Putnam
Tax-Free
Insured
Fund
ANNUAL REPORT
July 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Looking back over the past year, we've seen falling interest rates and
record issuance in the municipal market. Falling interest rates spurred
more municipalities to issue new debt because of the appeal of lower
financing costs. This heavy supply was one factor that held back the
performance of municipals relative to other sectors of the fixed-income
market over the year. U.S. Treasuries, for example, posted very strong
returns, as investors were nearly insatiable in their search for a haven
safe from the effects of Asian economic turbulence. At the end of your
fund's fiscal year, though, municipal bonds were attractively valued."
-- Richard P. Wyke, manager
Putnam Tax-Free Insured Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
20 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
With its mandate to provide as high a level of tax-free income through
investments in insured and Aaa-rated tax-exempt securities, Putnam
Tax-Free Insured Fund has been focusing on municipal bonds at the highest
end of the investment-grade spectrum. Despite near-record levels of new
issuance, demand from safety-minded investors has been even higher. As a
consequence, the competition for these securities has been intense and is
growing increasingly so.
Because investing in bonds with less than top ratings has not offered much
of a yield advantage, your fund's management has focused more on
strategies involving the maturity structure of the portfolio. In the
following report, Fund M anager Richard Wyke discusses in more detail the
strategy as he employed it during fiscal 1998 and follows up with his
outlook for the fiscal year ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 16, 1998
Report from the Fund Manager
Richard P. Wyke
Although ongoing economic problems in Asia translated into stronger
performance in most sectors of the fixed-income market this past year,
municipal bonds and other non-Treasury sectors did not perform as well as
U.S. Treasury securities. For the municipal bond market, much of this
underperformance was an outgrowth of record new issuance. Furthermore,
Putnam Tax-Free Insured Fund is a conservative fund designed for
conservative investors; its defensive positioning kept it from full
participation in continued market rallies. Nevertheless, the fund's class
A shares produced a total return of 4.63% at net asset value (-0.32% at
public offering price) for the 12 months ended July 31, 1998.
The Lehman Brothers Municipal Bond Index, an unmanaged index of long-term
investment-grade bonds that includes uninsured as well as insured bonds,
posted a return of 5.99% for the same period. Remember, however, that the
increased safety offered by insured bonds usually results in a slightly
lower return relative to uninsured alternatives. Performance details
follow on pages 8 and 9, but let's turn here to a recap of the municipal
market as well as the fund's key strategies.
* STRONG ECONOMY SPURS RECORD NEW ISSUANCE
Even though demand for municipal bonds was strong on several fronts,
record supply dampened performance in the municipal market during your
fund's fiscal year. New issuance for 1998 to date is roughly $170 billion,
50% more than we saw in 1997 and already nearly matching the record set in
1993. Included in this supply was the largest offering in municipal market
history, a $4.3 billion issue in May by the Long Island Power Authority.
In past falling-rate environments, prerefundings tended to account for
much of the new issuance. By prerefunding, an issuer offers a second bond
at a lower interest rate to pay off an older bond at its first call date.
The current supply peak, however, is the result of more issuers coming to
market for new projects, a direct consequence of the strong U.S. economy.
There is more cash flow coming into governmental entities, enabling them
to service more debt, increase their borrowing, and undertake more capital
projects.
We are not trying to imply that supply exceeds demand. Firm demand in the
municipal market remains, and it is coming from segments that
traditionally pursue tax-free alternatives, such as corporations,
individual investors, mutual funds, and insurance companies, with each
group tending to focus on a particular part of the yield curve. In
addition, hedge funds -- aggressive funds managed for high net-worth
clients -- have come to the fore as interested buyers of longer-term
municipals. Even though the bond supply as a whole is plentiful, this
added competition for the most attractive issues has increased the
challenge of obtaining the bonds we want for the portfolio.
* INSURED BONDS ON INCREASE
Insured bonds are making their own contributions to the growing bond
supply. Five years ago, they comprised about 35% of the municipal market.
Insured paper has risen and currently makes up about 50% of the market. As
a result, we are seeing an increased focus on the financial health of bond
insurance companies, with investor concerns affecting bond prices.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 23.0%
Transportation 17.6%
Health care 13.6%
Water and sewerage 10.8%
Housing 9.4%
Footnote reads:
*Based on net assets as of 7/31/98. Holdings will vary over time.
The fact is that although there have been a few recent high-profile
municipal bankruptcies, the actual impact on the bond insurers' balance
sheets has been minimal. Earnings for bond insurance companies have
remained solid, and even in a worst-case scenario, a tremendous amount of
cash flow would be recovered from a defaulted bond issuer through
bankruptcy proceedings; therefore, we believe bond insurers really are in
no danger.
* STRATEGY CHARACTERIZED BY NEUTRAL OUTLOOK AND BULLETED STRUCTURE
Over the past year, we have taken advantage of some opportunities to
enhance the fund's yield by investing in insured bonds, which due to the
nature of the particular issuer trade at higher yields in the market.
However, these opportunities have been few and far between. In addition,
there have not been any significant occasions to add value by investing in
issues from a particular geographic area or a particular sector of the
market. As a result, the fund's strategy has been focused on its maturity
structure.
The portfolio remains positioned in a bulleted structure, targeting the
intermediate part of the municipal yield curve at which we see the
strongest potential for consistent returns. Given the relationship between
short- and long-term rates, this bulleted construction has provided a
predictable and durable source of return for the fund's shareholders.
For most of the fiscal year, your fund's duration -- its sensitivity to
changes in interest rates, measured in years -- reflected a neutral
outlook regarding interest rates. Nevertheless, its duration was shorter
than the average of its peers, meaning it didn't participate as much in
the ongoing bond market rally. Looking at the potential risks and returns
based on our analysis of the market cycle, we still believe that the
fund's interest-rate posture is the correct one to meet the goals of
investors who have chosen the fund's conservative approach.
* CAUTIOUS OUTLOOK COLOR FISCAL 1999
The fund's positioning has been a reflection of a cautious outlook
regarding Federal Reserve Board policy and inflation. For some time now,
the U.S. economy has been strong. In our opinion, this strength made a
short-term interest-rate increase by the Fed a distinct possibility over
much of the fiscal year. Expecting that an increase might be prescribed in
order to slow economic growth and head off potential inflation, we
believed it prudent to position the portfolio accordingly. However, no
strong signs of inflation have emerged, tempering our expectations of Fed
action somewhat.
As a result of currency devaluations, Asian competitors have been able to
flood the U.S. market with cheaper goods, creating a deflationary impact
on prices here. However, if one were to eliminate that factor, one would
see that strong economic growth and a tight labor market point to latent
inflationary potential in the United States.
Should improvements become apparent in Asian economies, it is our view
that the market will interpret such a development as the beginning of the
end of the crisis. We anticipate that investors will then begin putting
money back into those currencies and economies, that the dollar could fall
relative to other currencies, and that the resulting inflationary response
could have a negative effect on all fixed-income markets. Consequently,
cautious and mostly defensive positioning is likely to remain a key
element of your fund's strategy as we move into fiscal 1999.
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 7/31/98, 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 primarily in
insured and Aaa-rated tax-exempt securities.
TOTAL RETURN FOR PERIODS ENDED 7/31/98
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 4.63% -0.32% 4.83% -0.13% 4.24% 0.86%
- ------------------------------------------------------------------------------
5 years 31.64 25.42 29.25 27.26 28.78 24.61
Annual average 5.65 4.63 5.27 4.94 5.19 4.50
- ------------------------------------------------------------------------------
10 years 104.36 94.65 100.67 100.67 99.94 93.35
Annual average 7.41 6.89 7.21 7.21 7.17 6.82
- ------------------------------------------------------------------------------
Life of fund 170.82 157.87 165.90 165.90 164.94 156.36
Annual average 8.04 7.63 7.88 7.88 7.85 7.58
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/98
Lehman
Bros. Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 5.99% 1.68%
- ------------------------------------------------------------------------------
5 years 36.95 13.02
Annual average 6.49 2.48
- ------------------------------------------------------------------------------
10 years 121.13 37.72
Annual average 8.26 3.25
- ------------------------------------------------------------------------------
Life of fund 204.11 51.11
Annual average 8.99 3.25
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. 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. 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: GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 7/31/88
Fund's class B Lehman Municipal Consumer Price
Date/year shares Bond Index Index
7/31/88 10,000 10,000 10,000
7/31/89 11,331 11,218 10,498
7/31/90 11,954 11,995 11,004
7/31/91 12,765 13,044 11,494
7/31/92 14,505 14,836 11,857
7/31/93 15,521 16,148 12,186
7/31/94 15,521 16,454 12,524
7/31/95 16,534 17,751 12,870
7/31/96 17,434 18,922 13,249
7/31/97 19,136 20,866 13,545
7/31/98 $20,067 $22,113 $13,772
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 $20,436 at net asset value ($19,465 at public offering
price); a $10,000 investment in the fund's class M shares would have been
valued at $19,994 ($19,335 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 7/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.730690 $0.762662 $0.683623
- ------------------------------------------------------------------------------
Capital gains1
- ------------------------------------------------------------------------------
Long-term 0.030118 0.030118 0.030118
- ------------------------------------------------------------------------------
Short-term 0.038378 0.038378 0.038378
- ------------------------------------------------------------------------------
Total $0.799186 $0.831158 $0.752119
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/97 $15.50 $16.27 $15.52 $15.50 $16.02
- ------------------------------------------------------------------------------
7/31/98 15.40 16.17 15.42 15.39 15.91
- ------------------------------------------------------------------------------
Current return
(end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.81% 4.59% 5.01% 4.51% 4.36%
- ------------------------------------------------------------------------------
Taxable equivalent3 7.96 7.60 8.29 7.47 7.22
- ------------------------------------------------------------------------------
Current 30-day SEC
yield4 4.12 3.93 4.35 3.82 3.69
- ------------------------------------------------------------------------------
Taxable equivalent3 6.82 6.51 7.20 6.32 6.11
- ------------------------------------------------------------------------------
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 6/30/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (9/20/93) (9/9/85) (6/1/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 7.53% 2.44% 7.74% 2.74% 7.20% 3.70%
- ------------------------------------------------------------------------------
5 years 31.00 24.76 28.60 26.62 28.29 24.14
Annual average 5.55 4.52 5.16 4.83 5.11 4.42
- ------------------------------------------------------------------------------
10 years 104.72 94.99 100.97 100.97 100.47 93.89
Annual average 7.43 6.91 7.23 7.23 7.20 6.85
- ------------------------------------------------------------------------------
Life of fund 170.17 157.26 165.22 165.22 164.55 155.98
Annual average 8.07 7.66 7.92 7.92 7.90 7.62
- ------------------------------------------------------------------------------
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 4.75% maximum 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 index and
performance of the fund will differ. It is not possible to invest directly
in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the fiscal year ended July 31, 1998
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") at July
31, 1998, 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,
1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 15, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investor 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
MUNICIPAL BONDS AND NOTES (99.7%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C>
Alabama (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
$3,000,000 Alabama A&M U. Rev. Bonds, MBIA,
6 1/2s,11/1/25 Aaa $ 3,382,500
Alaska (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
6,000,000 AK Hsg. Fin. Corp. Rev. Bonds, Ser. A, MBIA,
5.9s, 12/1/19 Aaa 6,300,000
Arizona (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
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 7,018,125
--------------
8,249,375
California (12.5%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 CA Hsg. Fin. Agcy. Rev. Bonds (Home Mtge.),
Ser. Q, MBIA, 5.85s, 8/1/16 Aaa 4,230,000
9,500,000 CA State G.O. Bonds, MBIA, 5 1/2s, 4/1/12 Aaa 10,236,250
3,000,000 CA Statewide Cmnty. Dev. Auth. Step-up
Recovery Floater COP (Motion Picture &
TV Fund), AMBAC, 5.68s, (5.35s, 1/25/04)
1/1/24 (STP) Aaa 3,063,750
2,000,000 East Bay, Muni. Util. Dist. Wtr. Syst. Rev. Bonds,
MBIA, 4 3/4s, 6/1/34 Aaa 1,862,500
Los Angeles Cnty. Trans. Comm. Sales Tax Rev. Bonds
2,500,000 Ser. A, FGIC, 6 3/4s, 7/1/20 Aaa 2,734,375
4,000,000 (Proposition C), Ser. A, MBIA, 6 3/4s, 7/1/19 Aaa 4,460,000
3,455,000 (Proposition C), Ser. A, MBIA, 6 1/2s, 7/1/20 Aaa 3,822,094
3,000,000 Ser. B, AMBAC, 6 1/2s, 7/1/13 Aaa 3,232,500
5,000,000 Los Angeles Cnty., Pub. Wks. Fin. Auth. Lease
Rev. Bonds, Ser. A, MBIA, 5.2s, 9/1/09 Aaa 5,262,500
5,000,000 Sacramento Muni. Util. Dist. Elec. Rev. Bonds,
Ser. Y, MBIA, 6 3/4s, 9/1/19 Aaa 5,487,500
2,000,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
7.433s, 4/23/08 Aaa 2,390,000
5,000,000 San Diego, Regl. Bldg. Auth. Lease COP,
MBIA, 5.65s, 5/1/23 Aaa 5,231,250
3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds
(Police Admin. & Hldg. Fac.), Ser. A,
MBIA, 6 1/4s, 7/1/17 Aaa 4,241,200
5,000,000 Santa Clara Cnty. Fin. Auth. Lease Rev. Bonds,
Ser. A, AMBAC, 5s, 11/15/22 Aaa 4,868,750
2,500,000 Southern CA Pub. Pwr. Auth. Rev. Bonds IFB, FGIC
6.42s, 7/1/12 Aaa 2,696,875
6,300,000 U. of CA Rev. Bonds (Multi-Purpose),
Ser. A, MBIA, 6 7/8s, 9/1/16 Aaa 7,079,625
--------------
70,899,169
Colorado (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,224,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider
Pooled Loan Program), Ser. A, FSA, 7 1/4s,
7/15/17 Aaa 4,583,040
Denver, City & Cnty. Arpt. Rev. Bonds, Ser. C, MBIA
1,180,000 6 3/4s, 11/15/22 Aaa 1,293,575
320,000 Prerefunded, 6 3/4s, 11/15/22 Aaa 356,800
1,765,000 6 3/4s, 11/15/13 Aaa 1,941,500
235,000 Prerefunded, 6 3/4s, 11/15/13 Aaa 262,025
3,555,000 El Paso Cnty. Home Mtge. Rev. Bonds, Ser. A,
GNMA Coll., 8s, 3/1/21 Aaa 3,629,939
6,000,000 Jefferson Cnty., School Dist. G.O. Bonds,
MBIA, 6 1/2s, 12/15/10 Aaa 7,080,000
--------------
19,146,879
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 5,468,750
District of Columbia (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
District of Columbia, G.O. Bonds, Ser. B, MBIA
8,440,000 6s, 6/1/11 Aaa 9,336,750
435,000 Prerefunded, Ser. B, 6s, 6/1/11 Aaa 484,481
4,100,000 5 3/4s, 6/1/09 Aaa 4,438,250
--------------
14,259,481
Florida (7.1%)
- --------------------------------------------------------------------------------------------------------------------------
3,295,000 FL Hsg. Fin. Agcy. Home Ownership Rev. Bonds,
Ser. 1987 G2, Class B, GNMA Coll., 8.595s,
11/1/18 Aaa 3,855,150
13,675,000 Hernando Cnty. Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 Aaa 17,965,531
5,500,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C,
MBIA, 8.859s, 10/29/21 Aaa 6,490,000
5,000,000 Orlando & Orange Cnty., Expressway Auth.
Rev. Bonds (Expwy. Rev.), FGIC, 8 1/4s, 7/1/14 Aaa 6,843,750
4,000,000 Sumter Cnty., School Dist. Rev. Bonds
(Multi Dist. Loan Program), FSA, 7.15s, 11/1/15 Aaa 5,010,000
--------------
40,164,431
Georgia (4.7%)
- --------------------------------------------------------------------------------------------------------------------------
GA Muni. Elec. Auth. Pwr. Rev. Bonds
5,130,000 MBIA, 6 1/2s, 1/1/12 Aaa 5,982,863
5,500,000 Ser. Y, AMBAC, 6.4s, 1/1/13 Aaa 6,373,125
7,500,000 Ser. B, AMBAC, 6 1/4s, 1/1/12 Aaa 8,568,750
5,700,000 Ser. A, FSA, 5 1/2s, 1/1/12 Aaa 6,091,875
--------------
27,016,613
Illinois (3.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,600,000 Chicago, Central Pub. Library Rev. Bonds, Ser. B,
AMBAC, 6.85s, 1/1/17 Aaa 2,886,000
2,310,000 Chicago, Res. Mtge. Rev. Bonds, Ser. B, MBIA,
zero %, 10/1/09 Aaa 1,068,375
Il Hlth. Fac. Auth. Rev. Bonds, MBIA
4,380,000 (Northwestern Med. Fac.), 5s, 11/15/18 Aaa 4,237,650
3,000,000 (Southern IL Hlthcare), Ser. A, 5s, 3/1/17 Aaa 2,932,500
5,000,000 Regional Trans. Auth. Rev. Bonds, Ser. A, AMBAC,
8s, 6/1/17 Aaa 6,812,500
--------------
17,937,025
Indiana (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds
(Columbus Regl. Hosp.), FSA, 7s, 8/15/15 Aaa 9,159,375
Iowa (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
4,500,000 IA Fin. Auth. Hosp. Rev. Bonds (Iowa Hlth Syst.),
Ser. A, MBIA, 5 1/8s, 1/1/28 Aaa 4,365,000
Louisiana (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,468,376 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 1,631,733
Massachusetts (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
11,000,000 MA State. Tpk. Auth. Rev. Bonds, Ser. A, MBIA,
5s, 1/1/37 Aaa 10,615,000
6,000,000 MA State Wtr. Resources Auth. Rev. Bonds,
Ser. A, FSA, 4 3/4s, 8/1/37 Aaa 5,535,000
--------------
16,150,000
Michigan (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (St. John
Health Syst.), Ser. A, AMBAC, 5s, 5/15/18 Aaa 4,862,500
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
4,000,000 (Detroit Edison) Ser. BB, AMBAC, 7s, 5/1/21 Aaa 5,065,000
2,750,000 Ser. AA, FGIC, 6.95s, 5/1/11 Aaa 3,334,375
7,000,000 Wayne Charter Cnty., Arpt. Rev. Bonds
(Detroit Met. Wayne Cnty), Ser. A, MBIA,
5s, 12/1/28 Aaa 6,667,500
--------------
19,929,375
Missouri (2.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac.
Rev. Bonds (Heartland Hlth. Sys. Project),
AMBAC, 6.35s, 11/15/17 Aaa 2,703,125
Sikeston Elec. Rev. Bonds, MBIA
3,020,000 6 1/4s, 6/1/22 Aaa 3,303,125
5,000,000 6s, 6/1/14 Aaa 5,612,500
--------------
11,618,750
Nebraska (4.3%)
- --------------------------------------------------------------------------------------------------------------------------
NE Investment Fin. Auth. Single Fam. Mtge. IFB
11,300,000 Ser. B, GNMA Coll., 11.358s, 3/15/22 Aaa 12,514,750
3,900,000 Ser. 2, GNMA Coll., 11.287s, 9/10/30 Aaa 4,377,750
3,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA, 9.34s,
11/15/16 Aaa 3,528,750
4,010,000 NE Investment Fin. Auth. Single Fam. Mtge.
Rev. Bonds, Ser. 1, MBIA, 8 1/8s, 8/15/38 Aaa 4,092,365
--------------
24,513,615
Nevada (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Clark Cnty., Passenger Fac. Rev. Bonds
(Las Vegas McCarran Intl.), MBIA, 4 3/4s, 7/1/22 Aaa 4,712,500
5,800,000 Clark Cnty., School Dist. G.O. Bonds, Ser. A,
MBIA, 7s, 6/1/10 (SEG) Aaa 7,097,750
7,350,000 NV State G.O. Bonds, MBIA, 4 3/4s, 5/15/26 Aaa 6,872,250
--------------
18,682,500
New Hampshire (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 NH State Tpk. Sys. IFB, FGIC, 9.688s, 11/1/17 Aaa 3,321,875
New Jersey (2.8%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 Middlesex Cnty., Utils. Auth. Swr. IFB, Ser. A,
MBIA, 6.25s, 8/15/10 Aaa 3,453,750
5,020,000 NJ State Tpk. Auth. Rev. Bonds, Ser. C,
MBIA, 6 1/2s, 1/1/16 Aaa 5,948,700
6,000,000 NJ State Trans. Fund Auth. Rev. Bonds, Ser. A,
AMBAC, 5 1/4s, 6/15/09 Aaa 6,300,000
--------------
15,702,450
New Mexico (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
635,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds,
Ser. C, FGIC, 8 1/2s, 7/1/07 Aaa 647,700
New York (13.2%)
- --------------------------------------------------------------------------------------------------------------------------
Metropolitan Trans. Auth. Commuter Fac. Rev. Bonds
7,425,000 Ser. A, MBIA, 5.7s, 7/1/17 Aaa 7,870,500
4,500,000 MBIA, 5.7s, 7/1/17 Aaa 4,775,625
7,000,000 Ser. B, FGIC, 4 3/4s, 7/1/26 Aaa 6,545,000
15,000,000 NY City, G.O. Bonds, MBIA, zero %, 8/1/09 Aaa 8,943,750
NY City, Muni. Wtr. & Swr. Fin. Auth. Rev. Bonds
7,265,000 Ser. B, FGIC, 7 1/2s, 6/15/11 Aaa 9,262,875
2,735,000 Prerefunded, Ser. B, FGIC, 7 1/2s, 6/15/11 Aaa 3,439,263
5,000,000 Ser. C, MBIA, 5 1/2s, 6/15/17 Aaa 5,175,000
8,000,000 Ser. D, MBIA, 4 3/4s, 6/15/25 Aaa 7,500,000
NY State Dorm. Auth. Rev. Bonds
500,000 (NY & Presbyterian Hosp.), AMBAC, 5s, 8/1/32 Aaa 477,500
5,000,000 (State U. Edl. Facs.), Ser. A, MBIA, 4 3/4s, 5/15/25 Aaa 4,681,250
3,000,000 NY State Energy Res. & Dev. Auth. IFB,
MBIA, 7.538s, 7/8/26 Aaa 3,116,250
9,750,000 NY State Energy Research & Dev. Auth. Poll.
Control Rev. Bonds, (Niagra Mohawk Pwr. Corp.)
Ser A, FGIC, 7.2s, 7/1/29 Aaa 11,212,500
2,000,000 Triborough Bridge & Tunnel Auth. Special
Obligation VRDN, FGIC, 3.45s, 1/1/24 VMIG1 2,000,000
--------------
74,999,513
North Carolina (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
(No. 1, Catawba Elec.), MBIA, 5.6s, 1/1/20 Aaa 4,235,000
Ohio (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
1,754,000 Ser. B, GNMA Coll., 8 1/4s, 12/15/19 AA+ 1,815,197
4,290,000 Ser. C, GNMA Coll., 8 1/8s, 3/1/20 AAA 4,454,951
3,335,000 Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 667,000
--------------
6,937,148
Oklahoma (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
3,890,000 OK Hsg. Fin. Agy. Single Fam. Rev. Bonds, Ser. A,
GNMA Coll., 8 1/4s, 12/1/20 AAA 3,983,944
Pennsylvania (3.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Keystone Oaks, School Dist IFB, AMBAC,
7.47s, 9/1/16 Aaa 2,322,500
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 2,014,820
3,000,000 Philadelphia, Regl. Port Auth. Lease IFB (Kidder
Peabody), MBIA, 8.42s, 9/1/13 Aaa 3,528,750
11,940,000 Pittsburgh, Wtr. & Swr. Auth. Rev. Bonds, Ser. A,
FGIC, 5.1s, 9/1/24 Aaa 11,716,125
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 2,185,000
--------------
21,767,195
Puerto Rico (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,100,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. EE, MBIA,
5s, 7/1/09 Aaa 5,284,875
South Carolina (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
Piedmont, Muni. Pwr. Agcy. Rev. Bonds, Ser. A,MBIA
1,500,000 5 1/2s, 1/1/13 Aaa 1,595,625
1,100,000 5 1/4s, 1/1/12 Aaa 1,145,375
3,500,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. IFB (St. Francis
Hosp.-Franciscan Sisters), AMBAC, 6.84s, 8/1/15 Aaa 3,666,250
--------------
6,407,250
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 5,251,400
Texas (8.1%)
- --------------------------------------------------------------------------------------------------------------------------
5,680,000 Austin, Arpt. Syst.Rev. Bonds, Ser. A, MBIA,
6.1s, 11/15/11 Aaa 6,233,800
3,490,000 Brownsville, Util. Syst. Rev. Bonds, AMBAC,
6 1/4s, 9/1/11 Aaa 4,009,136
137,000 Dallas Cnty. Hsg. Fin. Corp. Single Fam. Mtge.
Rev. Bonds, MBIA, 10s, 10/1/07 Aaa 139,424
5,000,000 Harris Cnty., Hosp. Dist. Mtge. Rev. Bonds,
AMBAC, 7.4s, 2/15/10 Aaa 6,062,500
Houston, Wtr. & Swr. Syst. Rev. Bonds,
Ser. C, AMBAC
9,400,000 6 3/8s, 12/1/17 Aaa 10,105,000
600,000 Prerefunded 6 3/8s, 12/1/17 Aaa 653,250
5,965,000 Hurst Euless Bedford Indpt. School Dist.
G.O. Bonds, Permanent School Funding Gtd.,
4.9s, 8/15/20 Aaa 5,786,050
7,000,000 Lockhart, Correctional Fac. Fin. Corp. Rev. Bonds,
MBIA, 6 5/8s, 4/1/12 Aaa 7,446,250
5,000,000 Rio Grande Valley Hlth Fac. Dev. Corp. Rev. Bonds,
MBIA, 6.4s, 8/1/12 Aaa 5,406,250
--------------
45,841,660
Utah (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
12,400,000 Utah Pwr. Supply Rev. Bonds (Intermountain
Pwr. Agcy.), Ser. A, MBIA, 6.15s, 7/1/14 Aaa 13,733,000
Virginia (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB, FGIC,
9.468s, 8/15/23 Aaa 11,787,500
Washington (5.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Tacoma, Elec. Syst. IFB, AMBAC, 9.073s, 1/2/15 Aaa 2,297,500
WA State Pub. Pwr. Supply Syst. Rev. Bonds
3,400,000 (Nuclear No. 2), Ser. C, FGIC, 7 3/8s, 7/1/11 Aaa 3,723,000
6,000,000 (Nuclear No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 7,455,000
5,000,000 (Nuclear No. 1), Ser. A, MBIA, 5 3/4s, 7/1/10 Aaa 5,368,750
5,000,000 (Nuclear No. 1), Ser. A, AMBAC, 5.7s, 7/1/09 Aaa 5,375,000
4,000,000 (Nuclear No. 1), Ser. B, AMBAC, 5 1/8s, 7/1/17 Aaa 3,985,000
--------------
28,204,250
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $524,627,516) (b) $ 566,979,331
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $568,403,918.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
July 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 July 31, 1998. Securities rated
by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of independent
accountants.
(b) The aggregate identified cost on a tax basis is $524,648,610, resulting in gross unrealized appreciation and
depreciation of $42,717,115 and $386,394, respectively, or net unrealized appreciation of $42,330,721.
(STP) 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.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at July 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 July 31, 1998.
The fund had the following industry group concentrations greater than 10% at July 31, 1998 (as a percentage of
net assets):
Utilities 23.0%
Transportation 17.6
Health care 13.6
Water & Sewerage 10.8
The fund had the following insurance concentrations greater than 10% at July 31, 1998 (as a percentage of net
assets):
MBIA 49.7%
FGIC 19.0
AMBAC 16.5
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 1998
Total Aggregate Face Expiration Unrealized
Value Value Date Depreciation
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond
20yr (Short) $53,328,281 $52,892,338 Sep-98 $(435,943)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
July 31, 1998
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $524,627,516) (Note 1) $566,979,331
- -----------------------------------------------------------------------------------------------
Interest and other receivables 6,315,859
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,353,629
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 217,397
- -----------------------------------------------------------------------------------------------
Total assets 574,866,216
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 60,312
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 2,714,713
- -----------------------------------------------------------------------------------------------
Payable for variation margin 13,594
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,296,485
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,913,817
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 284,290
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 60,622
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 19,249
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 808
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 40,000
- -----------------------------------------------------------------------------------------------
Other accrued expenses 58,408
- -----------------------------------------------------------------------------------------------
Total liabilities 6,462,298
- -----------------------------------------------------------------------------------------------
Net assets $568,403,918
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $528,478,916
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (316,312)
- -----------------------------------------------------------------------------------------------
Distributions in excess of gains on investments (Note 1) (1,674,558)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 41,915,872
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $568,403,918
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($230,283,127 divided by 14,951,431 shares) $15.40
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $15.40)* $16.17
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($336,286,161 divided by 21,806,018 shares)+ $15.42
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,834,630 divided by 119,178 shares) $15.39
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $15.39)** $15.91
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group
sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1998
<S> <C>
Tax exempt interest income: $32,017,313
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 3,301,507
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 681,850
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 18,298
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,843
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 445,969
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,834
- -----------------------------------------------------------------------------------------------
Reports to shareholders 27,742
- -----------------------------------------------------------------------------------------------
Registration Fees 3,124
- -----------------------------------------------------------------------------------------------
Auditing 44,009
- -----------------------------------------------------------------------------------------------
Legal 7,542
- -----------------------------------------------------------------------------------------------
Postage 40,526
- -----------------------------------------------------------------------------------------------
Other 15,759
- -----------------------------------------------------------------------------------------------
Total expenses 4,604,003
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (152,160)
- -----------------------------------------------------------------------------------------------
Net expenses 4,451,843
- -----------------------------------------------------------------------------------------------
Net investment income 27,565,470
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 5,850,477
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (4,016,612)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (3,409,371)
- -----------------------------------------------------------------------------------------------
Net loss on investments (1,575,506)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $25,989,964
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended July 31
-------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 27,565,470 $ 27,702,231
- ---------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,833,865 3,202,120
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (3,409,371) 21,060,361
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 25,989,964 51,964,712
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (10,576,810) (10,898,424)
- ---------------------------------------------------------------------------------------------------------------
Class B (16,563,021) (17,162,957)
- ---------------------------------------------------------------------------------------------------------------
Class M (69,217) (36,135)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (969,004) (1,307,922)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,476,320) (2,245,530)
- ---------------------------------------------------------------------------------------------------------------
Class M (6,563) (5,460)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) 12,564,138 (12,501,630)
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 8,893,167 7,806,654
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 559,510,751 551,704,097
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess
of net investment income of $316,312 and
$534,000, respectively) $568,403,918 $559,510,751
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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 .74 (c) .79 .81 .83 .73
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) .67 .08 .19 (1.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .70 1.46 .89 1.02 (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.73) (.80) (.81) (.82) (.72)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.07) (.10) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.01) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.80) (.90) (.81) (.83) (.82)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.40 $15.50 $14.94 $14.86 $14.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.63 10.09 6.06 7.21 (2.49)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $230,283 $219,265 $196,948 $184,241 $143,079
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .94 .92 .90 .89 .80 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.80 5.22 5.37 5.68 4.73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40.38 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).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.52 $14.96 $14.87 $14.68 $15.50
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .77 (c) .74 .71 .73 .74
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) .68 .09 .20 (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .73 1.42 .80 .93 .01
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.76) (.76) (.71) (.73) (.73)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.07) (.10) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- (.01) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.83) (.86) (.71) (.74) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.42 $15.52 $14.96 $14.87 $14.68
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.83 9.76 5.44 6.53 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $336,286 $339,354 $354,431 $377,443 $432,895
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .74 1.22 1.58 1.54 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.00 4.93 4.72 5.05 4.81
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40.38 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).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</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
- ------------------------------------------------------------------------------------------------------------------------------------
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 .69 (c) .74 .76 .12
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.04) .67 .08 (.25)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 1.41 .84 (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.69) (.75) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.07) (.10) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.76) (.85) (.76) (.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $15.39 $15.50 $14.94 $14.86
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.24 9.76 5.74 (0.87)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,835 $892 $325 $17
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.24 1.22 1.19 .14 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.50 4.87 4.99 .73 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 40.38 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).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
Notes to financial statements
July 31, 1998
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 year ended July
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. These differences include temporary and
permanent differences of dividends payable, market discount, 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,
1998, the fund reclassified $138,734 to increase undistributed net
investment loss and $165,619 to increase paid-in-capital, with an increase
to accumulated net realized losses of $26,885. The calculation of net
investment income per share in the financial highlights table excludes
these adjustments.
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 yield to
maturity basis.
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 July 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 year ended July 31, 1998, fund expenses were reduced by $152,160
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 $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 suspend the payment of the class B
Plan.
For the year ended July 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $32,308 and $1,435 from the sale
of class A and class M shares, respectively, and $318,736 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, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $98 in class A redemptions.
Note 3
Purchase and sales of securities
During the year ended July 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $229,946,493 and
$210,848,978, 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, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
July 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,565,662 $54,957,758
- -----------------------------------------------------------------------------
Shares issued in
connection
with reinvestment
of distributions 422,298 6,519,264
- -----------------------------------------------------------------------------
3,987,960 61,477,022
Shares
repurchased (3,182,810) (48,957,254)
- -----------------------------------------------------------------------------
Net increase 805,150 $12,519,768
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,236,109 $65,348,127
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 710,130 10,974,575
- -----------------------------------------------------------------------------
4,946,239 76,322,702
Shares
repurchased (5,006,852) (77,226,385)
- -----------------------------------------------------------------------------
Net decrease (60,613) $ (903,683)
- -----------------------------------------------------------------------------
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, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 102,035 $1,568,065
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,074 62,868
- -----------------------------------------------------------------------------
106,109 1,630,933
Shares
repurchased (44,505) (682,880)
- -----------------------------------------------------------------------------
Net increase 61,604 $ 948,053
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal Tax Information
(Unaudited)
The fund has designated 99% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $4,189,898 as a 20% capital gain, for its taxable
year ended July 31, 1998.
The Form 1099 you receive in January 1999 will show the tax status of
all distributions paid to your account in calendar 1998.
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
PricewaterhouseCoopers LLP
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
Ian C. Ferguson
Vice President
Steven M. Oristaglio
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
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
- ---------------
AN043 45525 035/438/629/849 9/98
