Putnam
Tax-Free
Insured
Fund
ANNUAL REPORT
July 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "In the municipal bond market, a well-balanced ratio between bond
supply and investor demand supported performance. Exceptionally
strong demand has come from insurance companies and supply has
kept pace -- primarily stemming from lower interest rates and
the ensuing refunding issues."
-- Richard Wyke, manager
Putnam Tax-Free Insured 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
8 Fund performance summary
12 Portfolio holdings
19 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 a few
basis points 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 high-quality insured bonds --
generally characterized more by their credit safety than by their return
potential.
While your fund's strength reflects that of the market, its performance is
also the result of the skillful securities selection and positioning
strategies implemented by manager Richard Wyke. In the following report, Rick
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 17, 1997
Report from the Fund Manager
Richard P. Wyke
Taking solace in the lack of Federal Reserve Board action at the past two
summer meetings, the municipal bond market strengthened toward the end of
Putnam Tax-Free Insured Fund's fiscal year on July 31, 1997. In keeping with
this positive performance, your fund turned in attractive returns for the
year. Class A shares generated 10.09% at net asset value and 4.83% at public
offering price. In comparison, the Lehman Brothers Municipal Bond Index, which
is an unmanaged list of long-term investment-grade (rated Aaa to Baa)
tax-exempt bonds representative of the general municipal bond market, reported
a return of 10.27%. Please see pages 8 through 10 for complete performance
information.
* ECONOMY HUMMED ALONG AT COMFORTABLE PACE
For most of the year, the U.S. economy continued to grow at a comfortable pace
- -- not too slow and not too fast; as Goldilocks would say, "just right."
Corporate earnings were strong and dependable. There has been no evidence of
inflation and the Fed has not considered it necessary to raise interest rates
since March. In the municipal bond market, a well-balanced ratio between bond
supply and investor demand supported performance. Exceptionally strong demand
has come from insurance companies and supply has kept pace -- primarily
stemming from lower interest rates and the ensuing refunding issues.
Insured bonds continued to underperform the uninsured sectors of the municipal
market slightly; this normally happens in periods of strong economic activity.
Given the overall power of the U.S. economy, the credit strength of many
issuers has improved, making higher-risk bonds more attractive and softening
the demand for insured bonds. Your fund reduces credit risk by investing only
in Aaa-rated and insured bonds. While insured bonds offer unsurpassed safety,
they can also be more interest-rate sensitive than other sectors of the
municipal market. This means that in a rising interest-rate environment, they
are more likely to experience price declines than lower-quality bonds,
although they tend to be quicker to appreciate when rates decline.
This helps explain why, when signs that the economy might be building up steam
again surfaced in late July, we didn't change the defensive positioning within
your fund's portfolio. We kept our focus on yield curve positioning,
maintaining a slightly shorter-than-market duration, and on finding extra
value within a prospective holding's structure.
* SHIFTING TO BULLETED MATURITY STRUCTURE
Yield curve positioning, our primary strategy in managing the fund, involves
maximizing yield within a certain maturity range on the yield curve. Our goal
has been to place more emphasis on bonds with maturities in the 10- to 20-year
range, a so-called bullet strategy, thereby decreasing the fund's average
maturity. In a market that has downside risk, we believe this strategy holds
the best opportunities for balancing the fund's priority of high current
income with price stability.
Yield curve positioning goes hand in hand with managing the fund's duration.
As a measure of the portfolio's maturity, duration reflects its price
sensitivity to changes in interest rates. Shorter durations can help preserve
portfolio values as interest rates rise. Since the portfolio is in a slightly
defensive position -- currently about 7% shorter than the market's benchmark
- -- we have been early in our positioning for higher interest rates. But
because we think the market will be surprised at the economy's strength in the
fourth quarter of calendar 1997, we are staying with our strategy of
maintaining shorter-than-market duration.
[GRAPHIC OMITTED: horizontal bar chart DIVERSIFICATION BY STATE]
DIVERSIFICATION BY STATE*
California 12.9%
New York 12.8%
Texas 10.6%
Florida 8.5%
Georgia 5.0%
Footnote reads:
*Based on net assets as of 7/31/97. Allocations will vary over time.
* EMPHASIZING BOND STRUCTURE TO ENHANCE YIELD
We also concentrate on finding bonds that are structured to protect the fund's
net asset value in down markets, specifically premium bonds or bonds with
overpriced call options. Premium bonds sell at prices above par value
($1,000), carry higher coupons, and tend to be more stable when interest rates
are rising. Additionally bonds with call options are more likely to be called
away by the issuer at higher prices when interest rates fall. By holding bonds
with high-priced call options, we can generate extra return when they are
called. This strategy fits into our overall mission of adding to the fund's
return without increasing risk.
Investments are also spread across the country to help increase the fund's
diversification and price stability. For example, we currently hold bonds from
California and New York -- states where tax rates are high and demand for
tax-exempt bonds is strong. We also emphasize bonds from Texas and Florida
because these states make up a large part of the municipal bond market. Their
predominance usually makes them less volatile than bonds from states that
don't sell many municipal bonds.
* STAGE SET FOR STRONGER ECONOMIC GROWTH
Looking ahead, we consider it unreasonable to expect a continuation of the
current low volatility and believe that prudent skepticism is warranted. The
stage seems set for a significant acceleration in the rate of economic growth
at some time in the fourth calendar quarter. The bond market typically does
not fare well in this type of environment, so we do not foresee much upside
potential for bonds over the near term. However, valuations in the U.S. bond
market are better than they have been since 1995, so we do not foresee a major
market decline in bonds either.
[GRAPHIC OMITTED: worm chart YIELD CURVES OF TAXABLE AND TAX-FREE BONDS]
YIELD CURVES OF TAXABLE AND TAX-FREE BONDS
Plot points read:
Taxable-
equivalent Aaa-rated
Maturity U.S. Treasury municipal municipal
range securities bond yield bonds
1 year 3.55 5.877 5.40
2 years 3.75 6.209 5.72
3 years 3.89 6.44 5.78
4 years 4.00 6.623 5.84
5 years 4.10 6.788 5.89
7 years 4.27 7.07 5.95
10 years 4.48 7.417 6.00
15 years 4.86 8.046 6.175
20 years 5.01 8.295 6.35
25 years 5.04 8.344 6.319
30 years 5.06 8.377 6.29
Footnote reads:
Chart compares yields of U.S. Treasury securities and tax-free Aaa-rated
municipal bonds of varying maturities on 7/31/97. The taxable-equivalent yield
for municipal bonds assumes the maximum 39.6% federal income tax rate. Returns
would not be as advantageous for investors in lower tax brackets. No
assurances can be made that the fund will attain any particular yield. Unlike
municipal bonds, principal and interest payments on U.S. Treasury securities
are backed by the full faith and credit of the U.S. government; market prices
and investment returns will vary and are not guaranteed. Source: Bloomberg.
It may take several months for the evidence of economic acceleration to become
compelling enough for Fed action. This means that bonds should continue to
trade within a narrow range. In times like this, we feel strongly that
investors should not let a small rise in interest rates keep them from buying
municipal bonds. Municipals still represent excellent after-tax value against
taxable investments and an excellent way to diversify a stock-heavy portfolio.
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. Shares of the fund are not insured and their
price will fluctuate with market conditions.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Tax-Free Insured Fund is designed for investors seeking high current
income free from federal income tax through investments in insured and
Aaa-rated tax-exempt securities.
TOTAL RETURN FOR PERIODS ENDED 7/31/97
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------------
1 year 10.09% 4.83% 9.76% 4.76% 9.76% 6.20%
- ---------------------------------------------------------------------------
5 years 34.62 28.23 31.92 29.92 32.20 27.89
Annual average 6.13 5.10 5.70 5.37 5.74 5.04
- ---------------------------------------------------------------------------
10 years 109.47 99.46 105.25 105.25 105.67 99.03
Annual average 7.67 7.15 7.46 7.46 7.48 7.13
- ---------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/97
Lehman Bros.
Municipal Consumer
Bond Index Price 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-, 5-, and 10-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 $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
7/31/87
Plot points read:
Fund's Lehman Brothers Consumer
Date Class B Shares Municipal Bond Index Price Index
7/31/87 10000 10000 10000
7/31/88 10724 10703 10413
7/31/89 12152 12006 10931
7/31/90 12820 12838 11459
7/31/91 13690 13960 11968
7/31/92 15556 15877 12346
7/31/93 16645 17281 12689
7/31/94 16646 17609 13040
7/31/95 17732 18997 13401
7/31/96 18697 20250 13796
7/31/97 20525 22329 14104
Footnote reads:
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 $20,947 at net asset value ($19,946 at
public offering price); a $10,000 investment in the fund's class M
shares would have been valued at $20,567 ($19,903 at public offering
price). 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) 13 13 13
- ---------------------------------------------------------------------------
Income $0.798589 $0.755009 $0.752861
- ---------------------------------------------------------------------------
Capital gains1
- ---------------------------------------------------------------------------
Long term 0.093000 0.093000 0.093000
- ---------------------------------------------------------------------------
Short term 0.005000 0.005000 0.005000
- ---------------------------------------------------------------------------
Total $0.896589 $0.853009 $0.850861
- ---------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ---------------------------------------------------------------------------
7/31/96 $14.94 $15.69 $14.96 $14.94 $15.44
- ---------------------------------------------------------------------------
7/31/97 15.50 16.27 15.52 15.50 16.02
- ---------------------------------------------------------------------------
Current return (end of period)
- ---------------------------------------------------------------------------
Current dividend rate2 4.98% 4.74% 5.18% 4.69% 4.54%
- ---------------------------------------------------------------------------
Taxable equivalent3 8.25 7.85 8.58 7.76 7.52
- ---------------------------------------------------------------------------
Current 30-day SEC yield4 4.69 4.46 4.89 4.39 4.24
- ---------------------------------------------------------------------------
Taxable equivalent3 7.76 7.38 8.10 7.27 7.02
- ---------------------------------------------------------------------------
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.
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------------
1 year 7.87% 2.75% 7.53% 2.53% 7.53% 4.04%
- ---------------------------------------------------------------------------
5 years 35.28 28.82 32.55 30.55 32.88 28.57
Annual average 6.23 5.20 5.80 5.48 5.85 5.15
- ---------------------------------------------------------------------------
10 years 104.77 94.97 100.61 100.61 101.11 94.60
Annual average 7.43 6.90 7.21 7.21 7.24 6.88
- ---------------------------------------------------------------------------
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.
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 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 does not take into account brokerage
commissions or other costs, may include bonds different from those in the
fund, and may pose different risks than the fund. 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 Insured Fund
(a series of Putnam Tax-Free Income Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, except for bond ratings, and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of Putnam Tax-Free Insured Fund (the "fund") (a series of Putnam
Tax-Free Income Trust) at July 31, 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
BIGI -- Bond Investors Guaranty Insurance
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (99.0%) *
PRINCIAL AMOUNT RATINGS** VALUE
Alabama (0.6%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 3,000,000 Alabama A&M U. Rev. Bonds, MBIA,
6 1/2s, 11/1/25 Aaa $ 3,341,250
Alaska (1.1%)
- ------------------------------------------------------------------------------------------------------------
6,000,000 AK Hsg. Fin. Corp. Rev. Bonds, Ser. A, MBIA,
5.9s, 12/1/19 Aaa 6,217,500
Arizona (1.5%)
- ------------------------------------------------------------------------------------------------------------
AZ State Muni. Fin. Program COP
1,000,000 Ser. 31, BIGI, 7 1/4s, 8/1/09 Aaa 1,231,250
5,700,000 Ser. 34, BIGI, 7 1/4s, 8/1/09 Aaa 7,018,120
--------------
8,249,370
California (13.5%)
- ------------------------------------------------------------------------------------------------------------
Anaheim, Pub. Fin. Auth. Lease Rev. Bonds, Ser. C, FSA
2,000,000 6s, 9/1/08 Aaa 2,260,000
2,500,000 6s, 9/1/10 Aaa 2,815,625
4,000,000 CA Hsg. Fin. Agcy. Rev. Bonds (Home Mtge.),
Ser. Q, MBIA, 5.85s, 8/1/16 Aaa 4,130,000
9,500,000 CA State G.O. Bonds, MBIA, 5 1/2s, 4/1/12 Aaa 10,176,875
3,000,000 CA Statewide Cmnty. Dev. Auth. Step-up Recovery
Floater COP (Motion Picture & TV Fund),
AMBAC, 5.35s (5.68s, 1/1/99), 1/1/24 ++ Aaa 2,932,500
3,500,000 Los Angeles Cnty., Pub. Wks. Fin. Auth. Lease
Rev. Bonds (Multiple Cap. Fac.), Ser. B,
AMBAC, 5 1/8s, 12/1/17 Aaa 3,478,125
Los Angeles Cnty. Trans. Comm. Sales Tax Rev. Bonds
2,500,000 Ser. A, FGIC, 6 3/4s, 7/1/20 Aaa 2,787,500
3,000,000 Ser. B, AMBAC, 6 1/2s, 7/1/13 Aaa 3,262,500
4,000,000 (Proposition C), Ser. A, MBIA, 6 3/4s, 7/1/19 Aaa 4,540,000
3,455,000 (Proposition C), Ser. A, MBIA, 6 1/2s, 7/1/20 Aaa 3,886,875
5,000,000 Sacramento Muni. Util. Dist. Elec. Rev. Bonds,
Ser. Y, MBIA, 6 3/4s, 9/1/19 Aaa 5,600,000
1,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
8.498s, 4/23/08 Aaa 1,188,750
5,000,000 San Diego, Regl. Bldg. Auth. Lease Rev. Bonds,
MBIA, 6.9s, 5/1/23 Aaa 5,200,000
3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds
(Police Admin. & Hldg. Fac.),
Ser. A, MBIA, 6 1/4s, 7/1/17 Aaa 4,195,200
5,000,000 Southern CA Pub. Pwr. Auth. VRDN
(Transmission), AMBAC, 3.35s, 7/1/19 Aaa 5,000,000
U. of CA Rev. Bonds
6,300,000 (Multi-Purpose), Ser. A, MBIA, 6 7/8s, 9/1/16 Aaa 7,213,500
6,845,000 Ser. A, MBIA, 5s, 11/1/13 Aaa 6,827,888
--------------
75,495,338
Colorado (2.3%)
- ------------------------------------------------------------------------------------------------------------
4,224,000 CO Hlth. Fac. Auth. Rev. Bonds
(Cmnty. Provider Pooled Loan Program),
Ser. A, FSA, 7 1/4s, 7/15/17 Aaa 4,630,560
Denver, City & Cnty. Arpt. Rev. Bonds
1,500,000 MBIA, 6 3/4s, 11/15/22 Aaa 1,629,375
2,000,000 Ser. C, MBIA, 6 3/4s, 11/15/13 Aaa 2,187,500
4,375,000 El Paso Cnty. Home Mtge. Rev. Bonds,
Ser. A, GNMA Coll., 8s, 3/1/21 Aaa 4,532,850
--------------
12,980,285
Delaware (1.0%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 DE State Econ. Dev. Auth. Poll. Control Rev. Bonds
(Delmarva Pwr.), Ser. B, FGIC, 7.15s, 7/1/18 Aaa 5,556,250
District of Columbia (1.7%)
- ------------------------------------------------------------------------------------------------------------
8,875,000 DC G.O. Bonds, Ser. A, MBIA, 6s, 6/1/11 Aaa 9,784,688
Florida (8.5%)
- ------------------------------------------------------------------------------------------------------------
5,855,000 Brevard Cnty., School Board COP, Ser. A,
AMBAC, 5 1/2s, 7/1/09 Aaa 6,272,169
3,920,000 FL Hsg. Fin. Agcy. Home Ownership Rev. Bonds,
Ser. 1987 G2, Class B, GNMA Coll., 8.595s,
11/1/18 Aaa 4,522,700
13,675,000 Hernando Cnty. Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 Aaa 18,324,500
5,500,000 Orange Cnty., Hlth. Fac. Auth. IFB,
Ser. 91-C, MBIA, 8.454s, 10/29/21 Aaa 6,696,250
5,000,000 Orlando & Orange Cnty., Expressway Auth. Rev.
Bonds (Expwy. Rev.), FGIC, 8 1/4s, 7/1/14 Aaa 6,868,750
4,000,000 Sumter Cnty., School Dist. Rev. Bonds
(Multi Dist. Loan Program), FSA, 7.15s, 11/1/15 Aaa 5,070,000
--------------
47,754,369
Georgia (5.0%)
- ------------------------------------------------------------------------------------------------------------
GA Muni. Elec Auth Rev. Bonds
6,100,000 Ser. A, AMBAC, 6 1/2s, 1/1/26 Aaa 6,915,875
5,500,000 Special Obligation (Crossover Ser.),
AMBAC, 6.4s, 1/1/13 Aaa 6,373,125
5,700,000 Ser. A, FSA, 5 1/2s, 1/1/12 Aaa 6,034,875
7,500,000 Ser. B, AMBAC, 6 1/4s, 1/1/12 Aaa 8,521,875
--------------
27,845,750
Illinois (2.0%)
- ------------------------------------------------------------------------------------------------------------
2,600,000 Chicago, Central Pub. Library Rev. Bonds, Ser. B,
AMBAC, 6.85s, 1/1/17 Aaa 2,934,750
2,960,000 Chicago Res. Mtge. Rev. Bonds, Ser. B., MBIA,
zero %, 10/1/09 Aaa 1,276,500
5,000,000 Regional Trans. Auth. Rev. Bonds, Ser. A,
AMBAC, 8s, 6/1/17 Aaa 6,787,500
--------------
10,998,750
Indiana (1.6%)
- ------------------------------------------------------------------------------------------------------------
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds
(Columbus Regl. Hosp.), FSA, 7s, 8/15/15 Aaa 8,943,750
Louisiana (0.6%)
- ------------------------------------------------------------------------------------------------------------
1,914,617 East Baton Rouge, Mtge. Fin. Auth. Single Fam.
Mtge. Rev. Bonds (Mortgage-Backed Securities
Program), Ser. B, GNMA Coll., 8 1/4s, 2/25/11 Aaa 2,113,260
1,025,000 LA Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds,
GNMA Coll., 9 1/8s, 11/1/18 Aaa 1,058,907
--------------
3,172,167
Massachusetts (0.9%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst. Rev.
Bonds, Ser. A, AMBAC, 5s, 7/1/17 Aaa 4,806,250
Michigan (3.0%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Detroit, Swr. Disp. Rev. Bonds, Ser. B, MBIA,
5 1/4s, 7/1/15 Aaa 5,025,000
4,000,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 5,000,000
2,750,000 MI Strategic Fund Ltd. Oblig. Rev. Bonds,
Ser. AA, FGIC, 6.95s, 5/1/11 Aaa 3,337,813
3,500,000 West Bloomfield School Dist. Rev. Bonds,
MBIA, 5 1/8s, 5/1/14 Aaa 3,504,375
--------------
16,867,188
Missouri (2.1%)
- ------------------------------------------------------------------------------------------------------------
2,500,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac. Rev.
Bonds (Heartland Hlth. Sys. Project),
AMBAC, 6.35s, 11/15/17 Aaa 2,696,875
Sikeston Elec. Rev. Bonds, MBIA
3,020,000 6 1/4s, 6/1/22 Aaa 3,337,100
5,000,000 6s, 6/1/14 Aaa 5,593,750
--------------
11,627,725
Nebraska (3.7%)
- ------------------------------------------------------------------------------------------------------------
4,500,000 NE Pub. Pwr. Distr. Rev. Bonds, Ser. B, MBIA,
5 1/4s, 1/1/13 Aaa 4,511,250
3,000,000 NE Investment Fin. Auth. Hosp. Rev. Bonds
IFB (Bishop Memorial Hosp.), MBIA, 8.98s,
11/15/16 Aaa 3,573,750
NE Investment Fin. Auth. Single Fam. Mtge. IFB
2,300,000 Ser. B, GNMA Coll., 11.135s, 3/15/22 Aaa 2,610,500
4,500,000 Ser. 2, GNMA Coll., 11.287s, 9/10/30 Aaa 5,146,875
4,450,000 NE Investment Fin. Auth. Single Fam. Mtge. Rev.
Bonds, Ser. 1, MBIA, 8 1/8s, 8/15/38 Aaa 4,628,757
--------------
20,471,132
Nevada (1.3%)
- ------------------------------------------------------------------------------------------------------------
5,800,000 Clark Cnty., School Dist. G.O. Bonds, Ser. A,
MBIA, 7s, 6/1/10 # Aaa 6,996,250
New Hampshire (0.6%)
- ------------------------------------------------------------------------------------------------------------
2,500,000 NH State Tpk. Syst. IFB, FGIC, 9.546s, 11/1/17 Aaa 3,259,375
New Jersey (4.7%)
- ------------------------------------------------------------------------------------------------------------
3,000,000 Middlesex Cnty., Utils. Auth. Swr. IFB, Ser. A, MBIA,
7.439s, 8/15/10 Aaa 3,472,500
5,020,000 NJ State Tpk. Auth. Rev. Bonds, Ser. C, MBIA,
6 1/2s, 1/1/16 Aaa 5,904,775
6,000,000 NJ State Trans. Trust Fund Auth. Rev. Bonds, Ser. A,
AMBAC, 5 1/4s, 6/15/09 Aaa 6,232,500
11,000,000 NJ State Trans. Trust Fund Auth. Rev. Bonds
(Trans. Syst.), Ser. A, MBIA, 5s, 6/15/15 Aaa 10,890,000
--------------
26,499,775
New Mexico (0.1%)
- ------------------------------------------------------------------------------------------------------------
810,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds,
Ser. C, FGIC, 8 1/2s, 7/1/07 Aaa 837,338
New York (12.8%)
- ------------------------------------------------------------------------------------------------------------
Metropolitan Trans. Auth. Commuter Fac. Rev. Bonds
7,425,000 Ser. A, MBIA, 5.7s, 7/1/17 Aaa 7,749,844
4,500,000 Ser. B, AMBAC, 5s, 7/1/17 Aaa 4,387,500
4,500,000 Metropolitan Trans. Auth. Rev. Bonds,
Ser. A, MBIA, 5.7s, 7/1/17 Aaa 4,696,875
8,300,000 NY City G.O. Bonds, Ser. L, MBIA, 8s, 8/1/06 Aaa 10,354,250
11,325,000 NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds,
Ser. B, MBIA, 5 3/4s, 6/15/29 AAA 11,834,625
NY City, Muni. Wtr. Fin. Auth. Wtr. & Swr. Syst.
Rev. Bonds, Ser. B, FGIC
2,735,000 Prerefunded, 7 1/2s, 6/15/11 Aaa 3,418,750
7,265,000 7 1/2s, 6/15/11 Aaa 9,326,444
5,500,000 NY State Dorm. Auth. Rev. Bonds (Mt. Sinai
Medical School), Ser. A, MBIA, 5s, 7/1/21 Aaa 5,286,875
3,000,000 NY State Energy Research & Dev. Auth. IFB,
MBIA, 7.437s, 7/8/26 Aaa 3,041,250
9,750,000 NY State Energy Research & Dev. Auth. Poll.
Control Rev. Bonds (Niagara Mohawk Pwr.
Corp.), Ser. A, FGIC, 7.2s, 7/1/29 Aaa 11,322,188
--------------
71,418,601
North Carolina (0.7%)
- ------------------------------------------------------------------------------------------------------------
$4,000,000 NC Muni. Pwr. Agcy. IFB (No 1 Catawba Elec.),
MBIA, 7.02s, 1/1/20 Aaa 4,085,000
Ohio (1.6%)
- ------------------------------------------------------------------------------------------------------------
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
2,294,000 Ser. B, GNMA Coll., 8 1/4s, 12/15/19 Aaa 2,400,098
5,055,000 Ser. C, GNMA Coll., 8 1/8s, 3/1/20 Aaa 5,307,750
5,745,000 Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 1,005,375
--------------
8,713,223
Oklahoma (0.8%)
- ------------------------------------------------------------------------------------------------------------
4,530,000 OK Hsg. Fin. Agy. Single Fam. Rev. Bonds,
Ser. A, GNMA Coll., 8 1/4s, 12/1/20 Aaa 4,694,213
Pennsylvania (4.8%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Keystone Oaks, School Dist IFB, AMBAC,
7.42s, 9/1/16 Aaa 2,147,500
2,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. Rev. Bonds (Sacred Heart Hosp.
Norristown), Ser. A, BIGI, 6.8s, 2/1/13 Aaa 2,032,680
5,000,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 4,868,750
4,500,000 PA State Higher Ed. Fac. Auth. Rev. Bonds
(Hahnemann U.), MBIA, 7.2s, 7/1/19 Aaa 4,848,750
Philadelphia, Muni. Auth. Rev. Bonds, FGIC
6,045,000 Prerefunded, 7.8s, 4/1/18 Aaa 6,611,719
620,000 7.8s, 4/1/18 Aaa 648,371
3,000,000 Philadelphia, Regl. Port Auth. Lease IFB
(Kidder Mvrics), MBIA, 8.42s, 9/1/13 Aaa 3,461,250
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 2,237,500
--------------
26,856,520
South Carolina (0.6%)
- ------------------------------------------------------------------------------------------------------------
3,500,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. IFB
(St. Francis Hosp.-Franciscan Sisters),
AMBAC, 6.7s, 8/1/15 Aaa 3,609,375
Tennessee (0.9%)
- ------------------------------------------------------------------------------------------------------------
4,840,000 Knox Cnty., Hlth., Ed. & Hsg. Fac. Rev. Bonds
(Fort Sanders Alliance), MBIA, 5 3/4s, 1/1/14 Aaa 5,203,000
Texas (10.6%)
- ------------------------------------------------------------------------------------------------------------
5,680,000 Austin, Arpt. Syst. Rev. Bonds, Ser. A., MBIA,
6.1s, 11/15/11 Aaa 6,098,900
3,505,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Hosp. Corp.
Rev. Bonds (Baptist Memorial Hosp. Sys.),
MBIA, 6 1/2s, 2/15/15 Aaa 3,995,700
Brownsville Util. Syst. Rev. Bonds, AMBAC
3,490,000 6 1/4s, 9/1/11 Aaa 3,969,875
5,250,000 5 1/4s, 9/1/20 Aaa 5,236,875
237,000 Dallas Cnty. Hsg. Fin. Corp. Single Fam. Mtge. Rev.
Bonds, MBIA, 10s, 10/1/07 Aaa 242,311
5,000,000 Harris Cnty., Hosp. Dist. Mtge. Rev. Rev. Bonds,
AMBAC, 7.4s, 2/15/10 Aaa 6,062,500
Harris Cnty., Toll Rd. Sr. Lien, Rev. Bonds, Ser. A
4,000,000 AMBAC, 6 1/2s, 8/15/17 Aaa 4,480,000
5,000,000 MBIA, 6 1/4s, 8/15/15 Aaa 5,481,250
Houston, Wtr. & Swr. Syst. Rev. Bonds, Ser. C, AMBAC
600,000 Prerefunded, 6 3/8s, 12/1/17 Aaa 662,250
9,400,000 6 3/8s, 12/1/17 Aaa 10,199,000
7,000,000 Lockhart, Correctional Fac. Fin. Corp. Rev. Bonds,
MBIA, 6 5/8s, 4/1/12 Aaa 7,525,000
5,000,000 Rio Grande Valley Hlth Fac. Dev. Corp. Rev. Bonds,
MBIA, 6.4s, 8/1/12 Aaa 5,381,250
--------------
59,334,911
Utah (3.3%)
- ------------------------------------------------------------------------------------------------------------
Utah Pwr. Supply Rev. Bonds (Intermountain Pwr. Agcy.),
12,400,000 Ser. A, MBIA, 6.15s, 7/1/14 Aaa 13,593,500
4,500,000 Ser. B, FSA, 6 1/8s, 7/1/07 Aaa 4,899,375
--------------
18,492,875
Virginia (2.2%)
- ------------------------------------------------------------------------------------------------------------
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 9.164s, 8/15/23 Aaa 12,175,000
Washington (4.0%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Tacoma, Elec. Syst. IFB, AMBAC, 8.90s, 1/2/15 Aaa 2,390,000
WA State Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear No. 1), Ser. A
5,000,000 AMBAC, 5.7s, 7/1/09 Aaa 5,318,750
3,500,000 MBIA, 5 3/4s, 7/1/10 Aaa 3,710,000
WA State Pub. Pwr. Supply Syst. Rev. Bonds
3,400,000 (Nuclear Project No. 2),
Ser. C, FGIC, 7 3/8s, 7/1/11 Aaa 3,803,750
6,000,000 (Nuclear Project No. 3),
Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 7,237,500
--------------
22,460,000
Wyoming (0.9%)
- ------------------------------------------------------------------------------------------------------------
5,000,000 Laramie Cnty. Indl. Dev. Rev. Bonds
(Cheyenne Lt., Fuel & Pwr. Co.), Ser. A,
AMBAC, 7 1/4s, 9/1/21 Aaa 5,111,100
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $506,440,891) *** $ 553,858,318
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $559,510,751.
** 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. Ratings are not covered by the
Report of independant accountants.
*** The aggregate identified cost on a tax basis is $506,461,985,
resulting in gross unrealized appreciation and depreciation of
$47,686,191 and $289,858, respectively, or net unrealized appreciation
of $47,396,333.
++ The interest rate and date shown parenthetically represent the
new interest rate to be paid and the date the fund will begin
receiving interest at this rate.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at
July 31, 1997.
The rates shown on IFBs and IF COPs, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, and VRDNs 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):
Utilities 25.8%
Transportation 16.9
Hospitals/Health care 11.6
The fund had the following insurance concentrations greater than 10%
at July 31, 1997 (as a percentage of net assets):
MBIA 46.2%
AMBAC 22.4
FGIC 16.6
</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 Futures (Short) $39,700,781 37,608,597 Sep-97 (2,092,184)
- -----------------------------------------------------------------------------------------
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 $506,440,891) (Note 1) $553,858,318
- ---------------------------------------------------------------------------------------------------
Cash 201,840
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 6,614,202
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,253,456
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 471,775
- ---------------------------------------------------------------------------------------------------
Total assets 563,399,591
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 30,469
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,081,678
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,336,654
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 277,699
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 35,099
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 13,299
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 880
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 36,964
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 76,098
- ---------------------------------------------------------------------------------------------------
Total liabilities 3,888,840
- ---------------------------------------------------------------------------------------------------
Net assets $559,510,751
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $515,749,159
- ---------------------------------------------------------------------------------------------------
Distribution in excess of net investment income (Note 1) (534,000)
- ---------------------------------------------------------------------------------------------------
Distribution in excess of gains on investments (Note 1) (1,029,651)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 45,325,243
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $559,510,751
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A shares
($219,264,857 divided by 14,146,281 shares) $15.50
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $15.50)* $16.27
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($339,353,606 divided by 21,866,631 shares) [DAGGER] $15.52
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($892,288 divided by 57,574 shares) $15.50
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $15.50)** $16.02
- ---------------------------------------------------------------------------------------------------
* On single retail of less than $25,000. On sales of $25,000 or more and on group sales the offering
price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
[DAGGER] Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1997
<S> <C>
Tax exempt interest income: $33,596,623
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 3,251,097
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 519,402
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 27,685
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 10,919
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 410,361
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,730,302
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 3,627
- --------------------------------------------------------------------------------------------------
Reports to shareholders 42,120
- --------------------------------------------------------------------------------------------------
Registration fees 163
- --------------------------------------------------------------------------------------------------
Auditing 33,024
- --------------------------------------------------------------------------------------------------
Legal 15,242
- --------------------------------------------------------------------------------------------------
Postage 55,652
- --------------------------------------------------------------------------------------------------
Other 28,597
- --------------------------------------------------------------------------------------------------
Total expenses 6,128,191
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (233,799)
- --------------------------------------------------------------------------------------------------
Net expenses 5,894,392
- --------------------------------------------------------------------------------------------------
Net investment income 27,702,231
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,690,471
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (488,351)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 21,060,361
- --------------------------------------------------------------------------------------------------
Net gain on investments 24,262,481
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $51,964,712
- --------------------------------------------------------------------------------------------------
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(decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 27,702,231 $ 27,849,024
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 3,202,120 7,015,645
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 21,060,361 (3,721,338)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 51,964,712 31,143,331
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (10,898,424) (10,229,355)
- ----------------------------------------------------------------------------------------------------------------------
Class B (17,162,957) (17,514,787)
- ----------------------------------------------------------------------------------------------------------------------
Class M (36,135) (11,865)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (1,307,922) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (2,245,530) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (5,460) --
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (12,501,630) (13,383,750)
- ----------------------------------------------------------------------------------------------------------------------
Total increase(decrease) in net assets 7,806,654 (9,996,426)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 551,704,097 561,700,523
- ----------------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess
of net investment income of $534,000 and
$254,588, respectively) $559,510,751 $551,704,097
- ----------------------------------------------------------------------------------------------------------------------
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 $14.94 $14.86 $14.67 $15.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .79 .81 .83 .73
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .67 .08 .19 (1.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.46 .89 1.02 (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.80) (.81) (.82) (.72)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.10) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- (.01) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.90) (.81) (.83) (.82)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.50 $14.94 $14.86 $14.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 10.09 6.06 7.21 (2.49)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $219,265 $196,948 $184,241 $143,079
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .92 .90 .89 .80 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.22 5.37 5.68 4.73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 36.13 54.58 37.62 47.72
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 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 $14.96 $14.87 $14.68 $15.50 $15.42
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .74 .71 .73 .74 .75
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .68 .09 .20 (.73) .28
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.42 .80 .93 .01 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.76) (.71) (.73) (.73) (.75)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.10) -- -- -- (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- (.01) (.10) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.86) (.71) (.74) (.83) (.95)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.52 $14.96 $14.87 $14.68 $15.50
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.76 5.44 6.53 -- 7.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $339,354 $354,431 $377,443 $432,895 $572,659
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.22 1.58 1.54 1.53 1.74
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.93 4.72 5.05 4.81 4.88
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 36.13 54.58 37.62 47.72 42.01
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 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 June 1, 1995+
operating performance Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $14.94 $14.86 $15.11
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .74 .76 .12
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .67 .08 (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.41 .84 (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.75) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.10) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.85) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.50 $14.94 $14.86
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 9.76 5.74 (0.87)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $892 $325 $17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.22 1.19 .14 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.87 4.99 .73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 36.13 54.58 37.62
- ------------------------------------------------------------------------------------------------------------------------------------
+ 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 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 Insured 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 in tax exempt securities that are covered
by insurance guaranteeing the timely payment of principal and interest, are
rated AAA or Aaa, or are backed by the U.S. government.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than class A shares,
and are subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charge of 3.25% and pay an ongoing distribution fee that is
lower than class B shares and higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class (including
the distribution fees applicable to such class). Each class votes as a class
only with respect to its own distribution plan or other matters on which a
class vote is required by law or determined by the Trustees. Shares of each
class would receive their pro-rata share of the net assets of the fund, if the
fund were liquidated. In addition, the Trustees declare separate dividends on
each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally accepted
accounting principles and requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
D) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held and for excise tax
on income and capital gains.
E) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gain distributions if any, are
recorded on the ex-dividend date and paid at least annually. The amount and
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. This difference includes treatment of market discount
on bonds, losses on wash sale transactions and realized and unrealized gains
and 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 $115,873 to decrease
accumulated net investment loss, with an increase to accumulated net realized
loss on investments of $115,873. 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, original
issue discount and step coupon bonds are accreted according to the effective
yield method.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Investment Management Inc., ("Putnam Management") the
fund's manager, a wholly-owned subsidiary of Putnam Investments, Inc. for
management and investment advisory services is paid quarterly based on the
average net assets of the fund. Such fee is based on the following annual
rates: 0.60% of the first $500 million of average net assets, 0.50% of the
next $500 million, 0.45% of the next $500 million, 0.40% of the next $5
billion, 0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34%
of the next $5 billion and 0.33% of any amount over $21.5 billion. Prior to
November 20, 1996, any amount over $1.5 billion was based on 0.40%.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC, a wholly-owned
subsidiary of Putnam Investments, Inc. Investor servicing agent functions are
provided by Putnam Investor Services, a division of PFTC.
For the year ended July 31, 1997, fund expenses were reduced by $233,799 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 $628 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 the fund or in other 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%, 0.60%
and 0.50% of the average net assets attributable to class A, class B and class
M shares respectively. Prior to September 6, 1996, the class B payment was at
an annual rate of 0.85%. Effective May 16, 1997, Putnam Mutual Funds Corp. has
been waiving the payment of the class B Plan.
For the year ended July 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $18,616 and $711 from the sale of
class A and class M shares, respectively, and $488,391 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
$10,436 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended July 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $193,280,479 and
$215,139,228, 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 5,586,209 $ 84,102,047
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 392,582 5,922,033
- ------------------------------------------------------------
5,978,791 90,024,080
Shares
repurchased (5,010,747) (75,561,797)
- ------------------------------------------------------------
Net increase 968,044 $ 14,462,283
- ------------------------------------------------------------
Year ended
July 31, 1996
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 3,576,738 $ 53,667,796
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 376,177 5,664,207
- ------------------------------------------------------------
3,952,915 59,332,003
Shares
repurchased (3,174,889) (47,633,437)
- ------------------------------------------------------------
Net increase 778,026 $ 11,698,566
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 2,604,861 $ 39,330,965
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 823,114 12,433,181
- ------------------------------------------------------------
3,427,975 51,764,146
Shares
repurchased (5,252,481) (79,269,046)
- ------------------------------------------------------------
Net decrease (1,824,506) $(27,504,900)
- ------------------------------------------------------------
Year ended
July 31, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 3,390,957 $51,105,197
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 728,563 10,984,541
- ------------------------------------------------------------
4,119,520 62,089,738
Shares
repurchased (5,808,443) (87,484,662)
- ------------------------------------------------------------
Net decrease (1,688,923) $(25,394,924)
- ------------------------------------------------------------
Year ended
July 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 58,619 $ 882,790
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,305 34,773
- ------------------------------------------------------------
60,924 917,563
Shares
repurchased (25,085) (376,576)
- ------------------------------------------------------------
Net increase 35,839 $ 540,987
- ------------------------------------------------------------
Year ended
July 31, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 23,526 $356,322
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 746 11,219
- ------------------------------------------------------------
24,272 367,541
Shares
repurchased (3,700) (54,933)
- ------------------------------------------------------------
Net increase 20,572 $312,608
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.6% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Fund paid ordinary taxable dividends of $.0039 per share and
short-term capital gain dividends of $.005 per share.
Pursuant to Section 852 of the Internal Revenue Code, the fund hereby
designates $.093 per share (or if different, the amount necessary to
offset net capital gain earned by the fund) for all share classes as
capital gain dividends for its taxable year ended July 31, 1997.
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
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free Insured
Fund. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment
objectives, and operating policies of the fund, and the most recent copy of
Putnam's Quarterly Performance Summary. For more information, or to request a
prospectus, call toll free: 1-800-225-1581. 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
- --------------------
35891-035/438/629/849 7/97
