Putnam
Tax-Free
High Yield
Fund
ANNUAL REPORT
July 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The recent bond rally, coupled with historically narrow spreads
between high-grade and high-yield issues, has allowed the fund to
capture many credit upgrade and prerefunding opportunities while
simultaneously reducing its exposure to further market volatility."
-- Triet M. Nguyen, manager
Putnam Tax-Free High Yield Fund
* "The factors affecting bond performance are still the same:
inflation, the budget deficit and how the dollar is trading. And
these factors have recently been working in bonds' favor."
-- Money, September 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
28 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
A substantially stronger municipal bond market brightened the closing months
of your fund's fiscal year, helping to bring its performance within one
percentage point of its benchmark index. This is no small achievement,
considering that the index encompasses the full spectrum of tax-free bonds
in today's market while the fund's portfolio emphasizes higher-yielding
lower-rated bonds -- generally characterized more by their income-producing
capability than their total return potential.
While your fund's strength in general reflects that of the market, its
performance is also the result of the skillful securities selection and
positioning strategies implemented by manager Triet Nguyen. In the following
report, Triet explains some of the year's key portfolio events and forecasts
his expectations for fiscal 1998.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 18, 1997
Report from the Fund Manager
Triet M. Nguyen
As Putnam Tax-Free High Yield Fund ended fiscal 1997, early investor jitters
about the economy had turned to virtual euphoria over the slow growth, low
inflation environment. Defensive positioning, along with a renewed emphasis on
income, enabled your fund to take advantage of improving market conditions.
For the 12 months ended July 31, 1997, the fund's class A shares returned
9.97% at net asset value and 4.75% at public offering price. For complete
performance information, please see pages 9 and 10.
*MUNICIPALS OUTPERFORM TAXABLE BONDS OVER PERIOD
Since April, investor expectations of benign inflation have continued to fall,
along with yields on Treasury bonds. At the same time, the strong economy and
a federal budget accord have left the government with lower borrowing needs,
diminishing the supply of Treasury issues. Meanwhile, demand has remained
steady, resulting in a sustained rally in bond prices that affected municipal
bonds as well as Treasuries.
Municipal bonds generally outperformed their taxable counterparts over the
period, primarily due to favorable supply and demand trends. Supply is running
slightly below the pace of one year ago, while demand -- from individual
investors, insurance companies, and other less traditional buyers -- has
remained steady, actually surging in June and July, when a seasonal rise in
municipal bond calls, maturities, and interest payments left many investors
with extra cash on hand. Issuers have attempted to meet this demand by
structuring offerings that are especially attractive to these buyers, who
generally seek high-quality intermediate-term securities. However, demand
continued to outstrip supply throughout the period.
*REMAINING DEFENSIVE WHILE FOCUSING ON INCOME
Although the economy's continued expansion has not yet brought about higher
inflation, labor markets remain tight and there are indications that inflation
pressures may be building. As a consequence, we remain cautious about the
future direction of interest rates and have adopted a moderately defensive
posture to protect the fund's net asset value. Strategically this means taking
advantage of the recent municipal bond market rally to shorten the portfolio's
average duration to approximately 5.8 years. Duration, which is measured in
years, indicates a bond portfolio's sensitivity to interest-rate changes. A
longer duration can mean a more volatile net asset value if rates change,
while a shorter duration can offer some measure of protection. The fund's
shorter duration helped stabilize its net asset value, although it may have
limited the portfolio's appreciation somewhat during the rally.
We have also restructured the portfolio slightly to reflect a greater emphasis
on income. During the rally, we sold some higher-grade holdings and reinvested
the profits in higher-yielding issues. While the portfolio retains a modified
barbell shape -- with holdings concentrated at both ends of the credit quality
spectrum -- it is now more heavily focused on higher-yielding lower-rated
securities. These have been outperforming as the rising economy bolsters the
financial standing of many issuers. With municipal bond yields now at such low
absolute rates, we believe this shift in emphasis offers the best opportunity
for outperformance going forward.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW]
PORTFOLIO QUALITY OVERVIEW*
Aaa 35.5%
Aa 8.2%
A 2.1%
Baa 12.0%
Under Baa 42.2%
Footnote reads:
*As a percentage of market value on 7/31/97. A bond rated Baa or higher is
considered investment grade. All ratings reflect Moody's descriptions,
unless noted otherwise; percentages may include unrated bonds considered by
Putnam Management to be of comparable quality. Allocations and ratings
will vary over time.
*CREDIT UPGRADES, PREREFUNDINGS BOOST FUND PERFORMANCE
Typically this fund invests in higher-yielding securities mainly for the
income they provide. While additional gains from credit quality upgrades are
always a long-term possibility, upgrades frequently take years to occur.
Recently, however, this cycle has begun to speed up; the economy's ongoing
strength has encouraged more municipalities to issue lower-grade
higher-yielding bonds just as municipal insurers have become more aggressive
in insuring these securities.
Washington, DC, general obligation bonds exemplify this trend. Purchased for
the fund last September, these bonds recently became insurable, and their
value has risen substantially. Ordinarily such a move could take one or two
years, but this happened after just nine months, enabling the fund to capture
significant gains much more quickly than expected.
Another example of swift appreciation among portfolio holdings came with the
fund's E470 Beltway high-yield bonds, which are being used to fund a new
highway leading into Denver International Airport. Although the highway is
still under construction, the bonds are already in the process of being
insured and have appreciated significantly. In a move that could lead to
further appreciation, the bonds were scheduled for prerefunding in August.
In a prerefunding, the municipality issues enough new bonds to pay off the
original issue at the first call date or maturity. Proceeds from the new
issue, in an amount sufficient to pay off the entire original bond issue, are
invested in an escrow fund made up of U.S. Treasury issues. Because of the
safety of principal represented by these securities, the underlying bonds
generally are considered to have the equivalent of a AAA - rating. The
perception of higher quality frequently can produce higher bond prices in the
fund's portfolio.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 18.6%
Transportation 14.8%
Utilities 13.9%
Forest products and paper 7.4%
Housing 5.3%
Footnote reads:
*Based on net assets as of 7/31/97. Sector allocations will vary over time.
*SECTOR STRATEGY ENHANCES VALUE, GENERATES MAINLY POSITIVE RESULTS
During the fiscal year, transportation bonds continued to generate substantial
returns for the fund, and once again, this sector was a top performer.
Hospital and health-care holdings also performed extremely well over the
period, especially in the long-term care sector. Frequently associated with
hospitals and funded through high-yield bonds, long-term care facilities offer
varying levels of nursing and hospital care to those who need it but often
resemble elder-exclusive apartment complexes in design and scope. Putnam's
superior credit research capabilities have been key in identifying appropriate
long-term care facility bonds for the fund. This sector has benefited
substantially from the compression of bond credit quality spreads, as
increased investor demand has driven up prices. However, compared to other
sectors, long-term care has remained relatively attractive and should continue
to offer opportunities to the fund.
Performance among the fund's forestry products holdings continues to lag,
although paper prices have begun to rebound and the outlook for this sector is
positive. Utility bond prices have also begun to show signs of improvement.
The market has been supported by a relative scarcity of supply and by an
improving outlook among investors, who are finding the utilities deregulation
process less disruptive than many had first feared. In fact, deregulation
seems to be creating high-yield investment opportunities as utility companies
shift away from protected monopolies to market-oriented, fully competitive
economic entities.
*POSITIONED WELL FOR WHAT LIES AHEAD
With the economy continuing to chug along steadily, we believe that it is only
a matter of time before inflation -- or, at the very least, inflationary
pressure -- begins to build. In our view, the Federal Reserve Board will
likely respond by raising short-term interest rates, and the bond market may,
in turn, correct. Given this somewhat cautious outlook, the fund's shorter
duration should continue to serve it well, providing ample protection of net
asset value. At the same time, the portfolio is structured to enhance its
income flow and has already realized gains resulting from credit upgrades and
prerefundings. All in all, the fund's somewhat defensive posture and income
focus should continue to provide shareholders with solid performance in the
coming months.
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 7/31/97, there is no guarantee the fund will continue to hold
these securities in the future. The lower credit ratings of high-yield
municipal bonds reflect a greater possibility that adverse changes in the
economy or in the financial condition of their issuers may affect the issuer's
ability to pay principal and interest on the bonds.
Performance summary
TOTAL RETURN FOR PERIODS ENDED 7/31/97
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (12/29/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 9.97% 4.75% 9.26% 4.26% 9.64% 6.09%
- ------------------------------------------------------------------------------
5 years 38.17 31.60 34.71 32.72 35.71 31.32
Annual average 6.68 5.65 6.14 5.83 6.30 5.60
- ------------------------------------------------------------------------------
10 years 110.87 100.80 105.60 105.60 107.11 100.42
Annual average 7.75 7.22 7.47 7.47 7.55 7.20
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/97
Lehman Consumer
Municipal Price
Bond Index Index
- ------------------------------------------------------------------------------
1 year 10.27% 2.23%
- ------------------------------------------------------------------------------
5 years 40.64 14.23
Annual average 7.06 2.70
- ------------------------------------------------------------------------------
10 years 123.29 41.04
Annual average 8.36 3.50
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% and 3.25%, respectively. Class B share returns for
the 1- and 5-year periods reflect the applicable contingent deferred sales
charge (CDSC), which is 5% in the first year, declines to 1% in the sixth
year, and is eliminated thereafter. Returns shown for class A and class M
shares for periods prior to their inception are derived from the
historical performance of class B shares, adjusted in the case of public
offering price to reflect the initial sales charge currently applicable to
each class, but have not been adjusted to reflect differences in expenses,
which are lower for class A and M shares than for class B shares. All
returns assume reinvestment of distributions at NAV and represent past
performance; they do not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
[GRAPHIC OMITTED worm chart GROWTH OF A $10,0000 INVESTMENT]
Cumulative total return of a $10,000 investement since 7/31/87
Lehman Bros. Municipal Bond Index $22,329
Fund's class B shares $20,560
Consumer Price Index $14,104
Fund's Lehman Bros.
class B Municipal Consumer
shares Bond Index Price Index
------- ----------- -----------
7/31/87 9523 10000 10000
7/31/88 10185 10703 10413
7/31/89 11377 12006 10913
7/31/90 11854 12838 11459
7/31/91 12681 13960 11968
7/31/92 14533 15877 12346
7/31/93 15940 17281 12689
7/31/94 16252 17609 13040
7/31/95 17266 18997 13401
7/31/96 18260 20250 13796
7/31/97 20560 22239 14104
Past performance is no assurance of future results. At the end
of the same time period, a $10,000 investment in the fund's
class A shares would have been valued at $21,087 at net asset
value ($20,080 at public offering price); a $10,000 investment
in the fund's class M shares would have been valued at $20,711
($20,042 at public offering price). See first page of performance
section for performance calculation method.
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (12/29/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 8.07% 2.95% 7.30% 2.30% 7.68% 4.19%
- ------------------------------------------------------------------------------
5 years 39.75 33.12 36.33 34.33 37.30 32.82
Annual average 6.92 5.89 6.39 6.08 6.55 5.84
- ------------------------------------------------------------------------------
10 years 108.27 98.4 103.18 103.18 104.62 97.95
Annual average 7.61 7.09 7.35 7.35 7.42 7.07
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.845009 $0.752851 $0.801702
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Total $0.845009 $0.752851 $0.801702
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/96 $14.05 $14.75 $14.05 $14.04 $14.51
- ------------------------------------------------------------------------------
7/31/97 14.56 15.29 14.56 14.55 15.04
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 5.53% 5.27% 4.90% 5.24% 5.07%
- ------------------------------------------------------------------------------
Taxable equivalent3 9.16 8.73 8.11 8.68 8.39
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 5.65 5.38 5.01 5.36 5.18
- ------------------------------------------------------------------------------
Taxable equivalent3 9.35 8.91 8.29 8.87 8.58
- ------------------------------------------------------------------------------
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 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.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 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 distribution
and interest payments and does not take into 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.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Tax-Free High Yield Fund
(a series of Putnam Tax-Free Income Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, except for bond ratings, and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of Putnam Tax-Free High Yield Fund (the "fund") (a series of Putnam
Tax-Free Income Trust) at July 31, 1997, 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, 1997 by correspondence with the
custodian and the application of alternative auditing procedures where
investments purchased were not yet received by the custodian, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
September 16, 1997
Portfolio of investments owned
July 31, 1997
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
TRAN -- Tax Revenue Anticipation Notes
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (100.2%) *
PRINCIPAL AMOUNT RATINGS ** VALUE
Alabama (0.4%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 5,000,000 Anniston Indl. Dev. Rev. Bonds (Hoover
Group Inc.), 8 1/2s, 9/1/10 B/P $ 5,418,750
2,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. TRAN,
7 7/8s, 5/1/19 BB/P 2,185,000
---------------
7,603,750
Arizona (2.3%)
- ------------------------------------------------------------------------------------------------------------
6,500,000 Apache Cnty., Ind. Dev. Auth. VRDN (Tucson Elec.),
Ser. 83A, 3.45s, 12/15/18 VMIG1 6,500,000
5,000,000 AZ State Trans. Board Excise Tax Rev. Bonds
(Maricopa Cnty. Regl. Area), Ser. A, AMBAC,
6 1/2s, 7/1/04 Aaa 5,631,250
Phoenix, Indl. Dev. Auth. Arpt. Fac. Rev. Bonds
(American West Airlines)
6,440,062 Ser. A-95-1, 8.3s, 1/1/06 B/P 6,532,413
1,578,947 Ser. B-95-2, 8.2s, 1/1/99 B/P 1,601,589
3,960,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Christian Care Retirement Apts.), Ser. A,
10 1/4s, 1/1/18 AA/P 4,109,609
3,625,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds (Casa
Grande Regl. Med. Ctr.), Ser. B, 8 1/8s, 12/1/22 B/P 4,041,875
11,370,000 Salt River, Agriculture Rev. Bonds, Ser. B, 7s, 1/1/05 Aa 13,160,775
Scottsdale, Indl. Dev. Auth. 1st Mtge. Rev. Bonds
2,300,000 Ser. A, 8s, 6/1/11 BB/P 2,555,875
3,150,000 Ser. B, 7.05s, 6/1/16 BB/P 3,370,500
---------------
47,503,886
Arkansas (0.7%)
- ------------------------------------------------------------------------------------------------------------
14,500,000 Northwest Regl. Apt. Auth. Apt. Rev. Bonds,
7 5/8s, 2/1/27 B/P 14,554,375
California (12.7%)
- ------------------------------------------------------------------------------------------------------------
6,500,000 Alameda Cnty., COP (Santa Rita Jail), MBIA,
5s, 12/1/15 Aaa 6,410,625
Anaheim, Pub. Fin. Auth. Lease Rev. Bonds,
Ser. C, FSA
3,025,000 6s, 9/1/14 Aaa 3,380,438
3,000,000 6s, 9/1/13 Aaa 3,356,250
4,000,000 6s, 9/1/11 # Aaa 4,510,000
14,005,000 CA Hlth. Fac. Auth. Rev. Bonds (Valley
Presbyterian Hosp.), Ser. A, 9s, 5/1/12 BBB 14,058,779
2,000,000 CA Poll. Control Fin. Auth. VRDN
(Pacific Gas & Elec.), Ser. F, 3.45s, 11/1/26 VMIG1 2,000,000
CA State G.O. Bonds
10,410,000 6.6s, 2/1/10 AA 12,244,763
13,700,000 6 1/2s, 2/1/08 A 15,943,375
16,065,000 CA State Pub. Wks. Board. Rev. Bonds
(Dept. of Corrections-State Prisons),
Ser. A, AMBAC, 5s, 12/1/19 Aaa 15,803,944
7,640,000 Contra Costa Wtr. Dist. Rev. Bonds,
Ser. G, MBIA, 5s, 10/1/24 Aaa 7,401,250
8,000,000 Corona, COP (Vista Hosp. Syst.), Ser. B, 9 1/2s,
7/1/20 B/P 9,140,000
17,000,000 Los Angeles Cnty., Metro. Trans. Auth. Sales
Tax Rev. Bonds, FGIC, 5s, 7/1/21 Aaa 16,277,500
Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds
5,700,000 (Air Canada), 8 3/4s, 10/1/14 Ba 6,476,625
5,070,000 (United Airlines, Inc.), 6 7/8s, 11/15/12 Baa 5,602,350
5,000,000 Los Angeles, Wastewater Syst. IFB, FGIC, 6.241s,
11/1/06 (acquired 11/8/93, cost $5,417,200) [DBL. DAGGER] Aaa 5,593,750
10,000,000 Orange Cnty., Pub. Fac. Corp. COP
(Solid Waste Management), 7 7/8s, 12/1/13 BBB 10,525,000
Redondo Beach, Redev. Agcy. Multi-Fam. Hsg.
Rev. Bonds (Heritage Point)
3,130,000 Ser. B, 8 1/2s, 9/1/23 BBB 3,263,025
5,100,000 Ser. A, 6 1/2s, 9/1/23 BBB 5,348,625
5,000,000 San Bernardino Cnty., COP (Med. Ctr. Fin.),
Ser. A, MBIA, 6 1/2s, 8/1/17 Aaa 5,825,000
21,000,000 San Bernardino Cnty., IF COP
(PA-100-Med. Ctr. Fin.), MBIA, 8.858s, 8/1/28
(acquired 6/27/95, cost $22,664,040) [DBL. DAGGER] AAA/P 27,877,500
10,000,000 San Diego, Regl. Bldg. Auth. Lease Rev. Bonds,
MBIA, 6.9s, 5/1/23 Aaa 10,400,000
10,000,000 San Luis Obispo, COP (Vista Hosp. Sys. Inc.),
8 3/8s, 7/1/29 B/P 10,012,500
9,650,000 Southern CA Pub. Pwr. Auth. IFB
(Transmission), 7.407s, 7/1/12 Aa 10,735,625
14,200,000 Southern CA Pub. Pwr. Auth. Pwr. Rev. Bonds,
FGIC, 5.35s, 7/1/12 Aaa 14,306,500
19,100,000 Vallejo, COP (Marine World Foundation),
7.2s, 2/1/26 BB/P 20,437,000
10,500,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BB/P 11,156,250
Valley Hlth. Syst. Hosp. Rev. Bonds
1,500,000 6 1/2s, 5/15/25 BBB 1,563,750
3,000,000 Ser. A, 6 1/2s, 5/15/15 BBB 3,150,000
---------------
262,800,424
Colorado (6.1%)
- ------------------------------------------------------------------------------------------------------------
13,000,000 Arapahoe Cnty., Hwy. Rev. Bonds,
Ser. E-470, 7s, 8/31/26 AAA/P 15,502,500
Arapahoe Cnty., Cap. Impt. Rev. Bonds, Ser. E-470
36,000,000 zero%, 8/31/26 AAA/P 5,220,000
32,000,000 zero%, 8/31/15 AAA/P 10,760,000
Colorado Edl. Fac. Auth. Rev. Bonds
(Ocean Journey, Inc.)
10,000,000 8 3/8s, 12/1/26 B/P 10,387,500
5,000,000 8.3s, 12/1/17 B/P 5,243,750
Denver City & Cnty., Airport Rev. Bonds
24,400,000 Ser. A, 8 3/4s, 11/15/23 Baa 28,975,000
10,000,000 Ser. A, MBIA, 8 3/4s, 11/15/23 Aaa 11,975,000
12,750,000 Ser. A, MBIA, 8 1/2s, 11/15/23 Aaa 14,694,375
3,915,000 Ser. A, 7 1/4s, 11/15/25 AAA 4,536,506
8,000,000 Ser. D, MBIA, 7 3/4s, 11/15/13 Aaa 10,240,000
6,350,000 Douglas Cnty., School Distr. G.O. Bonds
(North Regl. 1, Douglas & Elebert Cntys.),
MBIA, 7s, 12/15/12 Aaa 7,778,750
---------------
125,313,381
Connecticut (1.4%)
- ------------------------------------------------------------------------------------------------------------
7,195,000 CT State Dev. Auth. 1st Mtge. Rev. Bonds
(East Hill Woods), 8 3/4s, 7/1/19 (In default) + D/P 4,388,950
CT State Dev. Auth. Hlth. Care Rev. Bonds
(Alzheimers Resource Ctr.), Ser. A
6,430,000 10s, 8/15/21 AAA/P 7,965,163
4,625,000 7 1/8s, 8/15/14 BB/P 4,757,969
5,500,000 CT State Hlth. & Edl. Fac. Auth. IFB (Yale U.),
7.822s, 6/10/30 Aaa 5,946,875
6,000,000 CT. State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Edgehill), Ser. A, 6 7/8s, 7/1/27 BB/P 6,112,500
---------------
29,171,457
District of Columbia (2.7%)
- ------------------------------------------------------------------------------------------------------------
16,000,000 DC G.O. Bonds, Ser. A, 6 3/8s, 6/1/26 Ba 17,040,000
DC Rev. Bonds
4,400,000 (National Public Radio), 7.7s, 1/1/23 BB/P 4,812,500
2,500,000 (National Public Radio), 7 5/8s, 1/1/18 BB/P 2,737,500
18,630,000 7.3s, 1/1/13 B 20,912,175
10,000,000 DC, G.O. Bonds, Ser. A, 6s, 6/1/26 Ba 10,300,000
---------------
55,802,175
Florida (4.0%)
- ------------------------------------------------------------------------------------------------------------
9,260,000 Brevard Cnty., Hlth. Auth. Rev. Bonds
(Courtenay Springs Village), 7 3/4s, 11/15/24 BB/P 9,954,500
24,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 B/P 27,690,000
5,970,000 Hillsborough Cnty., Aviation Auth. Special Purpose
Fac. Rev. Bonds (U.S. Air Inc.), 8.6s, 1/15/22 B 6,835,650
Jacksonville Cnty., Elec. Auth. Rev. Bonds
(Johns River), Ser. 2-15
12,215,000 6s, 10/1/05 Aa 13,543,381
10,000,000 6s, 10/1/04 Aa 10,975,000
1,085,000 Jacksonville, Hlth. Fac. Auth. Rev. Bonds
(Mental Hlth. Ctr.), 9 1/8s, 10/15/19 B/P 1,121,619
2,250,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C,
MBIA, 8.454s, 10/29/21 Aaa 2,739,375
5,000,000 Palm Beach Cnty., Student Hsg. Rev. Bonds
(Palm Beach Cmnty. College),
Ser. A, 8 1/2s, 3/1/23 B/P 4,000,000
Sanford, Arpt. Auth. Indl. Dev. Rev. Bonds
(FL Terminals Inc.), Ser. A
3,125,000 7 3/4s, 5/1/21 BB/P 3,285,156
2,880,000 7 1/2s, 5/1/15 BB/P 3,016,800
---------------
83,161,481
Georgia (5.2%)
- ------------------------------------------------------------------------------------------------------------
5,100,000 Cobb Cnty., Dev. Auth. Indl. Dev. Rev. Bonds
(Boise Cascade Corp.), 7s, 9/1/14 Baa 5,724,750
5,000,000 Dalton Utils. Rev. Bonds, MBIA, 6s, 1/1/06 AAA 5,525,000
2,000,000 De Kalb Cnty., Hsg. Auth. Multi-Fam. Hsg. Adj.
Rate Rev. Bonds (Wood Hills Apt.), 3.65s,
12/1/07 VMIG1 2,000,000
8,000,000 De Kalb Cnty., Hsg. Auth. Muni Rev. Bonds
(Briarcliff Park Apts.), Ser. B, 10s, 4/1/17 B/P 8,870,000
5,900,000 De Kalb Cnty., Muni. Hsg. Auth. Rev. Bonds
(Briarcliff Park Apts.), Ser. A, 7 1/2s, 4/1/17 BBB/P 6,349,875
9,500,000 Forsyth Cnty., Dev. Auth. Indl. Rev. Bonds
(Hoover Group Inc.), 8 1/2s, 12/1/05 Ba 10,271,875
5,100,000 Fulton Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Holcombs Landing Apts), 3.7s, 8/1/26 VMIG1 5,100,000
9,200,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds,
Ser. B, FSA, 6 3/8s, 1/1/16 Aaa 10,568,500
7,070,000 GA State G.O. Bonds, Ser. C, 6 1/2s, 4/1/10 Aaa 8,298,413
GA State, G.O. Bonds
6,620,000 Ser. E, 6 3/4s, 12/1/12 Aaa 8,035,025
10,000,000 Ser. C, 6 1/2s, 7/1/07 Aaa 11,650,000
1,000,000 Marietta, Hsg. Auth. Multi-Fam. VRDN
(Wood Pointe Apts.), 3.65s, 10/1/07 VMIG1 1,000,000
Rockdale Cnty., Dev. Auth. Solid Waste Disp. Rev.
Bonds (Visay Paper Inc.)
3,875,000 7 1/2s, 1/1/26 BB/P 4,151,094
14,635,000 7.4s, 1/1/16 BB/P 15,677,744
3,160,000 Savannah, Econ. Dev. Auth. Poll. Control Rev.
Bonds (Stone Container Corp.), 8 1/8s, 7/1/15 B/P 3,574,750
---------------
106,797,026
Hawaii (1.1%)
- ------------------------------------------------------------------------------------------------------------
HI State G.O. Bonds
8,330,000 Ser. CM, FGIC, 6 1/2s, 12/1/16 Aaa 9,777,338
5,330,000 Ser. C, FGIC, 6 1/2s, 12/1/15 Aaa 6,262,750
5,000,000 Ser. C, FGIC, 6 1/2s, 12/1/14 Aaa 5,875,000
---------------
21,915,088
Illinois (2.3%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Chicago, Gas Supply Rev. Bonds (Peoples Gas),
Ser. A, 6 7/8s, 3/1/15 Aa 5,531,250
2,125,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa 2,411,875
5,000,000 Hinsdale, Hlth. Fac. Rev. Bonds (Glen Oaks
Medical Ctr. Inc.), 6.95s, 11/15/13 AAA/P 6,100,000
IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
5,000,000 (Regency Park-Lincolnwood), Ser. A, 10 1/4s,
4/15/19 (In default)+ D/P 3,500,000
1,180,000 (Mercy Hsg. Corp.), 7s, 8/1/24 Baa 1,280,300
IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.)
2,585,000 8 1/4s, 8/1/12 BB/P 2,891,969
7,885,000 Ser. A, 7 7/8s, 7/1/20 BB/P 8,959,331
3,065,000 Ser. A, 7 1/2s, 3/1/14 BB/P 3,605,206
925,000 Ser. A, 7 1/4s, 3/1/04 BB/P 1,010,563
IL Hlth. Fac. Auth. Rev. Bonds
3,000,000 (Glen Oaks Med. Ctr.), Ser. B, 7s, 11/15/19 AAA/P 3,442,500
3,000,000 (Hinsdale Hosp.), Ser. A, 7s, 11/15/19 AAA/P 3,442,500
5,170,000 (Hinsdale Hosp.), Ser. A, 6.95s, 11/15/13 AAA/P 6,307,400
---------------
48,482,894
Indiana (1.7%)
- ------------------------------------------------------------------------------------------------------------
East Chicago, Poll. Ctrl. Rev. Bonds (Inland Steel Co.)
12,000,000 7 1/8s, 6/1/07 Ba 13,305,000
8,000,000 6.8s, 6/1/13 Ba 8,520,000
7,033,233 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 BB 7,604,684
4,500,000 Plainfield, Indl. Econ. Dev. Rev. Bonds (Jorgensen
Steel), 8 1/2s, 9/1/04 B/P 4,865,625
1,701,147 Westfield, Econ. Dev. Rev. Bonds (Westfield Village
Hlth. Care Ctr.), FHA Insd., 12s, 5/15/14 A/P 1,909,538
---------------
36,204,847
Iowa (1.5%)
- ------------------------------------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives)
22,000,000 9 1/4s, 7/1/25 BB/P 29,205,000
1,500,000 9.15s, 7/1/09 BB/P 1,950,000
215,000 Marion Cnty., 1st Mtge. Rev. Bonds
(AHF/Kentucky Iowa, Inc.), 10 1/4s, 1/1/20 B/P 226,019
---------------
31,381,019
Kentucky (1.1%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst.),
MBIA, 8.806s, 10/1/14 Aaa 5,906,250
10,000,000 Kenton Cnty., Spec. Fac. Arpt. Rev. Bonds
(Delta Airlines), Ser. A, 7 1/2s, 2/1/12 Baa 11,087,500
1,265,000 Lexington-Fayette Cnty., Urban Govt. 1st Mtge.
Rev. Bonds (AHF/Kentucky Iowa, Inc.),
10 1/4s, 1/1/20 B/P 1,329,831
3,300,000 Muhlenberg Cnty., Hosp. Rev. Bonds
(Muhlenberg Cmnty. Hosp.), 9 1/2s, 8/1/10 AAA/P 3,544,431
---------------
21,868,012
Louisiana (4.7%)
- ------------------------------------------------------------------------------------------------------------
2,900,000 Beauregard, Parish Rev. Bonds (Boise Cascade
Corp.), 7 3/4s, 6/1/21 Baa 3,244,375
8,050,000 Hodge, Combined Util. Rev. Bonds (Stone
Container Corp.), 9s, 3/1/10 B/P 8,734,250
LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
2,361,797 (Emily Morten Foundation), 10 1/4s, 5/1/19 B/P 2,512,362
2,000,000 (St. James Place), 10s, 11/1/21 B/P 2,220,000
20,500,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline Co.), 7 3/4s, 8/15/22 Baa 23,498,125
7,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB 7,638,750
6,500,000 St. Charles Parish, Poll. Control, Rev. Bonds
(LA Pwr. & Lt. Co.), 8s, 12/1/14 Baa 7,093,125
11,000,000 St. James Parish, Solid Waste Disp. Rev. Bonds
(Kaiser Aluminum), 7 3/4s, 8/1/22 B/P 12,155,000
W. Feliciana Parish Poll. Control Rev. Bonds
(Gulf States Utilities Co.)
6,000,000 8s, 12/1/24 Ba 6,465,000
19,000,000 7.7s, 12/1/14 Ba 21,422,500
1,500,000 W. Feliciana Parish Poll. Control VRDN
(Gulf States Utilities Co.), 3.8s, 12/1/15 VMIG1 1,500,000
---------------
96,483,487
Maryland (0.4%)
- ------------------------------------------------------------------------------------------------------------
2,500,000 Denton, 1st. Mtge. Rev. Bonds (Shore Nursing
Rehab. Ctr.), 9s, 4/1/20 B/P 2,593,750
6,250,000 Prince Georges Cnty., Poll. Control Rev. Bonds
(Potomac Electric), 5 3/4s, 3/15/10 A 6,734,375
---------------
9,328,125
Massachusetts (7.0%)
- ------------------------------------------------------------------------------------------------------------
4,150,000 Agawam, Res. Recvy. Rev. Bonds (Springfield
Res. Recvy.), 8 1/2s, 12/1/08 BBB 4,277,696
MA State G.O. Bonds, Ser. A
19,330,000 6s, 11/1/11 AA 21,504,625
7,600,000 AMBAC, 5 3/4s, 8/1/11 Aaa 8,284,000
7,850,000 AMBAC, 5 3/4s, 8/1/09 Aaa 8,595,750
MA State Hlth. & Ed. Fac. Auth. IFB
5,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.57s, 8/15/21 Aaa 5,893,750
5,600,000 (Beth Israel Hosp.), AMBAC, 8.294s, 7/1/25 Aaa 6,062,000
2,000,000 (Boston U.), Ser. L, MBIA, 9.235s, 10/1/31 Aaa 2,372,500
MA State Hlth. & Ed. Fac. Auth. Rev. Bonds
3,136,276 (Summerfield Nursing Home), Ser. A, 9 1/2s,
7/1/14 (In default)+ D/P 1,881,766
3,325,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba 3,482,938
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
4,000,000 Ser. B, 9 1/4s, 7/1/15 BB/P 4,565,000
30,225,000 Ser. A, 9s, 7/1/15 BB/P 34,418,719
MA State Indl. Fin. Agcy. Rev. Bonds
1,900,000 (Atlanticare Med. Ctr.), Ser. A, 10 1/8s, 11/1/14 B/P 2,044,875
5,900,000 (Atlanticare Med. Ctr.), Ser. B, 10 1/8s, 11/1/14 B/P 6,349,875
8,800,000 (Orchard Cove Inc.), 9s, 5/1/22 AAA/P 10,791,000
2,360,000 (Mass Tpk.,), 9s, 10/1/20 AAA/P 2,737,600
2,080,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s,
7/1/11 Aaa 2,282,800
3,000,000 (Emerson College), 8 1/4s, 1/1/17 BB/P 3,292,500
2,500,000 (Molten Metal Technology), 8 1/4s, 8/1/14 B/P 2,375,000
5,000,000 (Evanswood Bethzatha Corp.), 8s, 1/15/18 B/P 5,175,000
3,500,000 (1st Mtge. Evanswood Bethzatha-A),
7 7/8s, 1/15/20 B/P 3,714,375
3,965,000 Worcester Mtge. Rev. Bonds (Briarwood Issue),
9 1/4s, 12/1/22 BB/P 4,376,369
---------------
144,478,138
Michigan (5.6%)
- ------------------------------------------------------------------------------------------------------------
2,562,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev.
Bonds (Glacier Hills Inc.), 8 3/8s, 1/15/19 B/P 2,650,620
18,577,000 Detroit, Hosp. Fac. Fin. Auth. Rev. Bonds
(MI Hlth. Care Corp.), 10s, 12/1/20
(acquired 12/12/91 to 7/15/92, cost
$18,383,161) (In default)[DBL. DAGGER]+ C 3,343,860
20,400,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 8.72s, 5/1/21 BBB/P 25,933,500
5,790,000 Highland Park, Fin. Auth. Hosp. Fac. Rev. Bonds
(MI Hlth. Care Corp.), Ser. A, 9 7/8s, 12/1/19
(acquired 6/22/87 to 3/2/92, cost $5,750,619)
(In default)[DBL. DAGGER]+ C 1,042,200
10,740,000 MI State Hosp. Fin. Auth. Adj. Rate Rev. Bonds
(Detroit-Macomb Hosp. Corp.),
Ser. A, 7.4s, 6/1/13 BB 10,847,400
MI State Hosp. Fin. Auth. Rev. Bonds
4,780,000 (Garden City Hosp.), 8.3s, 9/1/02 Ba 5,210,200
5,000,000 (Detroit-Macomb Hosp. Corp),
Ser. A, 7s, 6/1/15 BB 5,005,650
15,000,000 MI State Stragetic Fund Ltd. Oblig. Rev. Bonds
(Detroit Edison Co. Coll- AA),
MBIA, 6.4s, 9/1/25 Aaa 16,387,500
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
5,800,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 AAA/P 6,641,000
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
910,000 (MI Hlth. Care Corp.), 9.1s, 12/1/14
(acquired 6/14/91, cost $746,182)
(In default)[DBL. DAGGER]+ D/P 163,800
15,500,000 (Blue Wtr. Fiber), 8s, 1/1/12 (In default)+ D/P 10,385,000
19,500,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds
(Poll. Ctrl.), Ser. B, 9 1/2s, 7/23/09 B/P 21,571,875
5,390,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care), 8 3/8s, 7/1/23 B/P 5,726,875
---------------
114,909,480
Minnesota (1.1%)
- ------------------------------------------------------------------------------------------------------------
2,920,000 Chaska Indl. Dev. Rev. Bonds
(Lifecore Biomedical Inc.), 10 1/4s, 9/1/20 BB/P 3,339,750
5,000,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise
Cascade Corp.), 7.2s, 10/1/24 Baa 5,675,000
Minneapolis, Cmnty. Dev. Agcy. Multi-Fam.
Hsg. Rev. Bonds (Lindsay Bros.)
1,790,000 Ser. A, 9 1/2s, 12/1/07 B/P 1,863,838
1,200,000 Ser. B, 1 1/2s, 12/1/07 B/P 465,000
8,000,000 Minneapolis Single Family Rev. Bonds (Phase V),
FNMA & GNMA Coll., 6 1/4s, 4/1/22 Aaa 8,440,000
3,200,000 Shakopee Multi-Fam. Adj. Rate Rev. Bonds
(Riva Ridge Apts.), 8 1/2s, 12/1/08 B/P 3,200,000
---------------
22,983,588
Mississippi (1.2%)
- ------------------------------------------------------------------------------------------------------------
Claiborne Cnty., Poll. Ctrl. Rev. Bonds
(Middle South Energy, Inc.)
4,500,000 Ser. C, 9 7/8s, 12/1/14 Ba 4,910,625
10,000,000 Ser. A, 9 1/2s, 12/1/13 Ba 10,875,000
4,000,000 MS Hosp. Equip. & Fac. Auth. Rev. Bonds
(MS Methodist Hosp & Rehab.),
Ser. 1, 9 3/8s, 5/1/12 BB/P 4,280,320
4,200,000 Perry Cnty., Poll. Ctrl. VRDN, 3.7s, 10/1/12 VMIG1 4,200,000
---------------
24,265,945
Montana (1.5%)
- ------------------------------------------------------------------------------------------------------------
3,000,000 Missoula Cnty., Rev. Bonds (Cmnty. Med. Ctr. Inc.),
Ser. B, 9s, 6/1/18 Aaa 3,185,520
27,700,000 MT State Hlth. Fac. Auth. Fac. Rev. Bonds,
AMBAC, 5.342s, 2/25/25 Aaa 27,596,125
---------------
30,781,645
Nebraska (0.7%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA,
8.98s, 12/8/16 Aaa 2,382,500
12,100,000 NE Investment Fin. Auth. Single Fam. Mtge.
IFB, Ser. D, GNMA Coll., 7.766s, 3/24/26 Aaa 12,705,000
---------------
15,087,500
New Hampshire (1.8%)
- ------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
2,395,000 (Franklin Regl. Hosp.), 8 3/4s, 9/1/19 BBB/P 2,613,544
9,000,000 (1st Mtge. Rivermead Peterborough),
8 1/2s, 7/1/24 B/P 9,956,250
5,900,000 (Heritage Heights), 7.35s, 1/1/18 BB/P 6,180,250
6,750,000 (Wentworth-Douglass Hosp.), MBIA, 5 3/8s,
1/1/15 Aaa 6,834,375
2,850,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
(Havenwood-Heritage Heights),
9 3/4s, 12/1/19 AAA/P 3,281,063
7,700,000 NH State Bus. Fin. Auth. Poll. Ctrl. & Solid
Waste Rev. Bonds (Crown Paper Co.),
7 3/4s, 1/1/22 BB 8,652,875
---------------
37,518,357
New Jersey (3.0%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth. Rev. Bonds, 8.4s, 4/1/24 B/P 5,381,250
7,000,000 NJ Econ. Dev. Auth. 1st Mtge. Rev. Bonds
(Winchester Gardens), Ser. A, 8 5/8s, 11/1/25 B/P 7,455,000
NJ Econ. Dev. Auth. Rev. Bonds
2,700,000 (Stolt Terminals), 10 1/2s, 1/15/18 BB/P 2,841,345
12,000,000 (Newark Arpt. Marriot Hotel), 7s, 10/1/14 B/P 12,900,000
5,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 5,656,250
4,000,000 NJ State Hsg. & Mtge. Fin. Agcy. IFB, Ser. I, 8.155s,
11/1/07 (acquired from 2/11/93 to 8/24/95,
cost $4,143,120) [DBL. DAGGER] A 4,410,000
10,000,000 NJ State Trans. Trust Fund Auth. Rev. Bonds
(Trans. Syst.), Ser. B, MBIA, 6 1/2s, 6/15/10 Aaa 11,737,500
5,905,000 NJ Wastewtr. Treatment Rev. Bonds
(Wastewtr. Treatment), Ser. C, 6 7/8s, 6/15/08 Aa 7,019,569
4,000,000 Salem Cnty., Indl. Poll. Control Fin. Auth. IFB,
MBIA, 8.707s, 10/1/29 (acquired 10/28/94,
cost $3,785,680) [DBL. DAGGER] Aaa 4,850,000
---------------
62,250,914
New Mexico (0.5%)
- ------------------------------------------------------------------------------------------------------------
9,000,000 Farmington, Poll. Control Rev. Bonds (Tucson
Elec. Pwr Co. San Juan), Ser. A, 6.95s, 10/1/20 B 9,573,750
New York (11.5%)
- ------------------------------------------------------------------------------------------------------------
Metropolitan Trans. Auth. Fac. Rev. Bonds
13,640,000 Ser. A, MBIA, 6 1/4s, 4/1/12 Aaa 15,617,800
5,000,000 Ser. B-1, AMBAC, 5 1/2s, 7/1/09 Aaa 5,325,000
5,000,000 Ser. B-1, AMBAC, 5 1/2s, 7/1/08 Aaa 5,343,750
Metropolitan Trans. Auth. Svcs. Contract Rev. Bonds
4,000,000 (Commuter Fac.), Ser. O, 5 3/4s, 7/1/13 Baa 4,260,000
8,250,000 (Trans. Fac.), Ser. O, 5 3/4s, 7/1/13 Baa 8,765,625
NY City, VRDN
4,700,000 Ser. 94A-4, 3.7s, 8/1/21 VMIG1 4,700,000
500,000 Ser. 93B-4, 3.6s, 8/15/22 VMIG1 500,000
NY City, G.O. Bonds
10,000,000 Ser. L, 8s, 8/1/03 Baa 11,787,500
5,730,000 Ser. H, 6 1/8s, 8/1/25 Baa 6,088,125
300,000 NY City, Hsg. Dev. Corp. Mtge. VRDN
(Parkgate Tower), Ser. 1, 3.60s, 12/1/07 VMIG1 300,000
9,000,000 NY City, Indl. Dev. Agcy. Rev. Bonds
(Solid Waste Disp-Visy Paper), 7.8s, 1/1/16 BB/P 10,080,000
NY City, Muni. Assistance Corp. Rev. Bonds
10,000,000 Ser. G, 6s, 7/1/08 Aa 11,137,500
10,000,000 Ser. G, 6s, 7/1/07 Aa 11,175,000
15,000,000 Ser. E, 6s, 7/1/06 Aa 16,687,500
15,000,000 Ser. J, 6s, 7/1/04 Aa 16,443,750
10,000,000 NY City, Muni. Wtr. & Swr. Fin. Auth. VRDN,
Ser. G, FGIC, 3 3/4s, 6/15/24 VMIG1 10,000,000
NY State Dorm. Auth. Rev. Bonds
21,500,000 (Cons. City U.), Ser. A, MBIA, 5 3/4s, 7/1/13 Aaa 23,461,875
7,000,000 (U. Syst.), Ser. A, AMBAC, 5 3/4s, 7/1/09 Aaa 7,673,750
7,100,000 NY State Dorm. Auth. VRDN (Oxford U. Press
Inc.), 3.65s, 7/1/23 VMIG1 7,100,000
100,000 NY State Energy Res. & Dev. Auth. Poll. Control
VRDN (Niagara Mohawk Pwr.),
Ser. 85-A, 3.7s, 7/1/15 VMIG1 100,000
8,000,000 NY State Energy Res. & Dev. Auth. Poll. Ctrl. IFB,
FGIC, 10.05s, 7/1/29 (acquired 12/19/94,
cost $8,353,120) [DBL. DAGGER] Aaa 10,470,000
NY State Local Govt. Assistance Corp. VRDN
700,000 Ser. E, 3.55s, 4/1/25 VMIG1 700,000
3,000,000 3.5s, 4/1/22 VMIG1 3,000,000
5,500,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds,
Ser. A, AMBAC, 6 1/2s, 8/15/29 Aaa 6,132,500
9,750,000 NY State Pwr. Auth. Rev. Bonds, Ser. Z,
6 1/2s, 1/1/19 Aa 10,688,438
7,000,000 NY State Urban Dev. Corp. Rev. Bonds
(State Fac.), 7 1/2s, 4/1/20 AAA 7,936,250
12,590,000 NY State, G.O. Bonds, 6s, 3/1/07 A 14,006,375
7,000,000 Port Auth. NY & NJ Rev. Bonds
(Delta Airlines, Inc.), Ser. 1R, 6.95s, 6/1/08 Baa 7,665,000
300,000 Suffolk Cnty., Indl. Dev. Agcy. VRDN (Cold Spring
Harbor Lab), 3.6s, 7/1/23 VMIG1 300,000
---------------
237,445,738
North Carolina (1.7%)
- ------------------------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
4,000,000 Ser. B, MBIA, 7s, 1/1/08 AAA 4,770,000
14,940,000 Ser. B, MBIA, 6 1/8s, 1/1/09 AAA 16,751,475
5,000,000 Ser. C, MBIA, 5 1/2s, 1/1/07 AAA 5,362,500
500,000 NC Med. Care Community Hosp. VRDN
(Aces-Pooled Fin.), Ser. A, 3.8s, 10/1/20 VMIG1 500,000
7,500,000 NC Muni. Pwr. Agcy. Rev. Bonds (Catawba
Elec. No. 1), MBIA, 6s, 1/1/11 Aaa 8,334,375
---------------
35,718,350
Ohio (0.6%)
- ------------------------------------------------------------------------------------------------------------
7,200,000 Dayton, Special Fac. Rev. Bonds (Emery Air
Freight Corp.), Ser. A, 12 1/2s, 10/1/09 BBB 7,947,000
3,500,000 OH State Pub. Fac. Comm. Higher Ed. Cap.
Rev. Bonds, Ser. II-A, MBIA, 4 1/2s, 11/1/10 Aaa 3,399,375
9,165,000 Lucas Plaza, Hsg. Dev. Corp. Mtge. Rev. Bonds,
FHA Insd., zero %, 6/1/24 Aaa 2,050,669
---------------
13,397,044
Oklahoma (0.6%)
- ------------------------------------------------------------------------------------------------------------
6,000,000 Ottawa Cnty., Fin. Auth. Indl. Rev. Bonds
(Doane Prods Co.), 7 1/4s, 6/1/17 B/P 6,180,000
6,475,000 Tulsa, Indl. Auth. Rev. Bonds (U. of Tulsa),
Ser. A, MBIA, 6s, 10/1/11 Aaa 7,260,094
---------------
13,440,094
Pennsylvania (5.0%)
- ------------------------------------------------------------------------------------------------------------
Allegheny Cnty., Indl. Dev. Auth. Arpt. Special
Fac. Rev. Bonds
1,290,000 (U.S. Air, Inc.), Ser. A, 8 7/8s, 3/1/21 B 1,480,275
1,485,000 (Southwestern Arpt. Cargo Fac.), 8 3/4s,
2/15/09 BB/P 1,561,106
5,035,000 (U.S. Air, Inc.), Ser. B, 8 1/2s, 3/1/21 B 5,676,963
Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. Rev. Bonds (United Hosp. Inc.)
3,745,000 8 1/2s, 11/1/17 AAA 3,861,994
5,300,000 Ser. A, 8 3/8s, 11/1/11 AAA 5,889,625
5,370,000 PA Convention Ctr. Auth. Rev. Bonds,
Ser. A, FSA, 6 3/4s, 9/1/19 AAA 6,108,375
7,250,000 PA Econ. Dev. Fin. Auth. Res. Recvy. Rev. Bonds
(Northampton Generating), Ser. A, 6.6s, 1/1/19 BB/P 7,385,938
28,000,000 PA Econ. Dev. Fin. Auth. Recycling Rev. Bonds
(Ponderosa Fibres), Ser. A, 9 1/4s, 1/1/22 D/P 18,200,000
4,800,000 PA Hsg. Fin. Agcy. IFB, 8.009s, 4/1/25 Aa 5,004,000
13,000,000 PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds (Colver Project),
Ser. E, 8.05s, 12/1/15 BB/P 14,722,500
2,500,000 PA State Higher Ed. Assistance Agcy.
Student Loan IFB, AMBAC, 9.469s, 9/3/26 Aaa 2,871,875
8,250,000 PA State Higher Ed. Assistance Agcy. Student
Loan Rev. Bond, Ser. A&B, 7 1/4s, 7/1/18 BBB 8,982,188
5,300,000 Philadelphia, Muni. Auth. Rev. Bonds (Justice Lease),
Ser. C, 8 5/8s, 11/15/16 AAA 6,307,000
Philadelphia, Wtr. & Wastewtr. Rev. Bonds
4,760,000 FGIC, 10s, 6/15/05 Aaa 6,467,650
5,000,000 MBIA, 5 5/8s, 6/15/08 Aaa 5,437,500
4,000,000 Pottsville Hosp. Auth Hosp. Rev. Bonds
(Pottsville Hosp. Warne Clinic), 7s, 7/1/14 BBB 4,355,000
---------------
104,311,989
Puerto Rico (1.5%)
- ------------------------------------------------------------------------------------------------------------
8,000,000 Cmnwlth. of PR, Rev. Bonds, MBIA, 5.642s, 7/1/08 Aaa 8,500,000
3,305,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds,
Ser. Z, MBIA, 6 1/4s, 7/1/12 Aaa 3,809,013
7,000,000 PR Elec. Pwr. Auth. Pwr. Rev. Bonds,
Ser. AA, MBIA, 6s, 7/1/12 Aaa 7,848,750
2,000,000 PR Elec. Pwr. Auth. Rev. Bonds,
Ser. BB, MBIA, 6 1/4s, 7/1/10 Aaa 2,290,000
7,000,000 PR, Pub. Bldgs. Auth. Hlth. Fac. Rev. Bonds,
Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 7,673,750
---------------
30,121,513
South Carolina (1.6%)
- ------------------------------------------------------------------------------------------------------------
15,345,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 B/P 16,361,595
10,355,000 SC Jobs Econ. Dev. Auth. Econ. Dev. Rev. Bonds
(St. Francis Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa 11,209,288
5,000,000 Spartanburg Cnty., Hosp. Fac. IFB, FSA,
8.685s, 4/13/22 Aaa 5,743,750
---------------
33,314,633
Tennessee (0.2%)
- ------------------------------------------------------------------------------------------------------------
3,600,000 Clarkesville, Pub. Bldg. Auth. VRDN (TN Muni.
Bond Fund), 3.7s, 6/1/24 VMIG1 3,600,000
Texas (2.7%)
- ------------------------------------------------------------------------------------------------------------
5,040,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa 5,506,200
5,000,000 Amarillo, Hlth. Fac. Corp. Rev. Bonds (Sears
Panhandle Retirement), Ser. B, 7 3/4s, 8/15/26 BB/P 5,225,000
13,460,000 Austin, Util. Syst. Rev. Bonds, Ser. A, MBIA,
6s, 11/15/06 Aaa 14,906,950
4,785,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Heartway Corp.), Ser. A-1, 10 1/4s, 3/1/19
(In default) + D/P 3,923,700
5,615,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 B/P 6,190,538
10,000,000 Dallas Cnty., G.O. Bonds (Flood Control Dist. #1),
zero%, 4/1/16 BB/P 9,925,000
Harris Cnty., Single Fam. Hsg. Fin. Corp. Rev. Bonds
760,000 Ser. 1983A, 10 3/8s, 7/15/14 Baa 761,710
585,000 9 7/8s, 3/15/14 BB 585,644
8,000,000 TX State Hsg. & Cmnty. Affairs Home Mtge. IFB,
Ser. C, GNMA Coll, FNMA Coll, 9.612s, 7/2/24 AAA 9,810,000
---------------
56,834,742
Utah (0.5%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Salt Lake City, Hosp. Rev. Bonds
(IHC Hosps. Inc.), MBIA, 6 1/4s, 2/15/23 Aaa 5,381,250
5,500,000 Tooele Cnty., Poll. Control Rev. Bonds
(Laidlaw Enviromental), Ser. A, 7.55s, 7/1/27 B/P 5,692,500
---------------
11,073,750
Virginia (0.9%)
- ------------------------------------------------------------------------------------------------------------
4,500,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 9.164s, 8/15/23 Aaa 5,478,750
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB (Bon
Secours Hlth. Syst.), FSA, 7.772s, 8/23/27 Aaa 2,402,500
9,740,000 Hopewell, Indl. Dev. Rev. Bonds (Stone
Container Corp.), 8 1/4s, 6/1/16 B/P 10,908,800
---------------
18,790,050
Washington (2.2%)
- ------------------------------------------------------------------------------------------------------------
29,000,000 Port Walla Walla Pub. Corp. Solid Waste
Recycling Rev. Bonds (Ponderosa Fibres),
9 1/8s, 1/1/26 CCC/P 21,025,000
3,500,000 Spokane Cnty., Indl. Dev. Corp. Solid Waste Disp.
Rev Bonds (Kiaser Alummin. &
Chemical Corp.), 7.6s, 3/1/27 B/P 3,675,000
8,200,000 WA State Hsg. Fin. Comm. Single Fam. Mtge.
IFB, GNMA Coll., 9.567s, 12/1/17
(acquired 4/12/95, cost $9,225,000) [DBL. DAGGER] AAA 9,358,250
WA State Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear Project No. 3)
4,000,000 Ser. C, MBIA, 7 1/2s, 7/1/08 Aaa 4,900,000
5,000,000 Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 6,031,250
---------------
44,989,500
West Virginia (0.5%)
- ------------------------------------------------------------------------------------------------------------
Marion Cnty., Cmnty. Solid Waste Disp. Fac. Rev.
Bonds (American Pwr. Paper Recycling)
12,000,000 9s, 12/1/11 (acquired from 12/17/93
to 3/8/95, cost $11,850,760) (In default)[DBL. DAGGER]+ D/P 6,000,000
10,000,000 8 1/4s, 12/1/11 (acquired 12/17/93,
cost $10,000,000) (In default)[DBL. DAGGER]+ D/P 5,000,000
---------------
11,000,000
- ------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $1,984,572,597) *** $ 2,074,258,147
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $2,069,159,191.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings
available at July 31, 1997 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, 1997. Securities rated by
Putnam are indicated by "/P" and are not publicly rated.
The table below shows the percentage of the fund's investment on July 31, 1997 in securities
assigned to various rating categories by Moody's and Standard & Poor's and in unrated
securities determined by Putnam Management to be of comparable quality.
Unrated securities
Rated securities of comparable quality,
as a percentage of as a percentage of
Rating fund's net assets fund's net assets
AAA/Aaa 30.1% 5.5%
AA/Aa 8.0 0.2
A/A 2.0 0.1
BBB/Baa 10.3 1.7
BB/Ba 7.7 12.3
B/B 2.1 13.8
Caa/CCC -- 1.0
Ca/CC -- --
C 0.2 --
D -- 2.6
A-1/VMIGI 2.6 --
----- -----
63.0% 37.2%
Ratings are not covered by the Report of independent accountants.
*** The aggregate identified cost on a tax basis is $1,984,572,597, resulting in gross unrealized
appreciation and depreciation of $151,784,337 and $62,098,787, respectively, or net
unrealized appreciation of $89,685,550.
+ Non-income-producing security.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value of
restricted securities held at July 31, 1997 was $78,109,360 or 3.8% of net assets.
# A portion of this security was pledged and segregated with the custodian to cover margin
requirements for futures contracts at July 31, 1997.
The rates shown on IFB and IF COP, which are securities paying interest rates that vary
inversely to changes in the market interest rates, and VRDN's are the current interest rates
at July 31, 1997.
The fund had the following industry group concentrations greater than 10% at July 31, 1997
(as a percentage of net assets):
Healthcare 18.6%
Transportation 14.8
Utilities 13.9
The fund had the following insurance concentration greater than 10% at July 31, 1997 (as a
percentage of net assets):
MBIA 14.8%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 1997
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Muni Index Future (Short) $85,509,375 $81,785,312 Sep-97 $(3,724,063)
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,984,572,597) (Note 1) $2,074,258,147
- ---------------------------------------------------------------------------------------------------
Cash 14,730,962
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 27,000,122
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 5,928,423
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 825,523
- ---------------------------------------------------------------------------------------------------
Total assets 2,122,743,177
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 10,589,199
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 65,625
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,941,283
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 31,362,801
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 5,217,750
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 933,131
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 160,682
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 29,305
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,753
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,137,270
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 145,187
- ---------------------------------------------------------------------------------------------------
Total liabilities 53,583,986
- ---------------------------------------------------------------------------------------------------
Net assets $2,069,159,191
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 2,032,287,153
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (195,279)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (48,894,170)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 85,961,487
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $2,069,159,191
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($625,601,905 divided by 42,978,869 shares) $14.56
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $14.56)* $15.29
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,427,365,127 divided by 98,020,334 shares)** $14.56
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($16,192,159 divided by 1,112,943 shares) $14.55
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $14.55)*** $15.04
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more
and on group sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
*** 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.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1997
<S> <C>
Tax exempt interest income: $136,080,088
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 10,809,869
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,611,642
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 71,598
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 21,779
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,147,823
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 12,091,060
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 70,775
- --------------------------------------------------------------------------------------------------
Reports to shareholders 81,240
- --------------------------------------------------------------------------------------------------
Registration fees 3,299
- --------------------------------------------------------------------------------------------------
Auditing 51,667
- --------------------------------------------------------------------------------------------------
Legal 36,268
- --------------------------------------------------------------------------------------------------
Postage 209,736
- --------------------------------------------------------------------------------------------------
Other 109,241
- --------------------------------------------------------------------------------------------------
Total expenses 26,315,997
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (609,741)
- --------------------------------------------------------------------------------------------------
Net expenses 25,706,256
- --------------------------------------------------------------------------------------------------
Net investment income 110,373,832
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (160,569)
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (2,813,192)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 75,459,771
- --------------------------------------------------------------------------------------------------
Net gain on investments 72,486,010
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $182,859,842
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended July 31,
--------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 110,373,832 $ 113,667,354
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (2,973,761) 15,016,204
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 75,459,771 (28,204,166)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 182,859,842 100,479,392
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (34,200,705) (32,034,038)
- ----------------------------------------------------------------------------------------------------------------------
Class B (75,427,802) (80,787,224)
- ----------------------------------------------------------------------------------------------------------------------
Class M (797,574) (327,003)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 24,687,444 70,910,580
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 97,121,205 58,241,707
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 1,972,037,986 1,913,796,279
- ----------------------------------------------------------------------------------------------------------------------
End of year (distributions in excess of net investment
income of $195,279 and $428,650, respectively) $2,069,159,191 $1,972,037,986
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ----------------------------------------------------------------------------------------------------------------------
For the period
Per-share Sept. 20, 1993+
operating performance Year ended July 31 to July 31
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $14.05 $14.14 $14.24 $15.34
- ----------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income .84 .90 .94 .83
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .52 (.10) (.10) (.98)
- ----------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.36 .80 .84 (.15)
- ----------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------
From net
investment income (.85) (.89) (.94) (.83)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.02)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investment -- -- -- (.05)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.05)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (.85) (.89) (.94) (.95)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.56 $14.05 $14.14 $14.24
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.97 5.76 6.24 (.99)*
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $625,602 $540,607 $474,984 $361,593
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .85 .84 .87 .71*
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.94 6.27 6.73 5.58*
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 56.22 67.70 60.41 44.41
- ----------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts. (Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ----------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.05 $14.14 $14.24 $15.01 $14.64
- ----------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income .75 .80 .85 .86 .95
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .51 (.09) (.10) (.65) .41
- ----------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.26 .71 .75 .21 1.36
- ----------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------
From net
investment income (.75) (.80) (.85) (.85) (.95)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- (.03) --
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investment -- -- -- (.05) (.04)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.05) --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (.75) (.80) (.85) (.98) (.99)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.56 $14.05 $14.14 $14.24 $15.01
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.26 5.08 5.54 1.36 9.68
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,427,365 $1,421,448 $1,436,481 $1,522,955 $1,501,535
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.50 1.50 1.51 1.45 1.38
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.30 5.62 6.10 5.76 6.39
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 56.22 67.70 60.41 44.41 52.29
- ----------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2)
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ----------------------------------------------------------------------------------------------------------------------
For the period
Per-share Dec. 29, 1994+
operating performance Year ended July 31 to July 31
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $14.04 $14.13 $13.43
- ----------------------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------------------
Net investment income .80 .84 .58
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .51 (.08) .70
- ----------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.31 .76 1.28
- ----------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------
From net
investment income (.80) (.85) (.58)
- ----------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- --
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain
on investment -- -- --
- ----------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total distributions (.80) (.85) (.58)
- ----------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.55 $14.04 $14.13
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.64 5.44 9.69*
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $16,192 $9,984 $2,331
- ----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.15 1.13 .71*
- ----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.63 5.87 3.98*
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 56.22 67.70 60.41
- ----------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios
exclude these amounts. (Note 2)
</TABLE>
Notes to financial statements
July 31, 1997
Note 1
Significant accounting policies
Putnam Tax-Free High Yield Fund (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 primarily in high-yielding, lower rated
tax exempt securities constituting a portfolio that Putnam Investment
Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc., believes does not involve undue risk
to income or principal.
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. Short-term investments
are stated at amortized cost, which approximates market value, and restricted
securities are stated at fair value following procedures approved by the
Trustees.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures 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 nor for excise tax
on income and capital gains.
At July 31, 1997, the fund had a capital loss carryover of approximately
$36,876,000 available to offset future net capital gains, if any.
The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- ---------------------- ----------------------
$24,399,000 July 31, 2003
$12,477,000 July 31, 2004
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 market discount, defaulted bond
interest, post-October loss deferrals, and realized and unrealized losses on
certain futures contracts. 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, 1997, the fund reclassified $285,620 to decrease distributions in excess
of net investment income and $178 to decrease paid-in-capital, with an
increase to accumulated net realized loss on investments of $285,442. 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 accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. 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 discount are accreted according to the effective yield method.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.65% of the first $500 million of
average net assets, 0.55% of the next $500 million, 0.50% of the next $500
million, 0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405%
of the next $5 billion, 0.39% of the next $5 billion and 0.38% thereafter.
Prior to November 20, 1996, any amount over $1.5 billion was based on 0.45%.
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 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.
As part of the custodian contract between the subcustodian bank and PFTC, the
subcustodian bank has a lien on the securities of the fund to the extent
permitted by the funds investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At July 31, 1997, the payable to the subcustodian bank represents the amount
due for cash advance for the settlement of a security purchased.
For the year ended July 31, 1997, fund expenses were reduced by $609,741 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 $1,755 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 has 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 certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $120,283 and $8,096 from the sale of
class A and class M shares, respectively and $2,395,942 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, 1997, Putnam Mutual Funds Corp., acting as underwriter received
$13,626 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $1,118,953,699 and
$1,086,041,417, 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, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 17,469,517 $247,871,332
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,233,532 17,525,638
- ------------------------------------------------------------
18,703,049 265,396,970
Shares
repurchased (14,205,309) (201,674,072)
- ------------------------------------------------------------
Net increase 4,497,740 $ 63,722,898
- ------------------------------------------------------------
Year ended
July 31, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 13,029,114 $185,888,611
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,175,420 16,773,877
- ------------------------------------------------------------
14,204,534 202,662,488
Shares
repurchased (9,324,390) (132,743,846)
- ------------------------------------------------------------
Net increase 4,880,144 $ 69,918,642
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 19,278,563 $273,428,476
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,486,227 35,319,294
- ------------------------------------------------------------
21,764,790 308,747,770
Shares
repurchased (24,895,016) (353,480,814)
- ------------------------------------------------------------
Net decrease (3,130,226) $ (44,733,044)
- ------------------------------------------------------------
Year ended
July 31, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 26,982,574 $385,197,664
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,654,941 37,899,226
- ------------------------------------------------------------
29,637,515 423,096,890
Shares
repurchased (30,078,430) (429,880,151)
- ------------------------------------------------------------
Net decrease (440,915) $(6,783,261)
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 633,553 $8,978,501
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 35,274 500,706
- ------------------------------------------------------------
668,827 9,479,207
Shares
repurchased (266,903) (3,781,617)
- ------------------------------------------------------------
Net increase 401,924 $5,697,590
- ------------------------------------------------------------
Year ended
July 31, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 603,316 $8,601,895
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 16,752 237,979
- ------------------------------------------------------------
620,068 8,839,874
Shares
repurchased (74,012) (1,064,675)
- ------------------------------------------------------------
Net increase 546,056 $7,775,199
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99% 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 $.0139 per share.
The Form 1099 you receive in January 1998 will show the tax
status of all distributions paid to your account in calendar 1997.
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
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
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Triet M. Nguyen
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free High
Yield Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. For more information, or to
request a prospectus, call toll free: 1-800-225-1581. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
35890-500/036/679/851 7/97
