Putnam
Tax-Free
High Yield
Fund
ANNUAL REPORT
July 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The fundamentals underpinning the U.S. bond market are as strong as at
any time in recent memory. Inflation is low and should stay that way.
Economic growth . . . appears to be slowing to a pace less likely to
reignite inflation, a fixed-income investor's worst enemy. The Federal
Reserve is unlikely to raise interest rates for the foreseeable future.
And the growing federal budget surplus is shrinking the supply of bonds.
All are conditions that bond buyers generally love."
-- The Wall Street Journal, July 6, 1998
* "Since last fall, our primary goal has been to increase the fund's
income by selectively investing in more lower-rated bonds."
-- Blake E. Anderson, manager
Putnam Tax-Free High Yield Fund
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
14 Portfolio holdings
27 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 as is
consistent with the preservation of capital, Putnam Tax-Free High Yield
Fund has been focusing on municipal bonds at the lower end of the
investment-grade spectrum. Not surprisingly, so have many other
like-minded investors. The competition for these securities therefore is
intense and growing increasingly so. Putnam's extensive credit analysis
capability thus becomes an important differentiation factor.
Many of these sought-after issues are found in the health-care industry,
especially within the hospital universe. Your fund, in fact, has held a
significant number of hospital bonds for some time and as a group they
have performed well. In fund management's opinion, prospects within this
area are still positive, and so the fund's focus remains concentrated
there.
Finally, I am pleased to announce the appointment of Blake Anderson as
your fund's manager. Blake has been with Putnam since 1987 and has 12
years of investment experience. In the following report, Blake discusses
your fund's performance during fiscal 1998 and the outlook for the fiscal
year just begun.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
September 16, 1998
Report from the Fund Manager
Blake E. Anderson
Investors in tax-exempt funds have been more fortunate than other
investors who have had to deal with the turmoil in Asia, Russia, and Latin
America. The good fortune extends to Putnam Tax-Free High Yield Fund,
which has continued to provide a reliable income stream exempt from
federal taxes along with a minimum of price volatility. For the 12 months
ended July 31, 1998, the fund's class A shares returned 6.08% at net asset
value and 1.02% at public offering price. For complete performance
information, please see pages 8 through 10.
* FUND FOCUSES ON LOWER-RATED BONDS, HEALTH-CARE AND TRANSPORTATION
SECTORS
Since last fall, our primary goal has been to increase the fund's income
by selectively investing in more lower-rated bonds. When the yield
difference between high-quality bonds and low-quality bonds is narrow,
this is easier said than done. Bonds in the lowest tier of the
investment-grade sector (rated Baa by Moody's) are becoming more and more
difficult to find; not only are there many other tax-exempt funds looking
for higher-yield opportunities, but many Baa credits have been upgraded by
the addition of insurance. Consequently, we have been looking for
opportunities in the upper tier of the high-yield market (Ba- and B-rated
bonds), where there is slightly more supply and where we believe the
additional income potential justifies the additional risk.
Within our sector strategy, we remain attracted to issues in the
health-care/hospital sector, in which we have found many attractive
credits in the past. Nonprofit hospitals throughout the country have
experienced a significant amount of merger activity in recent months but
this trend seems to be declining; we are actually beginning to see
for-profit hospital groups selling individual hospitals. In addition, we
have purchased several smaller health-care bonds at attractive prices,
especially in the New Hampshire market.
Transportation issues have also fared well over the past year,
particularly industrial revenue bonds backed by major airlines. Passenger
volume has been up, while capacity remains steady and fuel costs are
relatively low. This combination of factors has enabled airlines to
increase prices and thereby realize substantial profits. As a result, we
have seen some strong performance from many of the fund's airline
holdings. One outstanding performer has been the Northwest Arkansas
Airport issue, which is currently nonrated. But American Airlines recently
signed on to provide jet service into this airport, providing a valuable
vote of confidence in the future of this enterprise. Additionally the
fund's investments in revenue bonds backed by Delta Airlines and American
Airlines have appreciated following their respective credit upgrades. We
believe these bonds represent some of the best opportunities in the
lower-rated sector of the market. While these holdings, along with others
discussed in this report were viewed favorably at the end of the fiscal
period, all are subject to review and adjustment in accordance with the
fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 22.4%
Transportation 13.3%
Utilities 11.2%
Housing 8.6%
Forest products
and paper 5.3%
Footnote reads:
*Based on net assets as of 7/31/98. Holdings will vary over time.
* STRONG ECONOMY BUOYS GENERAL OBLIGATION BONDS
Strengthened by economic growth, many cities and towns have experienced
large budget surpluses from strong tax collections. Given this background,
it makes sense that other high-performing bonds come from the general
obligation sector, in which the bond issues are backed by taxes, not
revenues or fees. One example of this trend is Massachusetts general
obligation bonds, which are backed by a strong local economy and have
benefited from a credit upgrade during the spring. Although the financial
troubles of Washington, DC, had been headline news for quite some time, we
believed that the district's general obligation bonds offered a more solid
opportunity than the negative publicity indicated. Our perseverance was
rewarded when the bonds were prerefunded during the past year.
In a prerefunding, the municipality issues new bonds to pay off the
original bond issue at the first call date or maturity. Proceeds from the
new issue in an amount sufficient to pay off the entire original bond
issues are invested in an escrow fund made up of U.S. Treasury issues.
Because U.S. Treasuries are the safest of all securities, the original
bonds are considered more creditworthy and an upgrade to AAA generally
follows -- along with higher prices.
With the 30-year bond paying only a modest 30 to 40 basis points over a
10-year bond, investors are not compensated for taking on higher risk of
longer maturities. For this reason, we have found the best value
(attractive yield with minimal volatility) in the intermediate range of
the yield curve -- anywhere from 8 to 15 years.
* OUTLOOK FAVORABLE FOR MUNICIPAL BONDS OVER REMAINDER OF FISCAL YEAR
As we move into the second half of 1998, we expect continued moderate
economic growth in the United States with little inflation, though growth
may be dampened by the crisis in Asia and other emerging markets. Personal
income growth remains strong and interest rates are low, presenting
favorable conditions for growth to continue.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW]
PORTFOLIO QUALITY OVERVIEW*
Ba and under -- 41.6%
Baa -- 13.6%
Aaa -- 34.2%
Aa -- 7.0%
A -- 3.6%
Footnote reads:
*As a percentage of market value as of 7/31/98. A bond rated Baa or higher
is considered investment grade. All ratings reflect Moody's descriptions,
unless noted otherwise; percentages may include unrated bonds considered
by Putnam Management to be of comparable quality. Ratings will vary over
time.
The financial unrest in Asia, Russia, and Latin America will likely keep
the Federal Reserve Board on the sidelines or allow U.S. interest rates to
move modestly lower over the near term. All these factors provide reasons
for reasonable optimism for municipal bonds, though bouts of volatility
are also expected. We will continue to focus on stabilizing the net asset
value and improving income levels through investments in lower-rated,
higher-yielding bonds.
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 7/3198, there is no guarantee the fund will
continue to hold these securities in the future.
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 High Yield Fund is designed for investors seeking high current
income free from federal income tax through investments primarily in high
yield 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) (12/29/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 6.08% 1.02% 5.47% 0.47% 5.84% 2.39%
- ------------------------------------------------------------------------------
5 years 33.64 27.26 29.52 27.57 30.95 26.74
Annual average 5.97 4.94 5.31 4.99 5.54 4.85
- ------------------------------------------------------------------------------
10 years 109.15 99.28 102.73 102.73 104.95 98.32
Annual average 7.66 7.14 7.32 7.32 7.44 7.09
- ------------------------------------------------------------------------------
Life of fund 186.68 172.98 177.88 177.88 180.91 171.85
Annual average 8.51 8.10 8.25 8.25 8.34 8.07
- ------------------------------------------------------------------------------
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: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
7/31/88
Lehman Bros.
Fund's class B Municipal Bond Consumer Price
Date shares Index Index
7/31/88 10,000 10,000 10,000
7/31/89 11,170 11,218 10,498
7/31/90 11,639 11,995 11,004
7/31/91 12,451 13,043 11,494
7/31/92 14,269 14,836 11,857
7/31/93 15,651 16,147 12,187
7/31/94 15,864 16,454 12,524
7/31/95 16,743 17,750 12,870
7/31/96 17,593 18,922 13,249
7/31/97 19,222 20,865 13,545
7/31/98 $20,273 $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 $20,915 at net asset value ($19,928 at public offering
price); a $10,000 investment in the fund's class M shares would have been
valued at $20,495 ($19,832 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 $0.813512 $0.718991 $0.769154
- ------------------------------------------------------------------------------
Capital gains1
- ------------------------------------------------------------------------------
Total $0.813512 $0.718991 $0.769154
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
7/31/97 $14.56 $15.29 $14.56 $14.55 $15.04
- ------------------------------------------------------------------------------
7/31/98 14.61 15.34 14.62 14.61 15.10
- ------------------------------------------------------------------------------
Current return
(end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 5.48% 5.22% 4.83% 5.18% 5.01%
- ------------------------------------------------------------------------------
Taxable equivalent3 9.07 8.64 8.00 8.58 8.29
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 4.60 4.38 4.02 4.35 4.20
- ------------------------------------------------------------------------------
Taxable equivalent3 7.62 7.25 6.66 7.20 6.95
- ------------------------------------------------------------------------------
1Capital 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.
2Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3Assumes maximum 39.6% federal tax rate. Results for investors subject to
lower tax rates would not be as advantageous.
4Based 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) (12/29/94)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 8.43% 3.30% 7.88% 2.88% 8.18% 4.67%
- ------------------------------------------------------------------------------
5 years 33.85 27.51 29.92 27.97 31.20 26.90
Annual average 6.00 4.98 5.37 5.06 5.58 4.88
- ------------------------------------------------------------------------------
10 years 110.71 100.73 104.50 104.50 106.54 99.81
Annual average 7.74 7.22 7.42 7.42 7.52 7.17
- ------------------------------------------------------------------------------
Life of fund 186.24 172.56 177.79 177.79 180.55 171.51
Annual average 8.56 8.15 8.31 8.31 8.39 8.12
- ------------------------------------------------------------------------------
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 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.
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Report of independent accountants
For the fiscal year ended July 31, 1998
To the Trustees and Shareholders of
Putnam Tax-Free High Yield Fund
(a series of Putnam Tax-Free Income Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings),
and the related statements of operations and of changes in net assets and
the financial highlights present fairly, in all material respects, the
financial position of Putnam Tax-Free High Yield Fund (the "fund") 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 11, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
July 31, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
TRAN -- Tax Revenue Anticipation Notes
U.S. Govt. Coll.-- U.S. Government Collateralized
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.6%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C> <C>
Alabama (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 5,000,000 Anniston, Indl. Dev. Rev. Bonds (Hoover Group Inc.),
8 1/2s, 9/1/10 B/P $ 5,612,500
3,500,000 Baldwin Cnty., Eastern Shore Hlth. Care
Auth. Rev. Bonds, 5 3/4s, 4/1/27 Baa3 3,565,625
10,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. Rev. Bonds,
5.7s, 5/1/19 BBB- 10,075,000
2,000,000 Jackson Cnty., Hlth. Care Auth. Hosp. TRAN,
7 7/8s, 5/1/19 BBB-/P 2,372,500
--------------
21,625,625
Alaska (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
10,000,000 AK Hsg. Fin. Auth. IFB, 8s, 12/1/19 (acquired 3/3/98,
cost $11,113,800) (RES) Aa/P 11,250,000
AK State Hsg. Fin. Corp. Rev. Bonds
3,650,000 7.7s, 12/1/35 (acquired 10/22/97,
cost $3,883,600) (RES) Aa/P 3,923,750
12,000,000 Ser. A, 5.55s, 6/1/34 (acquired 11/26/97,
cost $12,150,000) (RES) Aaa 12,285,000
--------------
27,458,750
Arizona (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
13,000,000 Apache Cnty., Indl. Dev. Auth. Poll. Control
Rev. Bonds (Tuscon Elec. Pwr. Co.),
Ser. B, 5 7/8s, 3/1/33 B2 13,032,500
Phoenix, Indl. Dev. Auth. Arpt. Fac. Rev. Bonds
(America West Airlines, Inc.)
5,682,408 Ser. A 95-1, 8.3s, 1/1/06 B+/P 5,770,372
526,316 Ser. B 95-2, 8.2s, 1/1/99 B+/P 534,468
200,000 Pima Cnty., Indl. Dev. Auth. VRDN (Tucson Elec.
Pwr. Co.-Irvington), Ser. A, 3.55s, 10/1/22
(Societe Generale (LOC)) VMIG1 200,000
3,625,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.), Ser. B,
8 1/8s, 12/1/22 B/P 3,887,813
Scottsdale, Indl. Dev. Auth. 1st Mtge. Rev. Bonds
(Westminster Village)
2,300,000 Ser. A, 8s, 6/1/11 BB-/P 2,578,875
3,150,000 Ser. B, 7.05s, 6/1/16 BB-/P 3,465,000
--------------
29,469,028
Arkansas (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
8,575,000 Arkansas Dev. Auth. Rev. Bonds, Ser. A, MBIA,
5.45s, 7/1/24 Aaa 8,575,000
Northwest Regl. Apt. Auth. Rev. Bonds
14,500,000 7 5/8s, 2/1/27 B+/P 16,602,500
3,000,000 7s, 2/1/10 B+/P 3,236,250
--------------
28,413,750
California (10.5%)
- --------------------------------------------------------------------------------------------------------------------------
ABAG Fin. Auth. COP (American
Baptist Homes), Ser. A
7,000,000 5.85s, 10/1/27 BBB 7,183,750
3,000,000 5 3/4s, 10/1/17 BBB 3,078,750
Anaheim, Pub. Fin. Auth. Lease Rev. Bonds, Ser. C, FSA,
3,025,000 6s, 9/1/14 Aaa 3,395,563
3,000,000 6s, 9/1/13 Aaa 3,367,500
4,000,000 6s, 9/1/11 (SEG) Aaa 4,520,000
5,000,000 CA Poll. Cntrl. Fin. Auth. Rev. Bonds
(Laidlaw Environmental), Ser. A, 6.7s, 7/1/07 B-/P 5,281,250
13,700,000 CA State G.O. Bonds, 6 1/2s, 2/1/08 A1 15,806,375
8,000,000 Corona, COP (Vista Hosp. Syst.), Ser. B, 9 1/2s, 7/1/20 B/P 9,590,000
3,000,000 East Bay, Muni. Util. Dist. Wtr. Syst. Rev. Bonds,
MBIA, 4 3/4s, 6/1/34 Aaa 2,793,750
Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds
5,700,000 (Air Canada), 8 3/4s, 10/1/14 B1 6,633,375
5,070,000 (United Airlines, Inc.), 6 7/8s, 11/15/12 Baa3 5,577,000
5,000,000 Los Angeles, Wastewater Syst. IFB, FGIC, 6.632s,
11/1/06 (acquired 11/8/93, cost $5,417,200) (RES) Aaa 5,650,000
10,000,000 Orange Cnty., Pub. Fac. Corp. COP
(Solid Waste Management), 7 7/8s, 12/1/13 Baa 10,335,600
Redondo Beach, Redev. Agcy. Multi-Fam. Hsg.
Rev. Bonds (Heritage Point)
3,130,000 Ser. B, 8 1/2s, 8/1/23 BBB/P 3,286,500
5,100,000 Ser. A, 6 1/2s, 9/1/23 BBB/P 5,393,250
5,000,000 San Bernardino Cnty., COP (Med. Ctr. Fin.),
Ser. A, MBIA, 6 1/2s, 8/1/17 Aaa 5,887,500
21,000,000 San Bernardino Cnty., IF COP (PA-100-Med. Ctr. Fin.),
MBIA, 8.535s, 8/1/28 (acquired 6/27/95,
cost 22,664,040) (RES) Aaa/P 27,273,750
10,000,000 San Diego, Regl. Bldg. Auth. Lease COP,
MBIA, 6.9s, 5/1/23 Aaa 10,462,500
10,000,000 San Luis Obispo, COP (Vista Hosp. Sys. Inc.),
8 3/8s, 7/1/29 B/P 10,787,500
10,000,000 Santa Clara Cnty., Hsg. Auth. Rev. Bonds
(Blossom River Apts), Ser. A, 6 1/2s, 9/1/39 B+/P 10,037,500
9,650,000 Southern CA Pub. Pwr. Auth. IFB (Transmission),
7.893s, 7/1/12 Aa3 10,976,875
19,100,000 Vallejo, COP (Marine World Foundation),
7.2s, 2/1/26 BB+/P 20,866,750
10,500,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BB+/P 11,379,375
Valley Hlth. Syst. Hosp. Rev. Bonds
1,500,000 6 1/2s, 5/15/25 BBB- 1,623,750
3,000,000 Ser. A, 6 1/2s, 5/15/15 BBB- 3,266,250
6,000,000 Ventura, Port. Dist. COP, 6 3/8s, 8/1/28 B/P 6,000,000
--------------
210,454,413
Colorado (6.4%)
- --------------------------------------------------------------------------------------------------------------------------
13,000,000 Arapahoe Cnty., Cap. Impt. Trust Fund Hwy.
Rev. Bonds, Ser. E-470, 7s, 8/31/26 Aaa 15,453,750
CO Edl. Fac. Auth. Rev. Bonds (Ocean Journey, Inc.)
10,000,000 8 3/8s, 12/1/26 B/P 11,687,500
5,000,000 8.3s, 12/1/17 B/P 5,837,500
CO Hsg. Fin. Auth. Rev. Bonds
8,500,000 (Single Fam.), Ser. A-2, 6.6s, 5/1/28 Aa2 9,456,250
9,500,000 Ser. C-3, FHA Insd., 5.7s, 10/1/21 Aa2 9,642,500
Denver, City & Cnty. Arpt. Rev. Bonds
2,645,000 Prerefunded Ser. A MBIA, 8 3/4s, 11/15/23 Aaa 3,061,588
6,475,000 Prerefunded Ser. A 8 3/4s, 11/15/23 Aaa 7,494,813
7,355,000 Ser. A, MBIA, 8 3/4s, 11/15/23 Aaa 8,513,413
17,925,000 Ser. A, 8 3/4s, 11/15/23 Baa1 20,479,313
1,100,000 Prerefunded Ser. A MBIA, 8 1/2s, 11/15/23 Aaa 1,226,500
11,650,000 Ser. A, MBIA, 8 1/2s, 11/15/23 Aaa 12,989,750
8,000,000 Ser. D, MBIA, 7 3/4s, 11/15/13 Aaa 10,330,000
3,915,000 Ser. A, 7 1/4s, 11/15/25 AAA 4,463,100
6,350,000 Douglas Cnty., School Distr. G.O. Bonds
(North Regl. 1, Douglas & Elebert Cntys.),
MBIA, 7s, 12/15/12 Aaa 7,834,313
--------------
128,470,290
Connecticut (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
6,355,000 CT State Dev. Auth. Hlth. Care Rev. Bonds
(Alzheimer's Resource Ctr.), Ser. A, 10s, 8/15/21 AAA/P 7,578,338
CT State Dev. Auth. Rev. Bonds (East Hills Woods)
5,036,500 Ser. A, 7 3/4s, 10/1/17 CCC/P 5,036,853
457,426 Ser. B, zero %, 3/1/21 CCC/P 82,282
5,500,000 CT State Hlth. & Edl. Fac. Auth. IFB (Yale U.),
8.116s, 6/10/30 Aaa 6,105,000
6,500,000 CT. State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Edgehill), Ser. A, 6 7/8s, 7/1/27 BB-/P 6,914,375
--------------
25,716,848
District of Columbia (3.8%)
- --------------------------------------------------------------------------------------------------------------------------
DC G.O. Bonds, Ser. A
17,000,000 Ser. A, 6 3/8s, 6/1/26 AAA 19,252,500
10,000,000 Ser. A, 6s, 6/1/26 Ba1 10,525,000
7,220,000 Ser. B, MBIA, 6s, 6/1/12 Aaa 7,996,150
10,000,000 Ser. B, MBIA, 6s, 6/1/11 Aaa 11,062,500
DC Rev. Bonds (National Public Radio)
4,400,000 7.7s, 1/1/23 BB+/P 4,829,000
2,500,000 7 5/8s, 1/1/18 BB+/P 2,746,875
18,630,000 DC Rev. Bonds COP, 7.3s, 1/1/13 BB- 20,958,750
--------------
77,370,775
Florida (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
9,260,000 Brevard Cnty., Hlth. Auth. Rev. Bonds
(Courtenay Springs Village), 7 3/4s, 11/15/24 BB-/P 10,197,575
10,360,000 FL Gen. Svcs. Rev. Bonds (Env. Protection
Preservation 2000), Ser. A, FSA, 6s, 7/1/11 Aaa 11,693,850
24,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 B+/P 27,900,000
5,970,000 Hillsborough Cnty., Aviation Auth. Special Purpose
Fac. Rev. Bonds (U.S. Air Inc.), 8.6s, 1/15/22 B2 6,761,025
1,070,000 Jacksonville, Hlth. Fac. Auth. Rev. Bonds
(Mental Hlth. Ctr.), 9 1/8s, 10/15/19 B/P 1,094,032
Palm Beach Cnty., Student Hsg. Rev. Bonds
(Palm Beach Cmnty. College)
3,950,000 Ser. A, 8s, 3/1/23 B-/P 3,954,938
135,000 Ser. B, zero %, 3/1/23 B-/P 124,538
Sanford, Arpt. Auth. Indl. Dev. Rev. Bonds
(FL Terminals Inc.), Ser. A
3,125,000 7 3/4s, 5/1/21 BB/P 3,433,594
2,880,000 7 1/2s, 5/1/15 BB/P 3,142,800
--------------
68,302,352
Georgia (3.4%)
- --------------------------------------------------------------------------------------------------------------------------
5,100,000 Cobb Cnty., Dev. Auth. Indl. Dev. Rev. Bonds
(Boise Cascade Corp.), 7s, 9/1/14 Baa3 5,731,125
De Kalb Cnty., Hsg. Auth. Muni. Rev. Bonds
(Briarcliff Park Apts.)
8,000,000 Ser. B, 10s, 4/1/17 B+/P 9,050,000
5,900,000 Ser. A, 7 1/2s, 4/1/17 BBB+/P 6,408,875
9,500,000 Forsyth Cnty., Dev. Auth. Indl. Rev. Bonds
(Hoover Group Inc.), 8 1/2s, 12/1/05 Ba3 11,055,625
700,000 Fulton Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Holcombs Landing Apts), 3.55s, 8/1/26
(First Union National Bank (LOC)) A-1 700,000
9,200,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds, Ser. B,
FSA, 6 3/8s, 1/1/16 Aaa 10,660,500
Rockdale Cnty., Dev. Auth. Solid Waste Disp.
Rev. Bonds (Visay Paper Inc.)
5,875,000 7 1/2s, 1/1/26 BB/P 6,411,094
14,240,000 7.4s, 1/1/16 BB/P 15,539,400
3,160,000 Savannah, Econ. Dev. Auth. Poll. Control Rev. Bonds
(Stone Container Corp.), 8 1/8s, 7/1/15 B/P 3,653,750
--------------
69,210,369
Hawaii (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
HI State G.O. Bonds FGIC
8,330,000 Ser. CM, 6 1/2s, 12/1/16 Aaa 9,808,575
5,330,000 Ser. C, 6 1/2s, 12/1/15 Aaa 6,276,075
5,000,000 Ser. C, 6 1/2s, 12/1/14 Aaa 5,887,500
--------------
21,972,150
Illinois (2.7%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Chicago, Gas Supply Rev. Bonds
(Peoples Gas & Lt.), Ser. A, 6 7/8s, 3/1/15 Aa3 5,481,250
2,080,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa2 2,321,800
IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
5,000,000 (Regency Park-Lincolnwood), Ser. A, 10 1/4s,
4/15/19 (acquired 5/10/90, cost $4,792,455)
(In default) (NON) (RES) D/P 3,850,000
1,160,000 (Mercy Hsg. Corp.), 7s, 8/1/24 Baa1 1,341,250
IL Dev. Fin. Auth. Rev. Bonds
(Cmnty. Rehab Providers Fac.)
2,585,000 8 1/4s, 8/1/12 BB/P 2,546,225
2,520,000 Ser. A, 7 7/8s, 7/1/20 BB/P 2,875,950
4,760,000 Prerefunded, Ser. A, 7 7/8s, 7/1/20 AAA/P 5,819,100
3,065,000 Ser. A, 7 1/2s, 3/1/14 BB/P 3,570,725
5,990,000 (Victor C. Neumann Associates), 7 1/4s, 7/1/18 B/P 6,027,438
835,000 Ser. A, 7 1/4s, 3/1/04 BB/P 912,238
IL Hlth. Fac. Auth. Rev. Bonds
3,000,000 (Glen Oaks Med. Ctr.), Ser. B, 7s, 11/15/19 Baa1 3,420,000
3,000,000 (Hinsdale Hosp.), Ser. A, 7s, 11/15/19 Baa1 3,420,000
5,000,000 (Glen Oaks Medical Ctr.), Ser. B, 6.95s, 11/15/13 Baa1 6,062,500
5,170,000 (Hinsdale Hosp.), Ser. A, 6.95s, 11/15/13 BBB/P 6,268,625
--------------
53,917,101
Indiana (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
East Chicago, Poll. Control Rev. Bonds
(Inland Steel Co.)
12,000,000 7 1/8s, 6/1/07 Ba3 13,695,000
8,000,000 6.8s, 6/1/13 Ba3 8,660,000
6,858,495 Hammond, Indl. Port Auth. COP, 9.65s, 6/1/14 BB+/P 7,385,433
4,500,000 Plainfield, Indl. Econ. Dev. Rev. Bonds
(Jorgensen Steel), 8 1/2s, 9/1/04 B-/P 4,966,875
1,667,765 Westfield, Econ. Dev. Rev. Bonds (Westfield Village
Hlth. Care Ctr.), FHA Insd., 12s, 5/15/14 AAA/P 1,790,529
--------------
36,497,837
Iowa (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives)
22,000,000 9 1/4s, 7/1/25 BB+/P 29,590,000
1,500,000 9.15s, 7/1/09 BB+/P 1,963,125
215,000 Marion Cnty., 1st Mtge. Rev. Bonds
(AHF/Kentucky Iowa, Inc.), 10 1/4s, 1/1/20 B-/P 224,944
--------------
31,778,069
Kentucky (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst.),
MBIA, 8.938s, 10/23/14 Aaa 5,918,750
10,000,000 Kenton Cnty., Special Fac. Arpt. Rev. Bonds
(Delta Airlines), Ser. A, 7 1/2s, 2/1/12 Baa3 11,050,000
1,255,000 Lexington-Fayette Cnty., Urban Govt. 1st Mtge.
Rev. Bonds (AHF/Kentucky Iowa, Inc.),
10 1/4s, 1/1/20 B-/P 1,313,044
--------------
18,281,794
Louisiana (4.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,900,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa3 3,193,625
8,050,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 8,643,688
7,000,000 LA Hlth. Ed. Auth. Rev. Bonds (Lambert House),
Ser. A, 6.2s, 1/1/28 B/P 7,113,750
2,000,000 LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
(St. James Place), 10s, 11/1/21 B-/P 2,285,000
20,500,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline Co.), 7 3/4s, 8/15/22 A3 23,498,125
7,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB 7,743,750
6,500,000 St. Charles, Parish Poll. Control Rev. Bonds
(LA Pwr. & Lt. Co.), 8s, 12/1/14 Baa3 6,955,000
St. James Parish, Solid Waste Disp. Rev. Bonds
(Kaiser Aluminum)
9,000,000 7 3/4s, 8/1/22 B-/P 9,990,000
19,000,000 7.7s, 12/1/14 Ba1 21,208,750
6,000,000 W. Feliciana, Parish Poll. Control Rev. Bonds
(Gulf States Util. Co.), 8s, 12/1/24 Ba1 6,375,000
--------------
97,006,688
Maryland (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,500,000 Denton, 1st Mtge. Rev. Bonds
(Shore Nursing Rehab. Ctr.), 9s, 4/1/20 B/P 2,662,500
Massachusetts (7.3%)
- --------------------------------------------------------------------------------------------------------------------------
3,935,000 Agawam, Res. Recvy. Rev. Bonds (Springfield Res.
Recvy.), 8 1/2s, 12/1/08 BBB- 4,020,980
10,000,000 MA St. Tpk. Auth. Rev. Bonds, Ser. A, MBIA, 5s, 1/1/37 Aaa 9,650,000
19,330,000 MA State G.O. Bonds, Ser. A, 6s, 11/1/11 Aa3 21,673,763
10,000,000 MA State Special Oblig. Rev. Bonds, Ser. A, 5 3/8s,
6/1/11 Aa3 10,612,500
MA State Hlth. & Edl. Fac. Auth. IFB
5,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.77s, 8/12/21 Aaa 5,868,750
2,000,000 (Beth Israel-Deaconess Hosp.), AMBAC,
9.396s, 10/1/31 Aaa 2,345,000
5,600,000 (Boston U.), Ser. L, MBIA, 8.268s, 7/1/25 Aaa 6,307,000
3,325,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
(MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Baa3 3,545,281
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
4,000,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 4,515,000
30,635,000 Ser. A, 9s, 7/1/15 BB-/P 34,464,375
MA State Indl. Fin. Agcy. Rev. Bonds
1,800,000 (Atlanticare Med. Ctr.), Ser. A, 10 1/8s, 11/1/14 B/P 1,950,750
5,800,000 (Atlanticare Med. Ctr.), Ser. B, 10 1/8s, 11/1/14 B/P 6,285,750
8,800,000 (Orchard Cove Inc.), U.S. Govt. Coll., 9s, 5/1/22 Aaa/P 10,494,000
2,330,000 (MA Tpk.), U.S. Govt. Coll., 9s, 10/1/20 Aaa/P 2,612,513
1,995,000 (Morton Hosp. & Med. Ctr.), Ser. A, U.S. Govt.
Coll., 8 3/4s, 7/1/11 Aaa 2,109,972
3,000,000 (Emerson College), 8 1/4s, 1/1/17 BBB-/P 3,296,250
5,000,000 (Evanswood Bethzatha Corp.), 8s, 1/15/27 B+/P 5,350,000
3,500,000 (1st Mtge. Evanswood Bethzatha-A),
7 7/8s, 1/15/20 B+/P 3,801,875
2,065,000 (Sr. Living Fac. Forge Hill), 7s, 4/1/17 B/P 2,080,488
3,925,000 Worcester Mtge. Rev. Bonds (Briarwood Issue),
9 1/4s, 12/1/22 BB-/P 4,572,625
--------------
145,556,872
Michigan (4.8%)
- --------------------------------------------------------------------------------------------------------------------------
2,530,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds
(Glacier Hills Inc.), 8 3/8s, 1/15/19 (SEG) B+/P 2,596,311
20,170,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB+/P 24,884,738
Garden Cty, Hosp. Fin. Auth. Rev. Bonds
3,000,000 (Garden City Hosp.), Ser. A, 5 3/4s, 9/1/17 BBB-/P 2,977,500
3,000,000 (Garden City Hosp. OB Group), Ser. A,
5 5/8s, 9/1/10 BBB-/P 2,981,250
4,130,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.), 8.3s, 9/1/02 Ba3 4,656,575
7,500,000 MI State Strategic Fund Ltd. Oblig. IFB, 8.4s, 9/1/25
(acquired 3/9/98, cost 9,018,750) (RES) Aaa 9,121,875
5,700,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 6,284,250
7,500,000 MI State Strategic Fund Resource Recvy. Ltd.
Oblig. Rev. Bonds (Central Wayne Energy Rec.),
Ser. A, 7s, 7/1/27 B/P 7,593,750
26,955,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds
(Poll. Ctrl.), Ser. B, 9 1/2s, 7/23/09 B/P 29,482,031
5,390,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care, Inc.), 8 3/8s, 7/1/23 B-/P 5,120,500
--------------
95,698,780
Minnesota (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,885,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical, Inc.), 10 1/4s, 9/1/20 BB-/P 3,124,945
5,000,000 Intl. Falls, Env. Fac. Rev. Bonds
(Boise Cascade Corp.), 7.2s, 10/1/24 Baa3 5,675,000
8,000,000 Minneapolis, Single Family Rev. Bonds (Phase V),
FNMA Coll. & GNMA Coll., 6 1/4s, 4/1/22 Aaa 8,570,000
3,200,000 Shakopee Multi-Fam. Adj. Rate Rev. Bonds
(Riva Ridge Apts.), 8 1/2s, 12/1/08 B-/P 3,200,000
--------------
20,569,945
Mississippi (0.8%)
- --------------------------------------------------------------------------------------------------------------------------
Claiborne Cnty., Poll. Control Rev. Bonds
(Middle South Energy, Inc.)
4,500,000 Ser. C, 9 7/8s, 12/1/14 Ba1 4,705,560
10,000,000 Ser. A, 9 1/2s, 12/1/13 Ba1 10,445,000
--------------
15,150,560
Montana (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
13,850,000 MT State Hlth. Fac. Auth. Hosp. Fac. IFB, AMBAC,
6.719s, 2/25/25 Aaa 13,971,188
Nebraska (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Kearney, Indl. Dev. Rev. Bonds (Great Platte
River Road), 6 3/4s, 1/1/28 B/P 4,875,000
2,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA,
9.34s, 11/15/16 Aaa 2,352,500
12,100,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB,
Ser. D, GNMA Coll., 7.918s, 3/1/26 Aaa 13,431,000
--------------
20,658,500
New Hampshire (2.9%)
- --------------------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
2,810,000 (Havenwood-Heritage Heights), U.S. Govt. Coll.,
9 3/4s, 12/1/19 Aaa/P 3,105,050
2,360,000 (Franklin Regl. Hosp.), 8 3/4s, 9/1/19 BBB/P 2,569,450
9,000,000 (1st Mtge.-Rivermead Peterborough),
8 1/2s, 7/1/24 Aaa/P 11,148,750
5,900,000 (Havenwood-Heritage Heights), 7.35s, 1/1/18 BB+/P 6,600,625
3,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 BB/P 2,992,500
4,400,000 (Lakes Region Hosp.), 5 3/4s, 1/1/08 A-/P 4,570,500
9,200,000 NH State Bus. Fin. Auth. Poll. Control &
Solid Waste Rev. Bonds (Crown Paper Co.),
7 3/4s, 1/1/22 BB- 10,614,500
3,550,000 NH State Bus. Fin. Auth. Rev. Bonds
(Proctor Academy), Ser. A, 5.6s, 6/1/28 Baa2 3,536,688
12,000,000 NH State Bus. Fin. Auth. Poll. Control Rev. Bonds
(Pub. Svc. Co.), Ser. D, 6s, 5/1/21 Ba3 12,225,000
--------------
57,363,063
New Jersey (3.0%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth. Rev. Bonds, 8.4s, 4/1/24
(acquired 4/12/94 cost $5,000,000) (RES) B/P 5,600,000
NJ Econ. Dev. Auth. Rev. Bonds
7,000,000 (Winchester Gardens), Ser. A, 8 5/8s, 11/1/25 B/P 7,831,250
12,000,000 (Newark Arpt. Marriot Hotel), 7s, 10/1/14 B+/P 13,050,000
5,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 5,500,000
4,000,000 NJ State Hsg. & Mtge. Fin. Agcy. IFB, Ser. I, 8.311s,
11/1/07 (acquired from 2/11/93 to 8/24/95,
cost $4,143,120) (RES) A+/P 4,375,000
10,000,000 NJ State Trans. Trust Fund Auth. Rev. Bonds
(Trans. Syst.), Ser. B, MBIA, 6 1/2s, 6/15/10 Aaa 11,725,000
5,905,000 NJ Wastewtr. Treatment Rev. Bonds
(Wastewtr. Treatment), Ser. C, 6 7/8s, 6/15/08 Aa2 7,093,381
4,000,000 Salem Cnty. Indl. Poll. Control Fin. Auth. IFB, MBIA,
8.1s, 10/1/29 (acquired 10/28/94,
cost $3,785,680) (RES) Aaa 4,965,000
--------------
60,139,631
New Mexico (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
9,000,000 Farmington, Poll. Control Rev. Bonds (Tucson Elec.
Pwr Co. San Juan), Ser. A, 6.95s, 10/1/20 B2 10,091,250
New York (9.4%)
- --------------------------------------------------------------------------------------------------------------------------
7,000,000 Erie Cnty., Indl. Dev. Life Care Cmnty. Rev. Bonds
(Episcopal Church Home), Ser. A, 6s, 2/1/28 B+/P 7,061,250
Metropolitan Trans. Auth. Fac. Rev. Bonds
13,640,000 Ser. A, MBIA, 6 1/4s, 4/1/12 Aaa 15,634,850
5,000,000 Ser. B-1, AMBAC, 5 1/2s, 7/1/08 Aaa 5,393,750
Metropolitan Trans. Auth. Svcs. Contract Rev. Bonds
4,000,000 (Commuter Fac.), Ser. O, 5 3/4s, 7/1/13 Baa1 4,315,000
8,250,000 (Trans. Fac.), Ser. O, 5 3/4s, 7/1/13 Baa1 8,899,688
5,000,000 Muni. Assistance Corp. IFB, Ser. 337B, 8.2s, 7/1/08
(acquired 3/19/98, cost 6,225,100) (RES) AA/P 6,225,000
10,000,000 NY City, G.O. Bonds, Ser. L, 8s, 8/1/03 A3 11,612,500
6,280,000 NY City, Rev. Bonds, 6s, 8/1/06 (acquired 9/12/97,
cost $7,384,526) (RES) BBB+/P 7,606,650
NY City, Indl. Dev. Agcy. Rev. Bonds
1,000,000 (Visy Paper Inc.), 7.95s, 1/1/28 BB-/P 1,168,750
9,000,000 (Paper Inc.), 7.8s, 1/1/16 BB-/P 10,507,500
5,000,000 NY City, Muni. Assistance Corp. Rev. Bonds
(PA 337A), 8.2s, 7/1/07 (acquired 3/19/98,
cost $6,169,900) (RES) AA/P 6,175,000
10,750,000 NY St. Dorm. Auth. IFB, MBIA 7.45s, 7/1/13
(acquired 10/22/97, cost 15,191,120) (RES) AAA/P 12,980,625
NY State Dorm. Auth. Rev. Bonds
7,200,000 (State Ed. Fac.), Ser. A, FGIC, 5 7/8s, 5/15/11 Aaa 7,956,000
7,000,000 (Cons. City U.), Ser. A, AMBAC, 5 3/4s, 7/1/09 Aaa 7,700,000
8,000,000 NY State Energy Research & Dev. Auth. Poll. Control
IFB, FGIC, 8.671s, 7/1/29 (acquired 12/19/94,
cost $8,353,120) (RES) Aaa 10,380,000
NY State Env. Fac. Corp. Poll. Control Rev. Bonds
11,185,000 (PA 198), 7.95s, 6/15/10 (acquired 10/22/97,
cost $6,012,500) (RES) Aaa 14,079,119
5,000,000 Ser. E, MBIA, 6s, 6/15/11 Aaa 5,562,500
5,500,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds, Ser. A,
AMBAC, FHA Insd., 6 1/2s, 8/15/29 Aaa 6,283,750
9,750,000 NY State Pwr. Auth. Rev. Bonds, Ser. Z,
6 1/2s, 1/1/19 (Refunded) Aa2 10,651,875
7,000,000 NY State Urban Dev. Corp. Rev. Bonds, 7 1/2s, 4/1/20 Aaa 7,743,750
12,590,000 NY State, G.O. Bonds, 6s, 3/1/07 A2 13,880,475
7,000,000 Port Auth. NY & NJ Rev. Bonds (Delta Airlines, Inc.),
Ser. 1R, 6.95s, 6/1/08 Baa3 7,656,250
--------------
189,474,282
North Carolina (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds, Ser. B
4,000,000 MBIA, 7s, 1/1/08 Aaa 4,705,000
14,940,000 MBIA, 6 1/8s, 1/1/09 Aaa 16,770,150
7,500,000 NC Muni. Pwr. Agcy. Rev. Bonds
(No. 1, Catawba Elec.), MBIA, 6s, 1/1/11 Aaa 8,362,500
--------------
29,837,650
Ohio (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
7,200,000 Dayton, Special Fac. Rev. Bonds
(Emery Air Freight Corp.), 12 1/2s, 10/1/09 AAA/P 7,511,544
6,150,000 OH State Solid Waste Rev. Bonds, (CSC Ltd.)
8 1/2s, 8/1/22 B-/P 6,488,250
--------------
13,999,794
Oklahoma (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
6,000,000 Ottawa Cnty., Fin. Auth. Indl. Rev. Bonds
(Doane Prods Co.), 7 1/4s, 6/1/17 B/P 6,345,000
6,475,000 Tulsa, Indl. Auth. Rev. Bonds (U. of Tulsa), Ser. A,
MBIA, 6s, 10/1/11 Aaa 7,332,938
--------------
13,677,938
Pennsylvania (5.7%)
- --------------------------------------------------------------------------------------------------------------------------
8,700,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(UPMC Hlth. Syst.), Ser. B, 6s, 7/1/25 Aaa 9,744,000
Allegheny Cnty., Indl. Dev. Auth. Arpt. Special
Fac. Rev. Bonds
1,415,000 (Southwestern Arpt. Cargo Fac.), 8 3/4s, 2/15/09 BB+/P 1,470,128
1,330,000 (U.S. Air, Inc.) Ser. A, 8 7/8s, 3/1/21 B3 1,506,225
5,035,000 (U.S. Air, Inc.) Ser. B, 8 1/2s, 3/1/21 B3 5,620,319
12,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds (Forum Place),
Ser. A, 6s, 1/15/25 BB-/P 12,437,500
5,300,000 Montgomery Cnty., Higher Ed. & Hlth. Auth.
Hosp. Rev. Bonds (United Hosp. Inc.), Ser. A,
8 3/8s, 11/1/11 AAA 5,697,500
5,370,000 PA Convention Ctr. Auth. Rev. Bonds, Ser. A,
FSA, 6 3/4s, 9/1/19 Aaa 6,081,525
PA Econ. Dev. Fin. Auth. Qualified Res.
Properties Rev. Bonds
4,400,000 Ser. A, 8s, 9/1/27 (RSI Properties/Buttler LLC) B-/P 4,515,500
3,500,000 Ser. B, 8s, 9/1/27 (RSI Properties/Greensburg LLC) B-/P 3,591,875
7,250,000 PA Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds (Northampton Generating),
Ser. A, 6.6s, 1/1/19 BBB- 7,712,188
4,800,000 PA Hsg. Fin. Agcy. IFB, 8.293s, 4/1/25 Aa 5,190,000
PA State Econ. Dev. Fin. Auth. Resource
Recvy. Rev. Bonds
13,000,000 (Colver), Ser. E, 8.05s, 12/1/15 BB-/P 14,950,000
6,250,000 (Northhampton), Ser. B, 6 3/4s, 1/1/07 BB+/P 6,828,125
PA State Higher Ed. Assistance Agcy. Student Loan
2,500,000 IFB, AMBAC, 9.703s, 9/1/26 Aaa 2,887,500
8,900,000 Ser. A&B, 7 1/4s, 7/1/18 (In default) (NON) Caa3 6,497,000
5,300,000 Philadelphia, Muni. Auth. Rev. Bonds, Ser. C,
8 5/8s, 11/15/16 Aaa 6,128,125
4,760,000 Philadelphia, Wtr. & Wastewtr. Rev. Bonds,
FGIC, 10s, 6/15/05 Aaa 6,283,200
Pottsville, Hosp. Auth. Rev. Bonds
(Pottsville Hosp. & Warne Clinic)
2,000,000 7 1/4s, 7/1/24 BBB 2,335,000
4,000,000 7s, 7/1/14 BBB 4,620,000
--------------
114,095,710
Puerto Rico (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
7,000,000 Cmnwlth. of PR, Pub. Bldg. Auth. Gtd. Ed. & Hlth. Fac.
Rev. Bonds, Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 7,726,250
4,000,000 Cmnwlth. of PR, IFB, MBIA, 7.934s, 7/1/08 Aaa 4,520,000
3,305,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds,
Ser. Z, MBIA, 6 1/4s, 7/1/12 Aaa 3,821,406
PR Elec. Pwr. Auth. Rev. Bonds
2,000,000 Ser. BB, MBIA, 6 1/4s, 7/1/10 Aaa 2,297,500
7,000,000 Ser. AA, MBIA, 6s, 7/1/12 Aaa 7,910,000
--------------
26,275,156
South Carolina (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
13,945,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 B+/P 15,130,325
10,355,000 SC Jobs Econ. Dev. Auth. Rev. Bonds
(St. Francis Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 11,299,894
5,000,000 Spartanburg Cnty., Hosp. Fac. IFB, FSA,
8.898s, 4/13/22 Aaa 5,956,250
--------------
32,386,469
Tennessee (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
7,500,000 McMinn Cnty., Indl. Dev. Brd. Poll. Control
Rev. Bonds (Newsprint Co.), 7 5/8s, 3/1/16 Baa1 8,137,500
Texas (4.0%)
- --------------------------------------------------------------------------------------------------------------------------
5,040,000 Alliance, Arpt. Auth. Special Fac. Rev. Bonds
(American Airlines, Inc.), 7 1/2s, 12/1/29 Baa2 5,443,200
5,000,000 Amarillo, Hlth. Fac. Corp. Rev. Bonds
(Sears Panhandle Retirement), Ser. B,
7 3/4s, 8/15/26 BB+/P 5,687,500
Bell Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Heartway Corp.)
635,000 Ser. B, 10s, 3/1/19 CCC+/P 159,544
3,765,000 Ser. A, 9 1/2s, 3/1/19 CCC+/P 3,849,713
5,455,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 B/P 6,648,281
10,000,000 Dallas Cnty., G.O. Bonds
(Flood Control Dist. (#1), stepped-coupon,
zero % (8.5s, 10/1/99) 4/1/16 (STP) BB-/P 11,000,000
Harris Cnty., Hsg. Fin. Corp. Dev. Bonds
665,000 Ser. 1983A, 10 3/8s, 7/15/14 Baa3 666,257
500,000 9 7/8s, 3/15/14 BB 502,185
9,280,000 Harris Cnty., Hlth. Fac. Rev. Bonds
(Hermann Mem. Hosp. Syst.), 5 1/2s, 6/1/13 Aaa 9,848,400
15,000,000 Houston, City G.O. Bonds, Ser. C, 7s, 3/1/08 Aa3 17,718,750
3,000,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds
(Mem. Hlth. Syst. of East TX), 5.7s, 2/15/28 BBB 3,007,500
5,135,000 San Antonio Indept. School Dist. G.O. Bonds,
PSFG, 6s, 8/15/09 Aaa 5,706,269
8,000,000 TX State Hsg. & Cmnty. Affairs Home Mtge. IFB,
Ser. C, GNMA Coll, FNMA Coll, 9.739s, 7/2/24 AAA 9,970,000
--------------
80,207,599
Utah (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC Hosps. Inc.),
MBIA, 6 1/4s, 2/15/23 Aaa 5,368,750
5,500,000 Tooele Cnty., Poll. Control Rev. Bonds
(Laidlaw Environmental), Ser. A, 7.55s, 7/1/27 B-/P 6,153,125
7,000,000 Tooele Cnty., Hazardous Waste Treatment
Rev. Bonds (Union Pacific), Ser. A, 5.7s, 11/1/26 Baa3 7,008,750
--------------
18,530,625
Virginia (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
4,500,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB, FGIC,
9.468s, 8/15/23 Aaa 5,304,375
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB
(Bon Secours Hlth. Syst.), FSA, 7.893s, 8/23/27 Aaa 2,525,000
10,435,000 Hopewell, Indl. Dev. Rev. Bonds
(Stone Container Corp.), 8 1/4s, 6/1/16 B/P 11,700,232
--------------
19,529,607
Washington (2.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,500,000 Spokane Cnty., Indl. Dev. Corp. Solid Waste Disp.
Rev Bonds (Kiaser Alummin. & Chemical Corp.),
7.6s, 3/1/27 B-/P 3,981,250
8,200,000 WA State Hsg. Fin. Comm. Single Fam. Mtge. IFB,
GNMA Coll., 10.02s, 12/1/17 (acquired 4/12/95,
cost $9,225,000) (RES) AAA/P 8,733,000
2,600,000 WA State Hsg. Fin. Comm. Multi-Fam. Rev. Bonds
(Clare House Apts.), Ser. A, 5 3/4s, 7/1/30 AA3 2,622,750
WA State Pub. Pwr. Supply Syst. Rev. Bonds
5,000,000 (Nuclear No. 3) Ser. C, MBIA, 7 1/2s, 7/1/08 Aaa 6,118,750
5,000,000 (Nuclear No. 3) Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 6,212,500
9,690,000 (Nuclear No. 2), Ser. A, FSA, 6s, 7/1/09 Aaa/P 10,707,450
5,500,000 Washington Cnty., Hsg. & Redev. Auth. Rev. Bonds
(Healtheast), 5 1/2s, 11/15/27 Baa3 5,341,875
--------------
43,717,575
- --------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $1,834,605,994) (b) $1,977,678,033
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $2,005,656,449.
(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.
(b) The aggregate identified cost on a tax basis is $1,834,605,994, resulting in gross unrealized appreciation and
depreciation of $151,856,248 and $8,784,209, respectively, or net unrealized appreciation of $143,072,039.
(NON) Non-income-producing security.
(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.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at July 31, 1998 was $154,473,769 or 7.7% of net assets.
(SEG) A portion of these securities were were 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):
Health care 22.4%
Transportation 13.3
Utilities 11.2
The fund had the following insurance concentration greater than 10% at July 31, 1998 (as a percentage of net
assets):
MBIA 12.3%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 1998
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
20 Yr T-Bond Future
(Short) $112,541,063 $111,705,197 Sep-98 $(835,866)
Muni Index Future
(Long) 22,816,000 22,685,254 Sep-98 130,746
- --------------------------------------------------------------------------------------------------
$(705,120)
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 $1,834,605,994) (Note 1) $1,977,678,033
- -----------------------------------------------------------------------------------------------
Cash 12,411,514
- -----------------------------------------------------------------------------------------------
Interest and other receivables 28,881,015
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,397,705
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 120,868
- -----------------------------------------------------------------------------------------------
Total assets 2,021,489,135
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 42,125
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 4,745,954
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 6,000,000
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,591,843
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 939,608
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 325,532
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 30,408
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,589
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,042,583
- -----------------------------------------------------------------------------------------------
Other accrued expenses 113,044
- -----------------------------------------------------------------------------------------------
Total liabilities 15,832,686
- -----------------------------------------------------------------------------------------------
Net assets $2,005,656,449
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,961,340,601
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 451,768
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (98,502,842)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 142,366,922
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $2,005,656,449
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($934,747,195 divided by 63,986,537 shares) $14.61
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $14.61)* $15.34
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,052,827,286 divided by 72,008,837 shares)** $14.62
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($18,081,968 divided by 1,237,641 shares) $14.61
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $14.61)*** $15.10
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group
sales the offering price is reduced.
** Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000 or more and on
group sales the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended July 31, 1998
<S> <C>
Tax exempt interest income: $131,188,653
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 10,911,248
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,323,194
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 36,788
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 19,440
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,290,402
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 11,626,175
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 90,457
- -----------------------------------------------------------------------------------------------
Reports to shareholders 41,909
- -----------------------------------------------------------------------------------------------
Registration fees 557
- -----------------------------------------------------------------------------------------------
Auditing 61,638
- -----------------------------------------------------------------------------------------------
Legal 16,080
- -----------------------------------------------------------------------------------------------
Postage 193,416
- -----------------------------------------------------------------------------------------------
Other 105,101
- -----------------------------------------------------------------------------------------------
Total expenses 26,716,405
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (335,816)
- -----------------------------------------------------------------------------------------------
Net expenses 26,380,589
- -----------------------------------------------------------------------------------------------
Net investment income $104,808,064
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (39,325,595)
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (9,771,241)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 56,405,435
- -----------------------------------------------------------------------------------------------
Net gain on investments 7,308,599
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $112,116,663
- -----------------------------------------------------------------------------------------------
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 (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 104,808,064 $ 110,373,832
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments (49,096,836) (2,973,761)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 56,405,435 75,459,771
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 112,116,663 182,859,842
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (36,129,110) (34,200,705)
- ---------------------------------------------------------------------------------------------------------------
Class B (67,180,332) (75,427,802)
- ---------------------------------------------------------------------------------------------------------------
Class M (949,710) (797,574)
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (71,360,253) 24,687,444
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (63,502,742) 97,121,205
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 2,069,159,191 1,972,037,986
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed and
distributions in excess of net investment
income of $451,768 and $195,279, respectively) $2,005,656,449 $2,069,159,191
- ---------------------------------------------------------------------------------------------------------------
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 $14.56 $14.05 $14.14 $14.24 $15.34
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .80(c) .84 .90 .94 .83
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .06 .52 (.10) (.10) (.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .86 1.36 .80 .84 (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.81) (.85) (.89) (.94) (.83)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investment -- -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.81) (.85) (.89) (.94) (.95)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.61 $14.56 $14.05 $14.14 $14.24
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.08 9.97 5.76 6.24 (.99)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $934,747 $625,602 $540,607 $474,984 $361,593
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) .88 .85 .84 .87 .71*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.60 5.94 6.27 6.73 5.58*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 39.62 56.22 67.70 60.41 44.41
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted 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 $14.56 $14.05 $14.14 $14.24 $15.01
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .73(c) .75 .80 .85 .86
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .05 .51 (.09) (.10) (.65)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .78 1.26 .71 .75 .21
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.72) (.75) (.80) (.85) (.85)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investment -- -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.72) (.75) (.80) (.85) (.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.62 $14.56 $14.05 $14.14 $14.24
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 5.47 9.26 5.08 5.54 1.36
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,052,827 $1,427,365 $1,421,448 $1,436,481 $1,522,955
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%) (b) 1.53 1.50 1.50 1.51 1.45
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.95 5.30 5.62 6.10 5.76
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 39.62 56.22 67.70 60.41 44.41
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted 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 Dec. 29, 1994+
operating performance Year ended July 31 to July 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.55 $14.04 $14.13 $13.43
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .78(c) .80 .84 .58
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .05 .51 (.08) .70
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .83 1.31 .76 1.28
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.77) (.80) (.85) (.58)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investment -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.77) (.80) (.85) (.58)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.61 $14.55 $14.04 $14.13
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 5.84 9.64 5.44 9.69*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $18,082 $16,192 $9,984 $2,331
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.18 1.15 1.13 .71*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.30 5.63 5.87 3.98*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 39.62 56.22 67.70 60.41
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the period ended July 31, 1996 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted number of shares outstanding
during the period.
</TABLE>
Notes to financial statements
July 31, 1998
Note 1
Significant accounting policies
Putnam Tax-Free High Yield Fund (the "fund") is a series of Putnam
Tax-Free Income Trust (the "trust") which is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund pursues its objective of seeking
high current income exempt from federal income tax by investing primarily
in high-yielding, lower rated tax exempt securities constituting a
portfolio that Putnam Investment Management, Inc. ("Putnam Management")
the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc.,
believes does not involve undue risk to income or principal.
The fund offers class A, class B, and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. Short-term
investments are stated at amortized cost, which approximates market value,
and restricted securities are stated at fair value following procedures
approved by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. 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, as amended. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held nor for excise tax on income and capital gains.
At July 31, 1998, the fund had a capital loss carryover of approximately
$58,227,000 available to offset future capital gains, if any. The amount
of the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- ---------------
$24,429,000 July 31, 2003
$12,477,000 July 31, 2004
$21,321,000 July 31, 2006
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
post-October loss deferrals, dividends payable, defaulted bond interest,
unrealized gains and losses on certain futures contracts, and market
discount. 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 $98,135 to increase undistributed net
investment income and $413,701 to increase paid-in-capital, with an
increase to accumulated net realized losses of $511,836. 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 bonds are accreted according to the yield to
maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.65% of the first $500
million of average net assets; 0.55% of the next $500 million; 0.50% of
the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion and
0.38% of any excess thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended July 31, 1998, fund expenses were reduced by $335,816
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.
Each Trustee of the fund receives an annual Trustee fee, of which $1,390
has been allocated to the fund, 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 "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B, and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00%, and 1.00% of the
average net assets attributable to class A, class B, and class M shares,
respectively. The Trustees have approved payment by the fund at an annual
rate of 0.20%, 0.85%, and 0.50% of the average net assets attributable to
class A, class B, and class M shares, respectively.
For the year ended July 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $116,216 and $5,795 from the sale
of class A and class M shares, respectively and $2,184,733 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 $19,643 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $748,998,582 and
$799,109,844, 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 28,069,998 $409,772,052
- ----------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,246,975 18,208,766
- ----------------------------------------------------------------------
29,316,973 427,980,818
Shares
repurchased (8,309,305) (120,936,185)
- ----------------------------------------------------------------------
Net increase 21,007,668 $307,044,633
- ----------------------------------------------------------------------
Year ended
July 31, 1997
- ----------------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------------
Shares sold 17,469,517 $247,871,332
- ----------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,233,532 17,525,638
- ----------------------------------------------------------------------
18,703,049 265,396,970
Shares
repurchased (14,205,309) (201,674,072)
- ----------------------------------------------------------------------
Net increase 4,497,740 $63,722,898
- ----------------------------------------------------------------------
Year ended
July 31, 1998
- ----------------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------------
Shares sold 10,108,105 $147,435,626
- ----------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,129,373 31,112,941
- ----------------------------------------------------------------------
12,237,478 178,548,567
Shares
repurchased (38,248,975) (558,756,204)
- ----------------------------------------------------------------------
Net decrease (26,011,497) $(380,207,637)
- ----------------------------------------------------------------------
Year ended
July 31, 1997
- ----------------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------------
Shares sold 19,278,563 $273,428,476
- ----------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,486,227 35,319,294
- ----------------------------------------------------------------------
21,764,790 308,747,770
Shares
repurchased (24,895,016) (353,480,814)
- ----------------------------------------------------------------------
Net decrease (3,130,226) $(44,733,044)
- ----------------------------------------------------------------------
Year ended
July 31, 1998
- ----------------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------------
Shares sold 414,110 $6,023,344
- ----------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 42,097 614,641
- ----------------------------------------------------------------------
456,207 6,637,985
Shares
repurchased (331,509) (4,835,234)
- ----------------------------------------------------------------------
Net increase 124,698 $1,802,751
- ----------------------------------------------------------------------
Year ended
July 31, 1997
- ----------------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------------
Shares sold 633,553 $8,978,501
- ----------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 35,274 500,706
- ----------------------------------------------------------------------
668,827 9,479,207
Shares
repurchased (266,903) (3,781,617)
- ----------------------------------------------------------------------
Net increase 401,924 $5,697,590
- ----------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.95% 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 $32,702,279 as capital gain, which includes $3,364,473
as 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.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund **
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts,
Michigan, Minnesota, New Jersey, New York,
Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds -- three investment
portfolios that spread your money across a variety of
stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
+ Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither
insured nor guaranteed by the U.S. government.
These funds are managed to maintain a price
of $1.00 per share, although there is no
assurance that this price will be maintained
in the future.
Please call your financial advisor or Putnam
at 1-800-225-1581 to obtain a prospectus for
any Putnam fund.It contains more complete
information, including charges and expenses.
Please read it carefully before you invest or
send money.
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
Blake E. Anderson
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 High
Yield Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of 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
- ---------------
45521 500/036/679/851 9/98
