Putnam
Tax-Free
Insured
Fund
SEMIANNUAL REPORT
January 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Municipal bonds should also play a part in most bond portfolios,
especially those of investors in higher tax brackets, because many are
currently trading at sizable discounts to comparable Treasurys."
-- The Wall Street Journal, January 30, 1998
* "Since the fund's entire portfolio is either insured or composed of
Aaa-rated government obligations, it is important to know that bond
insurance companies like FGIC, MBIA, and AMBAC have experienced solid
financial performance."
-- Richard P. Wyke, manager,
Putnam Tax-Free Insured Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
19 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[COPYRIGHT] Karsh, Ottawa
Dear Shareholder:
It might be difficult to conceive how the continuing turmoil in the
international securities markets could possibly affect municipal bonds to any
measurable degree. Yet the flight of global investors to the comparative
safety of U.S. bonds, especially following the Asian currency troubles last
fall, swept the U.S. fixed-income market to new highs, catching tax-free bonds
in the updraft. Putnam Tax-Free Insured Fund was clearly among the
beneficiaries of this phenomenon during the first half of its current fiscal
year.
Since the tax-exempt market did not rise quite as far as the U.S. Treasury
securities that commanded most of the recent investor attention, yields on
municipal securities did not fall as far. Because of this inverse relationship
of yields and prices, as Fund Manager Richard Wyke explains in the following
report, tax-free yields stood near 90% of yields on comparable Treasuries at
period's end, making them all the more attractive on an after-tax basis.
In his report, Rick discusses fund performance in general during the first
half of fiscal 1998 and then looks at prospects for the remaining half.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
March 18, 1998
Report from the Fund Manager
Richard P. Wyke
Although somewhat insulated from the turmoil of the Asian crisis, the
municipal bond market benefited along with Treasuries as long-term interest
rates fell over the past six months. Because Putnam Tax-Free Insured Fund was
positioned defensively for much of the period, the fund did not fully
participate in this fall's widespread bond rallies. However, performance
remains solid with class A shares turning in 3.40% at net asset value
(-1.49% at public offering price) for the six months ended January 31, 1998.
The Lehman Brothers Municipal Bond Index, an unmanaged index of long-term
investment-grade bonds that include uninsured as well as insured bonds,
reported a return of 4.02% for the same period. However, as you know, the
increased credit safety of an insured bond usually results in a slightly lower
return relative to comparable uninsured bonds. While you can find complete
performance details on pages 8 and 9, an explanation of your fund's key
strategies and positioning follows.
* ASIAN CRISIS REINFORCES DEFENSIVE POSITIONING
In October, Asian central banks were forced to liquidate reserves when faced
with an unanticipated equity and currency weakness. Responding to low
inflation levels and expectations that this crisis would weaken the U.S.
economy, long-term interest rates fell sharply over the period. Volatility
increased in virtually every sector of the financial markets, including the
municipal bond market, and our reaction was to maintain our defensive posture.
This seemed even wiser when short-term rates began to rise slightly at the
same time. As it turned out, when the Federal Reserve Board met in November,
it did not raise interest rates in deference to the fragile condition of
capital markets worldwide.
While bond prices skyrocketed during the turmoil and uncertainty, your fund's
defensive duration of 6.8 years was shorter than that of its benchmark.
Duration, which is measured in years, indicates a bond portfolio's sensitivity
to changes in interest rates. While shorter durations can help preserve
portfolio value as interest rates rise, they may also cost the fund some of
its return potential -- and this proved to be the case over the period. To
correct this, as we have opportunities to lengthen duration on market dips, we
will focus on slightly longer-term bonds and seek to lock in higher yields,
moderating but not relinquishing our defensive outlook.
* BOND INSURANCE COMPANIES FINANCIALLY SECURE
Since the fund's entire portfolio is either insured or composed of Aaa-rated
government obligations, it is important to know that bond insurance companies
like FGIC, MBIA, and AMBAC have experienced solid financial performance. These
companies have benefited from prerefundings on some of the bonds they insured,
shortening the amount of time that insurance is needed. With a prerefunding,
the issuer floats a second bond at a lower interest rate to pay off an older
bond at its first call date. Proceeds from the new bond are invested in
top-quality instruments such as U.S. Treasury securities, improving the
creditworthiness of the older bond and making the insurance unnecessary. Since
the insurance premiums are paid up front for coverage over a certain time
period, a prerefunding means a much lower risk of loss for the insurer. In
addition, bond insurance companies have diversified into other areas of
insurance, making the companies less dependent on their municipal business.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 22.7%
Transportation 15.3%
Health care 11.6%
Education 10.0%
Housing 8.2%
Footnote reads:
*Based on net assets as of 1/31/98. Sector allocations will vary over time.
Insured bonds are the main commodities of the municipal market with 75% of
issuers obtaining insurance, up from 26% at the beginning of the decade. The
growing popularity of insurance stems from the fact that issuers desire this
enhancement, sometimes more than they need it.
* BULLETED MATURITIES AND IMPROVED CALL STRUCTURE PLAY KEY ROLES
We have relied upon three basic strategies to manage your fund: bulleting
maturities, depending on the strength of individual issuer names, and
improving call risk. With a bulleted structure, our goal is to place a
majority of the fund's maturities in the 10- to 15-year range on the yield
curve. This is the location on the yield curve at which bonds currently carry
the most value -- in other words, the point at which we believe your
investment dollars will go the furthest with regard to both current yield and
appreciation potential.
Secondly, we are de-emphasizing some of our focus on the higher-tax states
such as California and New York. Issues from these states have performed well
in the past, but without much market volatility, the opportunity to generate
profits by moving between the states has fallen. We have found more value and
lower costs in electric power deals, such as Washington Public Power, South
Carolina Public Power, and Municipal Electric Power of Georgia. Of course,
while these securities were viewed favorably during the period, all holdings
are subject to review in accordance with the fund's investment strategy and
may vary in the future.
A third key strategy for improving performance is to reduce call risk within
the fund. Callable bonds carry the option of being redeemed or called away by
the issuer at a certain future date. Bonds are normally called away if
interest rates fall to a level below that at which the bonds were issued. By
seeking longer call dates whenever we reinvest assets from a bond that has
been called, we are working to extend call dates on all holdings and build a
more durable income stream for the fund.
[GRAPHIC OMITTED: Worm Chart Yield Curves]
YIELD CURVES OF TAXABLE
AND TAX-FREE BONDS
[PLOT POINTS]
Taxable
Equivalent Municipal Treasury
for Municipals Yields Yields
1 Yr 6.026% 3.640% 5.210%
2 Yr 6.192% 3.740% 5.300%
3 Yr 6.358% 3.840% 5.320%
4 Yr 6.523% 3.940% 5.400%
5 Yr 6.689% 4.040% 5.370%
7 Yr 6.887% 4.160% 5.470%
10 Yr 7.185% 4.340% 5.510%
15 Yr 7.815% 4.720% 5.690%
20 Yr 8.063% 4.870% 5.870%
25 Yr 8.113% 4.900% 5.835%
30 Yr 8.146% 4.920% 5.800%
Footnote reads:
Chart compares yields of U.S. Treasury securities and tax-free Aaa-rated
municipal bonds of varying maturities on 1/31/98. 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.
* CAUTION PREVAILS AS WE LOOK AHEAD
Moving into 1998, we expect a perceptible slowdown in the U.S. economic growth
rate in reaction to the financial crisis in Asia. We also believe that
interest rates have reached a cyclical low and may begin to move modestly
higher later in the year, primarily the result of high levels of employment
and wage pressure. Therefore we plan to maintain our slightly defensive stance
on duration. We are confident that our basic strategies of careful security
selection and call risk reduction can produce solid performance for the fund
over the challenging year ahead.
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 1/31/98, 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 1/31/98
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
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6 months 3.40% -1.49% 3.50% -1.50% 3.25% -0.11%
- ------------------------------------------------------------------------------
1 year 9.14 3.96 9.16 4.16 8.80 5.24
- ------------------------------------------------------------------------------
5 years 37.79 31.22 35.16 33.16 35.10 30.73
Annual average 6.62 5.58 6.21 5.89 6.20 5.51
- ------------------------------------------------------------------------------
10 years 104.03 94.40 100.12 100.12 100.04 93.61
Annual average 7.39 6.87 7.18 7.18 7.18 6.83
- ------------------------------------------------------------------------------
Life of fund 167.65 154.85 162.52 162.52 162.41 153.91
Annual average 8.27 7.84 8.10 8.10 8.10 7.81
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 1/31/98
Lehman Bros. Consumer
Municipal Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 4.02% 0.69%
- ------------------------------------------------------------------------------
1 year 10.12 1.57
- ------------------------------------------------------------------------------
5 years 42.49 13.32
Annual average 7.34 2.53
- ------------------------------------------------------------------------------
10 years 122.40 39.67
Annual average 8.32 3.40
- ------------------------------------------------------------------------------
Life of fund 198.46 49.63
Annual average 9.20 3.30
- ------------------------------------------------------------------------------
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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 1/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 7 7 7
- ------------------------------------------------------------------------------
Income $0.378316 $0.394347 $0.354776
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Long-term 0.022000 0.022000 0.022000
- ------------------------------------------------------------------------------
Short-term 0.027000 0.027000 0.027000
- ------------------------------------------------------------------------------
Total $0.427316 $0.443347 $0.403776
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/97 $15.50 $16.27 $15.52 $15.50 $16.02
- ------------------------------------------------------------------------------
1/31/98 15.59 16.37 15.61 15.59 16.11
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.75% 4.53% 4.95% 4.45% 4.31%
- ------------------------------------------------------------------------------
Taxable equivalent3 7.86 7.50 8.20 7.37 7.14
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 4.44 4.22 4.65 4.13 4.00
- ------------------------------------------------------------------------------
Taxable equivalent3 7.35 6.99 7.70 6.84 6.62
- ------------------------------------------------------------------------------
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 12/31/97
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 5.62% 0.62% 5.65% 0.65% 5.39% 1.95%
- ------------------------------------------------------------------------------
1 year 8.34 3.22 8.24 3.24 7.94 4.42
- ------------------------------------------------------------------------------
5 years 38.09 31.56 35.33 33.33 35.34 30.94
Annual average 6.67 5.64 6.24 5.92 6.24 5.54
- ------------------------------------------------------------------------------
10 years 111.04 101.00 106.85 106.85 106.84 100.08
Annual average 7.75 7.23 7.54 7.54 7.54 7.18
- ------------------------------------------------------------------------------
Life of fund 165.38 152.69 160.08 160.08 160.08 151.66
Annual average 8.25 7.82 8.07 8.07 8.07 7.79
- ------------------------------------------------------------------------------
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 charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 4.75% sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index assumes reinvestment of all distributions
and interest payments and does not take 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.
Portfolio of investments owned
January 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investors Guaranty Insurance
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
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
MUNICIPAL BONDS AND NOTES (99.1%) *
PRINCIPAL 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 $ 3,416,250
Alaska (1.1%)
- ------------------------------------------------------------------------------------------------------------
6,000,000 AK Hsg. Fin. Corp. Rev. Bonds, Ser. A, MBIA, 5.9s,
12/1/19 Aaa 6,322,500
Arizona (1.5%)
- ------------------------------------------------------------------------------------------------------------
AZ State Muni. Fin. Program COP
1,000,000 Ser. 31, BIGI, 7 1/4s, 8/1/09 Aaa 1,250,000
5,700,000 Ser. 34, BIGI, 7 1/4s, 8/1/09 Aaa 7,125,000
--------------
8,375,000
California (13.0%)
- ------------------------------------------------------------------------------------------------------------
Anaheim, Pub. Fin. Auth. Lease Rev. Bonds,
Ser. C, FSA
2,500,000 6s, 9/1/10 Aaa 2,859,375
2,000,000 6s, 9/1/08 Aaa 2,287,500
4,000,000 CA Hsg. Fin. Agcy. Rev. Bonds (Home Mtge.),
Ser. Q, MBIA, 5.85s, 8/1/16 Aaa 4,235,000
9,500,000 CA State G.O. Bonds, MBIA, 5 1/2s, 4/1/12 Aaa 10,414,375
3,000,000 CA Statewide Cmnty. Dev. Auth.
Step-up Recovery Floater COP
(Motion Picture & TV Fund),
AMBAC, 5.35s, 1/1/24 Aaa 3,071,250
Los Angeles Cnty. Trans. Comm. Sales Tax Rev. Bonds
2,500,000 Ser. A, FGIC, 6 3/4s, 7/1/20 Aaa 2,765,625
4,000,000 (Proposition C), Ser. A, MBIA, 6 3/4s, 7/1/19 Aaa 4,510,000
3,455,000 (Proposition C), Ser. A, MBIA, 6 1/2s, 7/1/20 Aaa 3,856,644
3,000,000 Ser. B, AMBAC, 6 1/2s, 7/1/13 Aaa 3,262,500
Los Angeles Cnty., Pub. Wks. Fin. Auth. Lease
Rev. Bonds
5,000,000 Ser. A, MBIA, 5.2s, 9/1/09 Aaa 5,293,750
3,500,000 (Multiple Cap. Fac.), Ser. B, AMBAC, 5 1/8s,
12/1/17 Aaa 3,539,375
5,000,000 Sacramento Muni. Util. Dist. Elec. Rev. Bonds,
Ser. Y, MBIA, 6 3/4s, 9/1/19 Aaa 5,550,000
2,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
7.535s, 4/23/08 Aaa 2,455,000
5,000,000 San Diego, Regl. Bldg. Auth. Lease Rev. Bonds,
MBIA, 6.9s, 5/1/23 Aaa 5,268,750
1,200,000 San Jacinto, U. School Dist. VRDN COP, 3 1/2s,
9/1/27 VMIG1 1,200,000
3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds
(Police Admin. & Hldg. Fac.), Ser. A, MBIA,
6 1/4s, 7/1/17 Aaa 4,324,000
U. of CA Rev. Bonds
6,300,000 (Multi-Purpose), Ser. A, MBIA, 6 7/8s, 9/1/16 Aaa 7,158,375
1,700,000 Ser. A, MBIA, 5s, 11/1/13 Aaa 1,712,750
--------------
73,764,269
Colorado (3.5%)
- ------------------------------------------------------------------------------------------------------------
4,224,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider
Pooled Loan Program), Ser. A, FSA, 7 1/4s,
7/15/17 Aaa 4,635,840
Denver, City & Cnty. Arpt. Rev. Bonds, Ser. C, MBIA
1,125,000 6 3/4s, 11/15/22 Aaa 1,244,531
1,750,000 6 3/4s, 11/15/13 Aaa 1,940,313
Denver, City & Cnty. Arpt. Rev. Bonds,
Prerefunded, Ser. C, MBIA
375,000 6 3/4s, 11/15/22 Aaa 422,344
250,000 6 3/4s, 11/15/13 Aaa 281,563
3,890,000 El Paso Cnty., Home Mtge. Rev. Bonds, Ser. A,
GNMA Coll., 8s, 3/1/21 Aaa 4,006,155
6,000,000 Jefferson Cnty., School Dist. G.O. Bonds, MBIA,
6 1/2s, 12/15/10 Aaa 7,155,000
--------------
19,685,746
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 5,537,500
District of Columbia (1.7%)
- ------------------------------------------------------------------------------------------------------------
8,875,000 DC G.O. Bonds, Ser. A, MBIA, 6s, 6/1/11 Aaa 9,917,813
Florida (8.5%)
- ------------------------------------------------------------------------------------------------------------
5,855,000 Brevard Cnty., School Board COP, Ser. A,
AMBAC, 5 1/2s, 7/1/09 Aaa 6,418,544
3,685,000 FL Hsg. Fin. Agcy. Home Ownership Rev. Bonds,
Ser. 1987 G2, Class B, GNMA Coll., 8.595s,
11/1/18 AAA 4,343,694
13,675,000 Hernando Cnty., Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 Aaa 18,478,340
5,500,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA,
8.857s, 10/29/21 Aaa 6,661,875
5,000,000 Orlando & Orange Cnty., Expressway Auth. Rev.
Bonds (Expwy. Rev.), FGIC, 8 1/4s, 7/1/14 Aaa 7,050,000
4,000,000 Sumter Cnty., School Dist. Rev. Bonds (Multi Dist.
Loan Program), FSA, 7.15s, 11/1/15 Aaa 5,115,000
--------------
48,067,453
Georgia (4.9%)
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GA Muni. Elec. Auth. Pwr. Rev. Bonds
5,130,000 MBIA, 6 1/2s, 1/1/12 Aaa 6,040,575
5,500,000 Ser. Y, AMBAC, 6.4s, 1/1/13 AAA 6,503,750
7,500,000 GA Muni. Elec. Auth. Rev. Bonds, Ser. B, AMBAC,
6 1/4s, 1/1/12 Aaa 8,737,500
5,700,000 GA Muni. Elec. Auth. Pwr. Rev Bonds, Ser. A, FSA,
5 1/2s, 1/1/12 Aaa 6,205,875
--------------
27,487,700
Illinois (3.3%)
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7,500,000 Chicago, Board of Ed. G.O.Bonds, Ser. A, AMBAC,
5 1/4s, 12/1/27 Aaa 7,509,375
2,600,000 Chicago, Central Pub. Library Rev. Bonds, Ser. B,
AMBAC, 6.85s, 1/1/17 Aaa 2,918,500
2,670,000 Chicago, Res. Recvy. Mtge. Rev. Bonds, Ser. B,
MBIA, 10/1/09 Aaa 1,191,488
5,000,000 Regional Trans. Auth. Rev. Bonds, Ser. A, AMBAC,
8s, 6/1/17 Aaa 6,937,500
--------------
18,556,863
Indiana (1.6%)
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7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds
(Columbus Regl. Hosp.), FSA, 7s, 8/15/15 Aaa 9,159,375
Louisiana (0.4%)
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1,756,133 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 1,966,869
Michigan (2.8%)
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2,945,000 Battle Creek, Downtown Dev.TAN, MBIA,
5s, 5/1/17 AAA 2,930,275
4,530,000 Grand Valley, State U. Rev. Bonds, MBIA,
5 1/4s, 10/1/22 AAA 4,580,963
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
4,000,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 5,150,000
2,750,000 Ser. AA, FGIC, 6.95s, 5/1/11 Aaa 3,399,688
--------------
16,060,926
Missouri (2.1%)
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2,500,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac. Rev.
Bonds (Heartland Hlth. Sys. Project), AMBAC,
6.35s, 11/15/17 Aaa 2,737,500
Sikeston Elec. Rev. Bonds MBIA
3,020,000 6 1/4s, 6/1/22 Aaa 3,333,325
5,000,000 6s, 6/1/14 Aaa 5,706,250
--------------
11,777,075
Nebraska (2.6%)
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NE Investment Fin. Auth. Single Fam. Mtge. IFB
2,200,000 Ser. B, GNMA Coll., 11.358s, 3/15/22 Aaa 2,477,750
4,200,000 Ser. 2, GNMA Coll., 11.379s, 9/10/30 Aaa 4,767,000
4,010,000 NE Investment Fin. Auth. Single Fam. Mtge.
Rev. Bonds, Ser. 1, MBIA, 8 1/8s, 8/15/38 Aaa 4,136,756
3,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA,
9.386s, 12/8/16 Aaa 3,611,250
--------------
14,992,756
Nevada (1.3%)
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5,800,000 Clark Cnty., School Dist. G.O. Bonds, Ser. A, MBIA,
7s, 6/1/10 # Aaa 7,155,750
New Hampshire (0.6%)
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2,500,000 NH State Tpk. Sys. IFB, FGIC, 9.384s, 11/1/17 Aaa 3,356,250
New Jersey (2.8%)
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3,000,000 Middlesex Cnty., Utils. Auth. Swr. IFB, Ser. A, MBIA,
6.25s, 8/15/10 Aaa 3,513,750
5,020,000 NJ State Tpk. Auth. Rev. Bonds, Ser. C, MBIA,
6 1/2s, 1/1/16 Aaa 6,061,650
6,000,000 NJ State Trans. Fund Auth. Rev. Bonds, Ser. A,
AMBAC, 5 1/4s, 6/15/09 Aaa 6,367,500
--------------
15,942,900
New Mexico (0.1%)
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755,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds,
Ser. C, FGIC, 8 1/2s, 7/1/07 Aaa 776,155
New York (13.5%)
- ------------------------------------------------------------------------------------------------------------
Metropolitan Trans. Auth. Commuter Fac.
Rev. Bonds
7,425,000 Ser. A, MBIA, 5.7s, 7/1/17 Aaa 8,009,719
4,500,000 Ser. B, AMBAC, 5s, 7/1/17 Aaa 4,455,000
4,500,000 Metropolitan Trans. Auth. Rev. Bonds, Ser. A,
MBIA, 5.7s, 7/1/17 Aaa 4,854,375
8,300,000 NY City, G.O. Bonds, Ser. L, MBIA, 8s, 8/1/06 Aaa 10,468,375
11,325,000 NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds,
Ser. A, FGIC, 5 1/8s, 6/15/17 Aaa 11,353,313
NY City, Muni. Wtr. & Swr. Syst. Fin. Auth. Rev.
Bonds, Ser. B, FGIC
7,265,000 7 1/2s, 6/15/11 Aaa 9,362,769
2,735,000 7 1/2s, 6/15/11 (Prerefunded) Aaa 3,487,125
5,500,000 NY State Dorm. Auth. Rev. Bonds (Mt. Sinai
Medical School), Ser. A, MBIA, 5s, 7/1/21 Aaa 5,390,000
3,000,000 NY State Energy Res. & Dev. Auth. IFB, MBIA,
7.538s, 7/8/26 Aaa 3,123,750
9,750,000 NY State Energy Res. & Dev. Auth. Poll. Control
Rev. Bonds (Niagara Mohawk Pwr. Corp.),
Ser. A, FGIC, 7.2s, 7/1/29 Aaa 11,358,750
5,000,000 Triborough Bridge & Tunnel Auth. Special
Obligation VRDN, FGIC, 1.85s, 1/1/24 VMIGI 5,000,000
--------------
76,863,176
North Carolina (0.8%)
- ------------------------------------------------------------------------------------------------------------
4,000,000 NC Muni. Pwr. Agcy. IFB (No 1 Catawba Elec.),
MBIA, 6.925s, 1/1/20 Aaa 4,270,000
Ohio (1.4%)
- ------------------------------------------------------------------------------------------------------------
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
2,094,000 Ser. B, GNMA Coll., 8 1/4s, 12/15/19 Aaa 2,182,932
4,700,000 Ser. C, GNMA Coll., 8 1/8s, 3/1/20 Aaa 4,917,798
4,110,000 Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 755,213
--------------
7,855,943
Oklahoma (0.8%)
- ------------------------------------------------------------------------------------------------------------
4,230,000 OK Hsg. Fin. Agy. Single Fam. Rev. Bonds, Ser. A,
GNMA Coll., 8 1/4s, 12/1/20 Aaa 4,363,287
Pennsylvania (5.7%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Keystone Oaks, School Dist IFB, AMBAC, 7.734s,
9/1/16 Aaa 2,347,500
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 2,035,100
5,000,000 PA State COP, Ser. A, AMBAC, 5s, 7/1/15 Aaa 4,968,750
6,045,000 Philadelphia, Muni. Auth. Rev. Bonds, FGIC, 7.8s,
4/1/18 Aaa 6,528,600
3,000,000 Philadelphia, Regl. Port Auth. Lease IFB
(Kidder Mvrics), MBIA, 8.12s, 9/1/13 Aaa 3,543,750
10,500,000 Pittsburgh, G.O. Bonds, AMBAC, 5 1/4s, 9/1/18 Baa 10,631,250
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 2,230,000
--------------
32,284,950
South Carolina (2.0%)
- ------------------------------------------------------------------------------------------------------------
Piedmont, Muni. Pwr. Agcy. Rev. Bonds, Ser. A,
MBIA
1,500,000 5 1/2s, 1/1/12 Aaa 1,612,500
1,100,000 5 1/4s, 1/1/12 Aaa 1,156,375
3,500,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. IFB
(St. Francis Hosp.-Franciscan Sisters), AMBAC,
7.02s, 8/1/15 Aaa 3,701,250
5,000,000 SC State Pub. Svcs. Auth. Rev. Bonds, Ser. A, MBIA,
5s, 1/1/17 Aaa 4,968,750
--------------
11,438,875
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 5,366,350
Texas (11.4%)
- ------------------------------------------------------------------------------------------------------------
5,680,000 Austin, Arpt. Syst. Rev. Bonds, Ser. A., MBIA, 6.1s,
11/15/11 Aaa 6,269,300
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 4,013,225
Brownsville, Util. Syst. Rev. Bonds AMBAC
3,490,000 6 1/4s, 9/1/11 Aaa 4,048,400
5,250,000 5 1/4s, 9/1/20 Aaa 5,289,375
192,000 Dallas Cnty., Hsg. Fin. Corp. Single Fam. Mtge.
Rev. Bonds, MBIA, 10s, 10/1/07 Aaa 195,425
5,000,000 Harris Cnty., Hosp. Dist. Mtge. Rev. Bonds,
AMBAC, 7.4s, 2/15/10 Aaa 6,206,250
Harris Cnty., Toll Rd. Sr. Lien, Rev. Bonds, Ser. A
4,000,000 AMBAC, 6 1/2s, 8/15/17 Aaa 4,460,000
5,000,000 MBIA, 6 1/4s, 8/15/15 Aaa 5,656,250
Houston, Wtr. & Swr. Syst. Rev. Bonds, Ser. C,
AMBAC
9,400,000 6 3/8s, 12/1/17 Aaa 10,246,000
600,000 6 3/8s, 12/1/17 (Prerefunded) Aaa 659,250
4,900,000 Katy, Independent School Dist. VRDN, Ser. A, PSFG,
3.55s, 2/15/20 AAA 4,900,000
7,000,000 Lockhart, Correctional Fac. Fin. Corp. Rev. Bonds,
MBIA, 6 5/8s, 4/1/12 Aaa 7,507,500
5,000,000 Rio Grande Valley Hlth Fac. Dev. Corp. Rev. Bonds,
MBIA, 6.4s, 8/1/12 Aaa 5,412,500
--------------
64,863,475
Utah (2.4%)
- ------------------------------------------------------------------------------------------------------------
12,400,000 Utah Pwr. Supply Rev. Bonds (Intermountain
Pwr. Agcy.), Ser. A, MBIA, 6.15s, 7/1/14 Aaa 13,826,000
Virginia (2.1%)
- ------------------------------------------------------------------------------------------------------------
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 9.377s, 8/15/23 Aaa 12,050,000
Washington (4.7%)
- ------------------------------------------------------------------------------------------------------------
2,000,000 Tacoma, Elec. Syst. IFB, AMBAC, 9.073s, 1/2/15 Aaa 2,357,500
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 3,774,000
6,000,000 Nuclear Project No. 3), Ser. B, MBIA, 7 1/8s,
7/1/16 Aaa 7,492,500
3,500,000 (Nuclear No. 1), Ser. A, MBIA, 5 3/4s, 7/1/10 Aaa 3,797,500
5,000,000 (Nuclear No. 1), Ser. A, AMBAC, 5.7s, 7/1/09 Aaa 5,437,500
4,000,000 WA State Pub. Pwr. Supply System Nuclear No. 1
Rev Bonds, Ser. B, AMBAC, 5 1/8s, 7/1/17 Aaa 3,995,000
--------------
$ 26,854,000
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $509,366,573) *** $ 562,355,206
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $567,534,237.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at January 31, 1998 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 January 31, 1998.
*** The aggregate identified cost on a tax basis is $509,387,667, resulting in gross unrealized appreciation
and depreciation of $53,272,024 and $304,485, respectively, or net unrealized appreciation of $52,967,539.
++ 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 January 31, 1998.
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 January 31, 1998.
The fund had the following industry group concentrations greater than 10% at January 31, 1998
(as a percentage of net assets):
Utilities 22.7%
Transportation 15.3
Healthcare 11.6
Education 10.0
The fund had the following insurance concentrations greater than 10% at January 31, 1998
(as a percentage of net assets):
MBIA 43.2%
AMBAC 23.3
FGIC 19.3
<CAPTION>
- ------------------------------------------------------------------------------------------
Futures Contracts Outstanding at January 31, 1998 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Index (Long) $ 4,475,250 $ 4,503,375 Mar 98 $ (28,125)
U.S. Treasury Bonds (Short) 48,912,500 47,811,781 Mar 98 (1,100,719)
- ------------------------------------------------------------------------------------------
$(1,128,844)
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
January 31, 1998 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $509,366,573) (Note 1) $562,355,206
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 6,614,154
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,013,861
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 607,783
- ---------------------------------------------------------------------------------------------------
Total assets 571,591,004
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustiodian (Note 2) 40,298
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 154,625
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,204,192
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,208,806
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 282,151
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 74,322
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 14,277
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,473
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 38,871
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 36,752
- ---------------------------------------------------------------------------------------------------
Total liabilities 4,056,767
- ---------------------------------------------------------------------------------------------------
Net assets $567,534,237
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $520,454,178
- ---------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (402,781)
- ---------------------------------------------------------------------------------------------------
Distributions in excess of gains on investments (Note 1) (4,376,949)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 51,859,789
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $567,534,237
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($229,827,115 divided by 14,739,875 shares) $15.59
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $15.59)* $16.37
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($336,016,086 divided by 21,523,677 shares)+ $15.61
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,691,036 divided by 108,468 shares) $15.59
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $15.59)** $16.11
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales
the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more an on group sales the
offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended January 31, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $16,246,653
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,648,462
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 296,610
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,868
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,652
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 218,955
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 3,518
- --------------------------------------------------------------------------------------------------
Reports to shareholders 16,481
- --------------------------------------------------------------------------------------------------
Auditing 24,623
- --------------------------------------------------------------------------------------------------
Legal 3,957
- --------------------------------------------------------------------------------------------------
Postage 22,039
- --------------------------------------------------------------------------------------------------
Other 9,444
- --------------------------------------------------------------------------------------------------
Total expenses 2,257,609
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (84,428)
- --------------------------------------------------------------------------------------------------
Net expenses 2,173,181
- --------------------------------------------------------------------------------------------------
Net investment income 14,073,472
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,983,168
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (3,576,507)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the period 6,534,546
- --------------------------------------------------------------------------------------------------
Net gain on investments 4,941,207
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $19,014,679
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
January 31 July 31
1998* 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $14,073,472 $27,702,231
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,593,339) 3,202,120
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,534,546 21,060,361
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 19,014,679 51,964,712
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (5,338,178) (10,898,424)
- ----------------------------------------------------------------------------------------------------------------------
Class B (8,572,009) (17,162,957)
- ----------------------------------------------------------------------------------------------------------------------
Class M (32,066) (36,135)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (693,067) (1,307,922)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,056,197) (2,245,530)
- ----------------------------------------------------------------------------------------------------------------------
Class M (4,695) (5,460)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) 4,705,019 (12,501,630)
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 8,023,486 7,806,654
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 559,510,751 551,704,097
- ----------------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income of $402,781 and
$534,000, respectively) $567,534,237 $559,510,751
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 Sept. 20, 1993+
operating performance (Unaudited) Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.50 $14.94 $14.86 $14.67 $15.88
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38 .79 .81 .83 .73
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .14 .67 .08 .19 (1.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .52 1.46 .89 1.02 (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.80) (.81) (.82) (.72)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.05) (.10) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.01) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.90) (.81) (.83) (.82)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.59 $15.50 $14.94 $14.86 $14.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.40 * 10.09 6.06 7.21 (2.49)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $229,827 $219,265 $196,948 $184,241 $143,079
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .47 * .92 .90 .89 .80 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.48 * 5.22 5.37 5.68 4.73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 13.10 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share January 31
operating performance (Unaudited) Year Ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.52 $14.96 $14.87 $14.68 $15.50 $15.42
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .40 .74 .71 .73 .74 .75
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .13 .68 .09 .20 (.73) .28
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .53 1.42 .80 .93 .01 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.39) (.76) (.71) (.73) (.73) (.75)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.05) (.10) -- -- -- (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.01) (.10) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.86) (.71) (.74) (.83) (.95)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.61 $15.52 $14.96 $14.87 $14.68 $15.50
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.50 * 9.76 5.44 6.53 -- 7.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $336,016 $339,354 $354,431 $377,443 $432,895 $572,659
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .37 * 1.22 1.58 1.54 1.53 1.74
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.58 * 4.93 4.72 5.05 4.81 4.88
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 13.10 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share January 31 June 1, 1995+
operating performance (Unaudited) Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $15.50 $14.94 $14.86 $15.11
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .36 .74 .76 .12
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .13 .67 .08 (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .49 1.41 .84 (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.35) (.75) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.05) (.10) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.40) (.85) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.59 $15.50 $14.94 $14.86
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 3.25 * 9.76 5.74 (0.87)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,691 $892 $325 $17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .62 * 1.22 1.19 .14 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.32 * 4.87 4.99 .73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 13.10 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
January 31, 1998 (Unaudited)
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. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
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) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the six months ended January 31, 1998, the
fund had no borrowings against the line of credit.
E) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation on securities held and for excise tax
on income and capital gains.
F) 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. 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.
G) 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.
H) 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 Investment Management Inc., (Putnam Management) the
fund's manager, a wholly-owned subsidiary of Putnam Investments, Inc. for
management and investment advisory services is paid quarterly based on the
average net assets of the fund. Such fee is based on the following annual
rates: 0.60% of the first $500 million of average net assets, 0.50% of the
next $500 million, 0.45% of the next $500 million and 0.40% of 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% thereafter.
As part of the subcustodian contract between the subcustodian bank and Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc., the subcustodian bank has a lien on the securities of the
fund to the extent permitted by the fund's investment restrictions to cover
any advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At January 31, 1998, the payable to the subcustodian
bank represents the amount due for cash advance for the settlement of a
security purchased.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended January 31, 1998, fund expenses were reduced by
$84,428 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.
The Internal Revenue Service is currently examining the treatment of expense
offset arrangements in existence since 1994 for another Putnam tax-exempt
income fund. Should a determination be made that such amounts should be
treated as taxable income, it may give rise to a liability on the part of the
fund and require the fund to report these amounts as taxable income in the
future. The outcome of this matter cannot currently be predicted.
Trustees of the fund receive an annual Trustees fee of $530 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. Effective May 16, 1997, the Trustees agreed to
temporarily waive the payment of the class B Plan.
For the six months ended January 31, 1998, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $16,670 and $660 from the sale of
class A and class M shares, respectively, and $186,759 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 that were
purchased without an initial sales charge as part of an investment of $1
million or more. For the six months ended January 31, 1998, Putnam Mutual
Funds Corp., acting as underwriter received $48 on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended January 31, 1998, purchases and sales of
investment securities other than short-term investments aggregated $71,509,766
and $76,414,866, 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 January 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
January 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 2,183,707 $33,637,368
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 220,794 3,404,525
- ------------------------------------------------------------
2,404,501 37,041,893
Shares
repurchased (1,810,907) (27,835,787)
- ------------------------------------------------------------
Net increase 593,594 $ 9,206,106
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Six months ended
January 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 2,006,274 $30,902,898
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 387,891 5,987,572
- ------------------------------------------------------------
2,394,165 36,890,470
Shares
repurchased (2,737,119) (42,174,388)
- ------------------------------------------------------------
Net decrease (342,954) $(5,283,918)
- ------------------------------------------------------------
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)
- ------------------------------------------------------------
Six months ended
January 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 80,690 $1,238,677
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,008 30,954
- ------------------------------------------------------------
82,698 1,269,631
Shares
repurchased (31,804) (486,800)
- ------------------------------------------------------------
Net increase 50,894 $ 782,831
- ------------------------------------------------------------
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
- ------------------------------------------------------------
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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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
William J. Curtin
Vice President
Gary N. Coburn
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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 the 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
- --------------------
SA043-40527 035/438/629 3/98
