25 3.67
- -----------------------------------------------------------------------
Life of class A 13.50 8.20
Annual average 4.57 2.79
- -----------------------------------------------------------------------
Life of class M 6.67 3.15
Annual average 5.68 2.69
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and net asset value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost. POP assumes 4.75% maximum sales charge for class A shares
and 3.25% for class M shares. CDSC for class B shares assumes the
applicable sales charge, with the maximum being 5%.
[GRAPHIC WORM CHART OMITTED: GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 7/31/86
Starting value (Insert ending Total)
$10,000 Fund's class B shares at CDSC $19,692
$10,000 Lehman Brothers Municipal Bond Index $22,087
$10,000 Consumer Price Index $14,338
(plot points for 10-year total return mountain chart)
Lehman Brothers
Date/year Fund at POP Municipal Bond Index CPI
- --------- ------------ ----------------------- ------
7/31/86 10,000 10,000 10,000
7/31/87 10,531 10,907 10,393
7/31/88 11,294 11,673 10,822
7/31/89 12,797 13,095 11,361
7/31/90 13,501 14,003 11,909
7/31/91 14,417 15,226 12,438
7/31/92 16,382 17,317 12,831
7/31/93 17,529 18,848 13,187
7/31/94 17,530 19,206 13,553
7/31/95 18,674 20,720 13,927
7/31/96 19,692 22,087 14,338
footnote reads:
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 $11,088 at net asset value on 7/31/96
($10,562 at public offering price). A $10,000 investment in the
fund's class M shares at inception on 6/1/95 would have been
valued at $10,482 at net asset value on 7/31/96 ($10,140 at
public offering price.)
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/96
Class A Class B Class M
- ----------------------------------------------------------------------
Distributions (number) 12 12 12
- ----------------------------------------------------------------------
Income1 $0.807134 $0.709644 $0.760962
- ----------------------------------------------------------------------
Capital gains1 -- -- --
- ----------------------------------------------------------------------
Total $0.807134 $0.709644 $0.760962
- ----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ----------------------------------------------------------------------
7/31/95 $14.86 $15.60 $14.87 $14.86 $15.36
- ----------------------------------------------------------------------
7/31/96 14.94 15.69 14.96 14.94 15.44
- ----------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------
Current dividend rate2 5.40% 5.14% 4.75% 5.06% 4.90%
- ----------------------------------------------------------------------
Taxable equivalent3 8.94 8.51 7.86 8.38 8.11
- ----------------------------------------------------------------------
Current 30-day SEC
yield4 5.04 4.79 4.39 4.73 4.57
- ----------------------------------------------------------------------
Taxable equivalent3 8.34 7.93 7.27 7.83 7.57
- ----------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases,
state tax purposes. For some investors, investment income may also be
subject to the federal alternative minimum tax. Investment income may be
subject to state and local taxes.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 39.6% federal income tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 5.85% 0.82% 5.09% 0.09% 5.45% 2.01%
- -----------------------------------------------------------------------
5 years -- -- 37.18 35.18 -- --
Annual average -- -- 6.53 6.21 -- --
- -----------------------------------------------------------------------
10 years -- -- 95.27 95.27 -- --
Annual average -- -- 6.92 6.92 -- --
- -----------------------------------------------------------------------
Life of class 9.86 4.64 -- -- 3.87 0.48
Annual average 3.44 1.65 -- -- 3.58 0.45
- -----------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and net asset value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
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.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's CDSC declines from a 5% maximum during the first
year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index assumes reinvestment of all
distributions and interest payments and does not take in account
brokerage fees or taxes. Securities in the fund do not match those in
the indexes and performance of the fund will differ. It is not possible
to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
(Formerly Natural Resources Fund)
Health Sciences Trust
International Growth Fund
(Formerly Overseas Growth Fund)
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC Emerging Growth Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
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
LIFESTAGESM 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:
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts++
* Not available in all states.
+ Relative to above.
++ 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 at
1-800-225-1581 to obtain a prospectus for any Putnam fund. It
contains more complete information, including charges and expenses.
Please read it carefully before you invest or send money.
Report of independent accountants
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, 1996, 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 investments owned at July 31,
1996 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 13, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1996
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investors Guaranty Insurance
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
<S> <C> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (98.6%)*
PRINCIPAL AMOUNT RATINGS** VALUE
Alabama (0.6%)
- -------------------------------------------------------------------------------------------------------------------------------
$3,000,000 Alabama A&M U. Rev. Bonds, MBIA, 6 1/2s, 11/1/25 Aaa $3,195,000
Arizona (1.4%)
- -------------------------------------------------------------------------------------------------------------------------------
AZ State Muni. Fin. Program COP
1,000,000 Ser. 31, BIGI, 7 1/4s, 8/1/09 Aaa 1,167,500
5,700,000 Ser. 34, BIGI, 7 1/4s, 8/1/09 Aaa 6,654,750
------------
7,822,250
California (16.7%)
- -------------------------------------------------------------------------------------------------------------------------------
8,500,000 CA Hlth. Fac. Fin. Auth. Rev. Bonds (Children's Hospital), MBIA, 5 3/8s, 7/1/16 Aaa 8,043,125
9,500,000 CA State G.O. Bonds, MBIA, 5 1/2s, 4/1/12 Aaa 9,357,500
3,000,000 CA Statewide Cmntys. Dev. Auth. Step-up Recovery Floater COP (Motion Picture &
TV Fund), AMBAC, 5.35s, (5.68s,1/1/99)1/1/24++ Aaa 2,666,250
LA Cnty. Trans. Comm. Sales Tax Rev. Bonds
2,500,000 Ser. A, FGIC, 6 3/4s, 7/1/20 Aaa 2,775,000
3,000,000 Ser. B, AMBAC, 6 1/2s, 7/1/13 Aaa 3,165,000
4,000,000 (Proposition C), Ser. A, MBIA, 6 3/4s, 7/1/19 Aaa 4,485,000
3,455,000 (Proposition C), Ser. A, MBIA, 6 1/2s, 7/1/20 Aaa 3,826,413
13,900,000 LA Waste Wtr Systems Rev. Bonds Ser. A, MBIA , 5.7s,6/1/20 Aaa 13,569,867
10,000,000 Orange Cnty. Recy. Rev. Bonds, Ser. A, MBIA, 5 3/4s, 6/1/15 Aaa 9,837,500
5,950,000 Orange Cnty. Loc. Trans. Auth. Sales Tax Rev. Bonds, Ser.2,FGIC, 5s,2/15/08 Aaa 5,726,875
Riverside Cnty. Rev. Bonds, FGIC
4,705,000 6s, 6/1/09 Aaa 4,969,656
2,000,000 6s, 6/1/08 Aaa 2,122,500
5,000,000 Sacramento Muni. Util. Dist. Elec. Rev. Bonds, Ser. Y, MBIA, 6 3/4s, 9/1/19 Aaa 5,562,500
5,000,000 San Diego, Regl. Bldg. Auth. Lease Rev. Bonds, MBIA, 6.9s, 5/1/23 Aaa 5,031,250
3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds (Police Admin. & Hldg. Fac.), Ser. A,
MBIA, 6 1/4s, 7/1/17 Aaa 3,951,400
6,300,000 U. of CA Rev. Bonds (Multi-Purpose Projects), Ser. A, MBIA, 6 7/8s, 9/1/16 Aaa 7,119,000
------------
92,208,836
Colorado (2.5%)
- -------------------------------------------------------------------------------------------------------------------------------
4,224,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider Pooled Loan Program),
Ser. A, FSA , 7 1/4s, 7/15/17 Aaa 4,556,640
Denver, City & Cnty. Arpt. Rev. Bonds Ser. C, MBIA
1,500,000 6 3/4s, 11/15/22 Aaa 1,586,250
2,000,000 6 3/4s, 11/15/13 Aaa 2,130,000
5,165,000 El Paso Cnty. Home Mtge. Rev. Bonds, Ser. A, GNMA Coll., 8s, 3/1/21 Aaa 5,378,056
------------
13,650,946
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 5,575,000
Florida (10.9%)
- -------------------------------------------------------------------------------------------------------------------------------
5,855,000 Brevard Cnty. School Board COP, Ser.A, AMBAC, 5 1/2s,7/1/09 Aaa 5,862,319
4,805,000 FL Hsg. Fin. Agcy. Home Ownership Rev. Bonds, Ser. 1987 G2, Class B, GNMA Coll.,
8.595s, 11/1/18 Aaa 5,285,500
4,000,000 FL State Tpk. Auth. Rev. Bonds, FGIC, 5s, 7/1/16 Aaa 3,645,000
13,675,000 Hernando Cnty. Rev. Bonds (Criminal Justice Complex Fin. Project), FGIC,
7.65s, 7/1/16 Aaa 17,127,938
5,500,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA, 8.91s, 10/29/21 Aaa 5,857,500
10,795,000 Orange Cnty., Hlth. Fac. Auth. Rev. Bonds (Pooled Hosp. Loan), Ser. B, BIGI,
7 7/8s, 12/1/25 Aaa 11,318,126
5,000,000 Orlando & Orange Cnty., Expwy. Auth. Rev. Bonds (Expwy. Rev.), FGIC, 8 1/4s,
7/1/14 Aaa 6,500,000
4,000,000 Sumter Cnty. School Dist. Rev. Bonds (Multi Dist. Loan Program), FSA, 7.15s,
11/1/15 Aaa 4,730,000
------------
60,326,383
Georgia (3.7%)
- -------------------------------------------------------------------------------------------------------------------------------
6,100,000 GA Muni. Elec. Auth. Rev. Bonds (Project One),Ser. A, AMBAC, 6 1/2s, 1/1/26 Aaa 6,481,250
7,500,000 GA Muni. Elec. Auth. Pwr. Rev. Bonds, Ser. B, AMBAC, 6 1/4s, 1/1/12 Aaa 8,025,000
5,500,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds (Crossover Ser. Project
One), AMBAC, 6.4s, 1/1/13 Aaa 5,953,750
------------
20,460,000
Illinois (3.8%)
- -------------------------------------------------------------------------------------------------------------------------------
2,600,000 Chicago, Central Pub. Library Rev. Bonds, Ser. B, AMBAC, 6.85s, 1/1/17 Aaa 2,902,250
8,530,000 Chicago, Pub. Bldg. Comm. Bldg. Rev. Bonds (Cmnty. Bldg.), Ser. A,
MBIA, 7s, 1/1/20 Aaa 10,076,063
4,150,000 Chicago, Res. Mtge. Rev. Bonds, Ser. B., MBIA, zero%, 10/1/09 Aaa 1,654,813
5,000,000 Regional Trans. Auth. Rev. Bonds, Ser. A, AMBAC, 8s, 6/1/17 Aaa 6,356,250
------------
20,989,376
Indiana (1.5%)
- -------------------------------------------------------------------------------------------------------------------------------
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds (Columbus Regl. Hosp.), FSA,
7s, 8/15/15 Aaa 8,400,000
Kentucky (0.1%)
- -------------------------------------------------------------------------------------------------------------------------------
140,000 KY Hsg. Corp. Multi-Fam. Mtge. Rev. Bonds, Ser. A, BIGI, 8 7/8s, 7/1/19 Aaa 141,918
Louisiana (0.7%)
- -------------------------------------------------------------------------------------------------------------------------------
2,302,155 East Baton Rouge, Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds
(Mortgage-Backed Securities Program), Ser. B, GNMA Coll., 8 1/4s, 2/25/11 Aaa 2,446,041
1,100,000 LA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds, GNMA Coll., 9 1/8s, 11/1/18 Aaa 1,145,375
------------
3,591,416
Massachusetts (4.7%)
- -------------------------------------------------------------------------------------------------------------------------------
8,765,000 MA G.O. Bonds, Ser. D, FGIC , 5 1/8s, 11/1/09 Aaa 8,469,181
5,700,000 MA G.O. Bonds, Ser. B, MBIA , 5.4s, 11/1/07 Aaa 5,778,375
7,000,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds (Baystate Med. Ctr.), Ser. E,
FSA , 6s, 7/1/26 Aaa 7,000,000
5,000,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst. Rev. Bonds, Ser. A, AMBAC,
5s, 7/1/17 Aaa 4,468,750
------------
25,716,306
Michigan (3.3%)
- -------------------------------------------------------------------------------------------------------------------------------
5,000,000 Detroit Swr. Disp. Rev. Bonds, Ser. B, MBIA, 5 1/4s, 7/1/15 Aaa 4,706,250
2,505,000 MI State Hsg. Dev. Auth. Multi-Fam. Rev. Bonds, Ser. A, FGIC, 8 3/8s, 7/1/19 Aaa 2,636,337
MI Strategic Fund Ltd. Oblig. Rev. Bonds
4,000,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 4,700,000
2,750,000 Ser. AA, FGIC, 6.95s, 5/1/11 Aaa 3,128,125
3,500,000 West Bloomfield School Dist. Rev Bonds, MBIA, 5 1/8s, 5/1/14 Aaa 3,241,875
------------
18,412,587
Missouri (2.8%)
- -------------------------------------------------------------------------------------------------------------------------------
MO State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,500,000 (Heartland Hlth. Sys. Project), AMBAC, 6.35s, 11/15/17 Aaa 2,600,000
4,500,000 (St. Luke's Health Syst.), MBIA, 5.1s, 11/15/13 Aaa 4,224,375
Sikeston Elec. Rev. Bonds, MBIA
3,020,000 6 1/4s, 6/1/22 Aaa 3,314,450
5,000,000 6s, 6/1/14 Aaa 5,218,750
------------
15,357,575
Nebraska (3.2%)
- -------------------------------------------------------------------------------------------------------------------------------
3,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA, 9.406s, 12/8/16 Aaa 3,300,000
NE Investment Fin. Auth. Single Fam. Mtge. IFB
2,700,000 Ser. B, GNMA Coll., 11.265s, 3/15/22 Aaa 2,980,125
5,300,000 Ser. 2, GNMA Coll., 11.278s, 9/10/30 Aaa 5,916,125
5,250,000 NE Investment Fin. Auth. Single Fam. Mtge. Rev. Bonds, Ser. 1, MBIA,
8 1/8s, 8/15/38 Aaa 5,505,938
------------
17,702,188
Nevada (0.9%)
- -------------------------------------------------------------------------------------------------------------------------------
4,500,000 Clark Cnty. School Dist. G.O. Bonds, Ser. A, MBIA, 7s, 6/1/10 Aaa 5,158,125
New Hampshire (0.5%)
- -------------------------------------------------------------------------------------------------------------------------------
2,500,000 NH State Tpk. Syst. IFB, FGIC, 9.838s, 11/1/17 Aaa 2,890,625
New Jersey (2.4%)
- -------------------------------------------------------------------------------------------------------------------------------
3,000,000 Middlesex Cnty., Utils. Auth. Swr. IFB, Ser. A, MBIA, 7.191s, 8/15/10 Aaa 3,243,750
11,000,000 NJ State Trans. Trust Fund Auth. Rev. Bonds (Trans. Syst.), Ser. A,
MBIA, 5s, 6/15/15 Aaa 10,175,000
------------
13,418,750
New Mexico (0.2%)
- -------------------------------------------------------------------------------------------------------------------------------
880,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds, Ser. C, FGIC, 8 1/2s, 7/1/07 Aaa 910,800
New York (9.1%)
- -------------------------------------------------------------------------------------------------------------------------------
635,000 Erie Cnty., Wtr. Auth. Rev. Bonds (Fourth Resolution), AMBAC, zero %,12/1/17 Aaa 137,643
NY City, Muni. Wtr. Fin. Auth. Wtr. & Swr. Syst. Rev. Bonds
2,735,000 Ser. B, FGIC, 7 1/2s, 6/15/11 Aaa 3,299,094
7,265,000 Refunded, Ser. B, FGIC, 7 1/2s, 6/15/11 Aaa 8,854,219
5,000,000 NY City, Muni Wtr. Fin. Auth. Wtr. & Swr. Syst. IFB, MBIA, 7.524s, 6/15/19 Aaa 4,700,000
5,500,000 NY State Dorm. Auth. Rev. Bonds (Mt. Sinai Medical School), Ser. A, MBIA, 5s,
7/1/21 Aaa 4,860,625
3,000,000 NY State Energy Research & Dev. Auth. IFB, MBIA, 7.69s, 7/8/26 Aaa 2,640,000
9,750,000 NY State Energy Research & Dev. Auth. Poll. Control Rev. Bonds (Niagara
Mohawk Pwr. Corp.), Ser. A, FGIC, 7.2s, 7/1/29 Aaa 10,895,625
4,350,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds (Mental Hlth. Svcs.),
Ser. F, FSA, 5 1/4s, 2/15/21 Aaa 3,991,125
5,000,000 NY State Urban Dev. Corp. Rev. Bonds (State Fac.), 7 1/2s, 4/1/20 Aaa 5,675,000
6,000,000 Suffolk Cnty., Wtr. Auth. Wtrwks. Rev. Bonds, MBIA, 5s, 6/1/17 Aaa 5,400,000
------------
50,453,331
North Carolina (1.8%)
- -------------------------------------------------------------------------------------------------------------------------------
4,000,000 NC Muni. Pwr. Agcy. (No 1 Catawba Elec.) IFB, MBIA, 7.17s, 1/1/20 Aaa 3,630,000
6,275,000 New Hanover Cnty. Hosp. Rev. Bonds, (Hanover Regl. Med, Ctr. Project),
AMBAC , 5 3/4s, 10/1/26 Aaa 6,133,813
------------
9,763,813
Ohio (3.1%)
- -------------------------------------------------------------------------------------------------------------------------------
6,675,000 Lucas Cnty. Hosp. Rev. Bonds(Promedical Hlth. Care Oblig.), MBIA ,
5 3/4s, 11/15/14 Aaa 6,683,344
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
2,699,000 Ser. B, GNMA Coll., 8 1/4s, 12/15/19 Aaa 2,820,455
6,120,000 Ser. C, GNMA Coll., 8 1/8s, 3/1/20 Aaa 6,426,000
8,270,000 Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 1,292,188
85,000 OH State Wtr. Dev. Auth. Rev. Bonds, AMBAC, 9 3/8s, 12/1/18 Aaa 88,387
------------
17,310,374
Oklahoma (1.0%)
- -------------------------------------------------------------------------------------------------------------------------------
5,185,000 OK Hsg. Fin. Agcy. Single Fam. Rev. Bonds, Ser. A, GNMA Coll., 8 1/4s, 12/1/20 Aaa 5,359,994
Pennsylvania (4.8%)
- -------------------------------------------------------------------------------------------------------------------------------
2,000,000 Keystone Oaks School Dist. IFB, AMBAC, 7.826s, 9/1/16 Aaa 1,982,500
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 2,027,500
5,000,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 4,506,250
4,500,000 PA State Higher Ed. Fac. Auth. Rev. Bonds (Hahnemann U. Project), MBIA,
7.2s, 7/1/19 Aaa 4,933,125
Philadelphia, Muni. Auth. Rev. Bonds, FGIC
6,045,000 7.8s, 4/1/18 Aaa 6,694,838
620,000 7.8s, 4/1/18 Aaa 668,825
3,000,000 Philadelphia, Regl. Port Auth. Lease IFB, (Kidder Mvrics) MBIA, 8.531s, 9/1/13 Aaa 3,187,500
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds, Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 2,212,500
------------
26,213,038
South Carolina (0.4%)
- -------------------------------------------------------------------------------------------------------------------------------
2,500,000 SC Econ. Dev. Auth. Hosp. Fac. IFB, AMBAC, 6.87s,8/1/15 Aaa 2,265,625
Tennessee (0.9%)
- -------------------------------------------------------------------------------------------------------------------------------
4,840,000 Knox Cnty. Hlth., Ed. & Hsg. Fac. Auth. Rev. Bonds, (Ft. Saunders Alliance),
MBIA , 5 3/4s, 1/1/14 Aaa 4,876,300
Texas (10.4%)
- -------------------------------------------------------------------------------------------------------------------------------
3,505,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Hosp. Corp. Rev. Bonds (Baptist Memorial
Hosp. Sys. Project), MBIA, 6 1/2s, 2/15/15 Aaa 3,759,113
Brownsville Util. Syst. Rev. Bonds, AMBAC
3,490,000 6 1/4s, 9/1/11 Aaa 3,747,388
5,250,000 5 1/4s, 9/1/20 Aaa 4,849,688
Dallas Cnty. Hsg. Fin. Corp. Single Fam. Mtge. Rev. Bonds
272,000 MBIA, 10s, 10/1/07 Aaa 279,224
5,000 (Lomas & Nettleton Co.), FGIC, 9.2s, 7/1/06 Aaa 5,121
5,000,000 Harris Cnty., Hosp. Dist. Mtge. Rev. Bonds, AMBAC, 7.4s, 2/15/10 Aaa 5,875,000
Harris Cnty. , Toll Rd., Sr. Lien, Rev. Bonds
4,000,000 Ser. A, AMBAC, 6 1/2s, 8/15/17# Aaa 4,415,000
5,000,000 Ser. A, MBIA, 6 1/4s, 8/15/15 Aaa 5,243,750
12,000,000 Houston Wtr. & Swr. Syst. Rev. Bonds, Ser. C, AMBAC, 6 3/8s, 12/1/17 Aaa 12,585,000
7,000,000 Lockhart, Correctional Fac. Fin. Corp. Rev. Bonds, MBIA, 6 5/8s, 4/1/12 Aaa 7,393,750
4,630,000 Lubbock, Hsg. Fin. Corp. Single Fam. Mtge. Rev. Bonds, Ser. A, GNMA Coll.,
zero %, 11/25/17 Aaa 862,338
5,000,000 Rio Grande Valley Hlth Fac. Dev. Corp. , Rev. Bonds, MBIA, 6.4s, 8/1/12 Aaa 5,225,000
3,250,000 Sabine River Auth. Poll.Ctrl. Rev. Bonds (Southwestern Elec. Pwr.),
MBIA, 6.1s, 4/1/18 Aaa 3,294,688
------------
57,535,060
Virginia (2.0%)
- -------------------------------------------------------------------------------------------------------------------------------
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB, FGIC, 9.466s, 8/15/23 Aaa 10,787,500
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 3,816,500
6,000,000 (Nuclear Project No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 6,915,000
------------
10,731,500
Wisconsin (1.4%)
- -------------------------------------------------------------------------------------------------------------------------------
2,000,000 Superior, Ltd. Oblig. Rev. Bonds (Midwest Energy Resources), Ser. E,
FGIC, 6.9s, 8/1/21 Aaa 2,297,500
5,000,000 WI Hlth. Fac. Auth. Rev. Bonds (Meriter Hosp. Inc.), FGIC, 8 3/8s, 12/1/09 Aaa 5,381,250
------------
7,678,750
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 5,224,500
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $ 519,775,484)*** $544,127,866
- -------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $551,704,097.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at July 31, 1996
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, 1996. Ratings are not covered by the Report of independent
accountants.
*** The aggregate identified cost on a tax basis is $519,938,538, resulting in gross unrealized appreciation and depreciation
of $27,873,657 and $3,684,329, respectively, or net unrealized appreciation of $24,189,328.
++ The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will
begin receiving interest income at this rate.
# A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts
at July 31,1996. The market value of this security is $562,913 or 0.1% of net assets.
The rates shown on IFB, which are securities paying interest rates that vary inversely to changes in the market interest
rates, are the current interest rates at July 31,1996.
The fund had the following industry group concentrations greater than 10% at July 31, 1996 (as a percentage of net assets):
Hospitals\Healthcare 19.9%
Utilities 19.5
Transportation 12.7
Water/Sewer 10.3
The fund had the following insurance concentrations greater than 10% at July 31,1996 (as a percentage of net assets):
MBIA 40.3%
FGIC 22.2
AMBAC 19.0
<CAPTION>
- ---------------------------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 1996
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Muni Index Future (short) $15,806,875 $15,719,375 Sep-96 $(87,500)
- ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1996
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $519,775,484) (Note 1) $544,127,866
- ---------------------------------------------------------------------------------------------------------
Interest and other receivables 6,978,628
- ---------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 4,574,237
- ---------------------------------------------------------------------------------------------------------
Receivable for securities sold 14,123,287
- ---------------------------------------------------------------------------------------------------------
Total assets 569,804,018
Liabilities
- ---------------------------------------------------------------------------------------------------------
Payable to subcustiodian (Note 2) 1,357,294
- ---------------------------------------------------------------------------------------------------------
Payable for variation margin 99,282
- ---------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 994,772
- ---------------------------------------------------------------------------------------------------------
Payable for securities purchased 13,606,409
- ---------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,370,430
- ---------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 274,485
- ---------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 48,927
- ---------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,583
- ---------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 990
- ---------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 287,377
- ---------------------------------------------------------------------------------------------------------
Other accrued expenses 58,372
- ---------------------------------------------------------------------------------------------------------
Total liabilities 18,099,921
- ---------------------------------------------------------------------------------------------------------
Net assets $551,704,097
Represented by
- ---------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $528,250,789
- ---------------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (254,588)
- ---------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (556,986)
- ---------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 24,264,882
- ---------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $551,704,097
- ---------------------------------------------------------------------------------------------------------
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A shares
($196,948,369 divided by 13,178,237 shares) $14.94
- ---------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $14.94)* $15.69
- ---------------------------------------------------------------------------------------------------------
Net asset value and offering price per class B shares
($354,430,955 divided by 23,691,137 shares)+ $14.96
- ---------------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M shares
($324,773 divided by 21,735 shares) $14.94
- ---------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $14.94)** $15.44
- ---------------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000
or more and on group sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31,1996
<S> <C>
Tax exempt interest income: $35,027,354
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,321,088
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 535,833
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 21,174
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 12,435
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 382,175
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,174,867
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,191
- --------------------------------------------------------------------------------------------------
Reports to shareholders 60,357
- --------------------------------------------------------------------------------------------------
Registration fees 9,223
- --------------------------------------------------------------------------------------------------
Auditing 43,168
- --------------------------------------------------------------------------------------------------
Legal 13,962
- --------------------------------------------------------------------------------------------------
Postage 29,096
- --------------------------------------------------------------------------------------------------
Other 9,485
- --------------------------------------------------------------------------------------------------
Total expenses 7,614,054
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (435,724)
- --------------------------------------------------------------------------------------------------
Net expenses 7,178,330
- --------------------------------------------------------------------------------------------------
Net investment income 27,849,024
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 8,930,102
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (1,914,457)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (3,721,338)
- --------------------------------------------------------------------------------------------------
Net gain on investments 3,294,307
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $31,143,331
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended July
---------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- --------------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------------
Net investment income $27,849,024 $29,175,078
- --------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 7,015,645 (2,373,727)
- --------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (3,721,338) 8,753,042
- --------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 31,143,331 35,554,393
- --------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------------
From net investment income
Class A (10,229,355) (9,224,293)
- --------------------------------------------------------------------------------------------------------
Class B (17,514,787) (19,697,447)
- --------------------------------------------------------------------------------------------------------
Class M (11,865) (41)
- --------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
Class A -- (50,968)
- --------------------------------------------------------------------------------------------------------
Class B -- (140,286)
- --------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (13,383,750) (20,715,061)
- --------------------------------------------------------------------------------------------------------
Total decrease in net assets (9,996,426) (14,273,703)
- --------------------------------------------------------------------------------------------------------
Net assets
- --------------------------------------------------------------------------------------------------------
Beginning of year 561,700,523 575,974,226
- --------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net
investment income of $254,588 and $524,841, respectively) $551,704,097 $561,700,523
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
June 1, 1995
(commencement
Year ended of operations) to Year ended
July 31 July 31 July 31
------------------------------------------------------
1996 1995 1996
------------------------------------------------------
Class M Class A
------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.86 $15.11 $14.86
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .76 .12 .81
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .08 (.25) .08
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .84 (.13) .89
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.76) (.12) (.81)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.76) (.12) (.81)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.94 $14.86 $14.94
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 5.74 (0.87)(c) 6.06
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $325 $17 $196,948
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.19 .14(c) .90
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 4.99 .73(c) 5.37
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 54.58 37.62 54.58
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the period
September 20, 1993
(commencement
Year ended of operations) to Year Ended
July 31 July 31 July 31
------------------------------------------------------
1995 1994 1996
------------------------------------------------------
Class A
------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.67 $15.88 $14.87
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .83 .73 .71
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .19 (1.12) .09
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.02 (.39) .80
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.82) (.72) (.71)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments (.01) (.10) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.83) (.82) (.71)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.86 $14.67 $14.96
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 7.21 (2.49)(c) 5.44
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $184,241 $143,079 $354,431
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .89 .80(c) .58
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.68 4.73(c) 4.72
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 37.62 47.72 54.58
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
Year Ended
July 31
------------------------------------------------------
1995 1994 1993
------------------------------------------------------
Class B
------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.68 $15.50 $15.42
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .73 .74 .75
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .20 (.73) .28
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .93 .01 1.03
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.73) (.73) (.75)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.20)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments (.01) (.10) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.74) (.83) (.95)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.87 $14.68 $15.50
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 6.53 -- 7.00
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $377,443 $432,895 $572,659
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.54 1.53 1.74
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.05 4.81 4.88
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 37.62 47.72 42.01
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
- ---------------------------------------------------------------------------------
1992
- ---------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $14.38
- ---------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------
Net investment income .76
- ---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.14
- ---------------------------------------------------------------------------------
Total from investment operations 1.90
- ---------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------
From net investment income (.77)
- ---------------------------------------------------------------------------------
From net realized gain on investments (.09)
- ---------------------------------------------------------------------------------
In excess of net realized gain on investments --
- ---------------------------------------------------------------------------------
Total distributions (.86)
- ---------------------------------------------------------------------------------
Net asset value, end of period $15.42
- ---------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 13.63
- ---------------------------------------------------------------------------------
Net assets, end of period (in thousands) $466,135
- ---------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) 1.79
- ---------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.16
- ---------------------------------------------------------------------------------
Portfolio turnover (%) 66.18
- ---------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2).
(c) Not annualized
</TABLE>
Notes to financial statements
July 31, 1996
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. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares,
which convert to class A shares after approximately eight years, do not
pay a front-end sales charge, but pay a higher ongoing distribution fee
than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class
M shares are sold with a maximum front-end sales charge of 3.25 % and
pay an ongoing distribution fee that is lower than class B shares and
higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
D) 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 on securities held and for 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 if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences include
treatment of post-October loss deferrals and market discounts.
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,
1996, the fund reclassified $177,236 to decrease distributions in excess
of net investment income with an increase to accumulated net realized
loss on investments of $177,236. The calculation of net investment
income per share in the financial highlights table excludes these
adjustments.
F) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among 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.
G) Amortization of bond premium and discount Any premium resulting from
the purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis. 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. Discounts on zero coupon bonds and
original issue bonds are accreted according to the effective yield
method.
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 the
following annual rates: 0.60% of the first $500 million of average net
assets, 0.50% of the next $500 million, 0.45% of the next $500 million
and 0.40% of any amount over $1.5 billion subject, under current law, to
reduction in any year by the amount of certain brokerage commissions and
fees (less expenses) received by affiliates of Putnam Management on the
fund's portfolio transactions.
As part of the custodian contract between the subcustodian bank and
Putnam Fiduciary Trust Company (PFTC), the subcustodian bank has a lien
on the securities of the fund to the extent permitted by the funds
investment restrictions to cover any advances made by the subcustodian
bank for the settlement of securities purchased by the fund. At July 31,
1996, the payable to the subcustodian bank represents the amount due for
cash advance for the settlement of a security purchased.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC, a
wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided by Putnam Investor Services, a division of
PFTC.
For the year ended July 31, 1996, fund expenses were reduced by $435,724
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $1,150 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund 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.
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. Effective September 6, 1996, the Trustees have approved
payment by the fund at an annual rate of 0.60% attributable to class B
shares.
For the year ended July 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $25,994 and $358 from the sale
of class A and class M shares, respectively and $652,666 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended July 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received $451 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended July 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $301,103,649 and
$314,233,249, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At July 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 3,576,738 $53,667,796
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 376,177 5,664,207
- ----------------------------------------------------
3,952,915 59,332,003
Shares
repurchased (3,174,889) (47,633,437)
- ----------------------------------------------------
Net increase 778,026 $11,698,566
- ----------------------------------------------------
Year ended
July 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 4,343,427 $61,969,526
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 366,885 5,321,976
- ----------------------------------------------------
4,710,312 67,291,502
Shares
repurchased (2,061,211) (29,864,967)
- ----------------------------------------------------
Net increase 2,649,101 $37,426,535
- ----------------------------------------------------
Year ended
July 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 3,390,957 $51,105,197
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 728,563 10,984,541
- ----------------------------------------------------
4,119,520 62,089,738
Shares
repurchased (5,808,443) (87,484,662)
- ----------------------------------------------------
Net decrease (1,688,923) $(25,394,924)
- ----------------------------------------------------
Year ended
July 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 2,875,400 $41,920,297
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 858,519 12,416,984
- ----------------------------------------------------
3,733,919 54,337,281
Shares
repurchased (7,836,307) (112,496,308)
- ----------------------------------------------------
Net decrease (4,102,388) $(58,159,027)
- ----------------------------------------------------
Year ended
July 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 23,526 $356,322
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 746 11,219
- ----------------------------------------------------
24,272 367,541
- ----------------------------------------------------
Shares repurchased (3,700) (54,933)
- ----------------------------------------------------
Net increase 20,572 $312,608
- ----------------------------------------------------
For the period
June 1, 1995
(commencement of operations)
to July 31, 1995
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
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
- ----------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.6% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The fund paid ordinary taxable dividends of $.0031 per share.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
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
Ronald J. Jackson
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
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
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
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ------------------
27079-438/035/629 9/96
