Putnam
Tax-Free
Insured
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
September 20, 2000
REPORT FROM FUND MANAGEMENT
Richard P. Wyke
The tide is finally starting to turn in the financial markets. Many
equity markets have struggled and declined so far this year, but the
bond market, as measured by the 30-year Treasury bond, recorded a 6.30%
total return for the period ended July 31, 2000. It is true that the
first half of this fiscal year was a difficult one for bonds and bond
investors, but the positive performance of the second half of the year
set the stage for improving performance from Putnam Tax-Free Insured
Fund.
Total return for 12 months ended 7/31/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
----------------------------------------------------------------------
3.86% -1.05% 3.44% -1.49% 3.11% 2.12% 3.55% 0.16%
----------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 5.
* YEAR FULL OF CHANGE
Fiscal 2000 was a year full of uncertainty. The 10-year economic
expansion in the United States surpassed everyone's expectations and
provoked renewed worry over inflation. After six interest-rate increases
by the Federal Reserve Board during the period, it was clear that the
fight against inflation would be a tough one.
During the year, the Treasury announced its debt buy-back program. The
move threw the Treasury market off balance by greatly diminishing
supply. Finally, with sufficient signs of a slowdown in the economy in
late spring and a consensus that the Fed was satisfied with the slower
pace of the economy, we have begun to experience a more comfortable
environment in the municipal bond market.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Utilities 18.7%
Health care 16.7%
Transportation 14.5%
Water and sewer 10.8%
Education 4.8%
Footnote reads:
*Based on net assets as of 7/31/00. Holdings will vary over time.
* WIDENING OF CREDIT SPREADS AFFECTS MARKET FOR INSURED BONDS
Another major event that began in the third quarter of calendar 1999 and
extended into this year was the widening of credit spreads in the
municipal bond market -- a situation in which the difference between
interest rates on lower-rated investment-grade bonds and higher-rated
bonds was growing. Lower-tier investment-grade bonds carried interest
rates that were three quarters of a percentage point above those of
Aaa/AAA-rated bonds. Numerous defaults from several troubled bond
issuers and the resulting price declines caused the wider spreads and
made potential buyers more reluctant to consider investing in this
sector.
"The bond market, by virtue of its positive performance in recent
months, seems to be comfortable with the economy's pace and direction."
-- Richard P. Wyke, portfolio manager
The widening of credit spreads and lack of investor interest in the
lower-rated investment-grade market affected the market for insured
municipal bonds, greatly boosting demand. The guarantee of timely
principal and interest payments that comes with insured municipal bonds
suddenly became appealing to investors who were concerned about the
increase in defaults and the stock market's volatility.
* FUND USES SEVERAL STRATEGIES TO CAPTURE HIGHER INCOME
A discussion of our duration strategy is always pertinent to the fund's
performance. Duration is a measure of the portfolio's sensitivity to
interest-rate changes. During the period, our strategy was to keep the
fund's duration at about 8 1/2 years, slightly shorter than that of its
benchmark. There was one exception to this strategy; in March, we
briefly lengthened duration during a bond market rally. This one-month
period of locking in longer maturities significantly helped the fund's
performance because we purchased bonds with higher interest rates that
have recently appreciated in value.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Hernando County, Florida,
Criminal Justice
Revenue Bonds, 7.65%, 7/1/16
Utah Intermountain Power Agency
Revenue Bonds, 6.15%, 7/1/14
Massachusetts Turnpike Authority
Revenue Bonds, 5.00%, 1/1/37
Portland, Oregon, Sewer System
Revenue bonds, 5.00%, 6/1/12
Fredericksburg, Virginia, Industrial
Development Authority
Inverse Floating Rate Bonds,
8.76%, 8/15/23
New York State Energy Niagra
Mohawk Power Corp.
Revenue Bonds, 7.20%, 7/1/29
Massachusetts State Tufts University
Revenue Bonds, 4.75%, 2/15/28
State of California
General Obligation Bonds, 5.50%, 4/1/12
New Jersey Turnpike Authority
Floating Rate Bonds, 7.05%, 1/1/11
Houston, Texas, Water and Sewer
Revenue Bonds, 6.38%, 12/1/17
Footnote reads:
These holdings represent 22.9% of the fund's net assets as of 7/31/00.
Portfolio holdings will vary over time.
Sometimes we can boost performance by underweighting a certain type of
bond. This was the case recently with deeply discounted bonds, those
with a market value far below their $1,000 face amount. As interest
rates have risen, these bonds have severely underperformed. Deeply
discounted bonds usually mean a large capital gains tax and potentially
taxable regular income for investors and so demand for them is small.
Low demand drives their prices even lower than those of other discount
bonds in a rising-rate environment. Fortunately the fund did not own a
significant percentage of deeply discounted bonds, and thus this
strategy of omission helped the fund's performance.
* NEW YORK HEALTH-CARE BONDS OFFERED UNIQUE OPPORTUNITY
In previous reports, we have mentioned our strategy of taking profits
from some of our California holdings and investing the proceeds into
other states offering what we considered greater opportunity. In our
opinion, several California bonds had reached their peak in terms of
performance. We believed that New York, a state with high taxes and
strong investor demand for tax-exempt investments, had more attractive
potential.
In September, Nassau County, one of the wealthier counties in the state,
was preparing to issue $260 million in revenue bonds to acquire and make
capital improvements to the Nassau County Medical Center. While planning
was underway for this bond issue, it became public knowledge that the
county was having difficulty balancing its budget. As a result, the
credit rating agencies downgraded the county's debt. When the Nassau
County Health Care System bonds came to market, they traded lower
because of the negative publicity, even though they were insured. Given
this situation, we were able to purchase Nassau County Health Care
System revenue bonds yielding 5.33% and 5.60%. Later in the year, we
also purchased Nassau County general obligation bonds at especially
attractive prices.
* BONDS MOVING INTO LIMELIGHT
The big question for the future is whether the economy will slow down to
a pace that is acceptable to the Fed and its battle against inflation.
Consumers in the United States are still buying goods and services at a
record rate, pushing up retail sales in July and causing some
uncertainty about inflation. However, many analysts are convinced that
the Fed will not raise interest rates again because several other
indicators, such as slower job growth, a drop in the rate of housing
construction, and strong productivity, suggest that the economy has
cooled.
The bond market, by virtue of its positive performance in recent months,
seems comfortable with the economy's pace and direction. Bond investors
have waited a long time for a shift in sentiment and if the equity
markets remain unsteady and economic growth without inflation becomes an
accepted reality, municipal bondholders should benefit from the
subsequent decline in interest rates.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 7/31/00, there is no guarantee the fund will
continue to hold these securities in the future. Shares of the fund are
not insured and their price will fluctuate with market conditions.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Tax-Free Insured Fund is designed for investors seeking high current
income free from federal income tax through investments primarily in
insured and AAA/Aaa-rated tax-exempt securities.
TOTAL RETURN FOR PERIODS ENDED 7/31/00
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 3.86% -1.05% 3.44% -1.49% 3.11% 2.12% 3.55% 0.16%
------------------------------------------------------------------------------
5 years 28.05 21.98 26.73 24.78 22.96 22.96 26.42 22.31
Annual average 5.07 4.05 4.85 4.53 4.22 4.22 4.80 4.11
------------------------------------------------------------------------------
10 years 79.14 70.64 75.26 75.26 68.88 68.88 74.74 69.04
Annual average 6.00 5.49 5.77 5.77 5.38 5.38 5.74 5.39
------------------------------------------------------------------------------
Life of fund 183.85 170.29 177.71 177.71 165.49 165.49 176.86 167.89
Annual average 7.26 6.91 7.10 7.10 6.78 6.78 7.08 6.84
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/00
Lehman Brothers Municipal Consumer
Bond Index price index
------------------------------------------------------------------------------
1 year 4.31% 3.60%
------------------------------------------------------------------------------
5 years 33.70 13.10
Annual average 5.98 2.49
------------------------------------------------------------------------------
10 years 97.83 32.44
Annual average 7.06 2.85
------------------------------------------------------------------------------
Life of fund 226.37 59.91
Annual average 8.25 3.20
------------------------------------------------------------------------------
Past performance is not indicative of future results. More recent
returns may be worth more or less than those shown. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-,
10-year, and life of fund 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. For class C shares, returns for periods
prior to their inception are derived from the historical performance of
class B shares, adjusted to reflect both the CDSC currently applicable
to class C shares, which is 1% for the first year and is eliminated
thereafter, and the higher operating expenses applicable to class C
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 7/31/90
Lehman Brothers
Fund's class B Municipal Bond Consumer price
Date shares Index index
7/31/90 10,000 10,000 10,000
7/31/91 10,677 10,874 10,445
7/31/92 12,134 12,367 10,775
7/31/93 12,984 13,461 11,074
7/31/94 12,984 13,716 11,380
7/31/95 13,832 14,797 11,710
7/31/96 14,584 15,773 12,055
7/31/97 16,007 17,393 12,316
7/31/98 16,777 18,434 12,523
7/31/99 16,943 18,965 12,784
7/31/00 $17,526 $19,783 $13,244
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class A and M
shares would have been valued at $17,914 and $17,474, respectively
($17,064 and $16,904 at public offering price). A $10,000 investment in
the fund's class C shares would have been valued at $16,888 and no
contingent deferred sales charge would apply.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/00
Class A Class B Class C Class M
----------------------------------------------------------------------------
Distributions (number) 12 12 12 12
----------------------------------------------------------------------------
Income $0.73412 $0.67766 $0.62134 $0.693241
----------------------------------------------------------------------------
Capital gains1 -- -- -- --
----------------------------------------------------------------------------
Total $0.73412 $0.67766 $0.62134 $0.693241
----------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
----------------------------------------------------------------------------
7/31/99 $14.72 $15.45 $14.74 $14.72 $14.76 $15.26
----------------------------------------------------------------------------
7/31//00 14.52 15.24 14.54 14.53 14.56 15.05
----------------------------------------------------------------------------
Current return (end of period)
----------------------------------------------------------------------------
Current dividend rate2 4.90% 4.67% 4.50% 4.10% 4.60% 4.45%
----------------------------------------------------------------------------
Taxable equivalent3 8.11 7.73 7.45 6.79 7.62 7.37
----------------------------------------------------------------------------
Current 30-day
SEC yield4 4.63 4.41 4.24 3.87 4.34 4.20
----------------------------------------------------------------------------
Taxable equivalent3 7.67 7.30 7.02 6.41 7.19 6.95
----------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases,
state tax purposes. For some investors, investment income may also be
subject to the federal alternative minimum tax. Investment income may be
subject to state and local taxes.
2 Most recent distribution, annualized and divided by NAV or POP at end
of period.
3 Assumes maximum 39.6% federal rate. Results for investors subject to
lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/00 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (7/26/99) (6/1/95)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 2.80% -2.11% 2.39% -2.49% 1.78% 0.81% 2.50% -0.86%
------------------------------------------------------------------------------
5 years 27.31 21.27 25.87 23.93 22.10 22.10 25.60 21.49
Annual average 4.95 3.93 4.71 4.38 4.07 4.07 4.66 3.97
------------------------------------------------------------------------------
10 years 79.62 71.12 75.79 75.79 69.25 69.25 75.24 69.58
Annual average 6.03 5.52 5.80 5.80 5.40 5.40 5.77 5.42
------------------------------------------------------------------------------
Life of fund 180.15 166.77 174.19 174.19 162.02 162.02 173.33 164.47
Annual average 7.20 6.85 7.05 7.05 6.72 6.72 7.03 6.79
------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable or reinvested distributions. 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 C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
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 or C shares and assumes redemption at the
end of the period. Your fund's class B 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. The CDSC for class C shares is 1% for one
year after purchase.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index assumes reinvestment of all
distributions and interest payments and does not take into account
brokerage fees or taxes. Securities in the fund do not match those in
the index and performance of the fund will differ. It is not possible to
invest directly in an index.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended July 31, 2000
To the Trustees of Putnam Tax-Free Income Trust and
Shareholders of Putnam Tax-Free Insured Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio (except for bond ratings), and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Putnam Tax-Free Insured Fund (the "fund") at July
31, 2000, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United
States. 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 auditing standards
generally accepted in the United States, 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,
2000 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 8, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
July 31, 2000
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
BIGI -- Bond Investor Guaranty Insurance
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FRB -- Floating Rate Bonds
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (99.1%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C>
Alabama (2.3%)
-------------------------------------------------------------------------------------------------------------------
$ 3,000,000 AL A&M U. Rev. Bonds, MBIA, 6 1/2s, 11/1/25 Aaa $ 3,303,750
Jefferson Cnty., Swr. Rev. Bonds
3,750,000 (Rites-PA), Ser. 487 R, FGIC, FRB, 5.899s,
2/1/38 (acquired 3/23/99, cost $4,290,150) (RES) AAA 3,646,875
5,000,000 Ser. A, FGIC, 5s, 2/1/33 Aaa 4,450,000
----------------
11,400,625
Alaska (1.2%)
-------------------------------------------------------------------------------------------------------------------
6,000,000 AK Hsg. Fin. Corp. Rev. Bonds, Ser. A, MBIA,
5.9s, 12/1/19 Aaa 6,045,000
Arizona (2.1%)
-------------------------------------------------------------------------------------------------------------------
AZ State Muni. Fin. Program COP
1,000,000 Ser. 31, BIGI, 7 1/4s, 8/1/09 Aaa 1,175,000
5,700,000 Ser. 34, BIGI, 7 1/4s, 8/1/09 Aaa 6,697,500
2,395,000 Phoenix Indl. Dev. Auth. Rev. Bonds, (Mission Place
Project A-1), GNMA Coll., 7 1/2s, 7/20/35 AAA 2,682,400
----------------
10,554,900
Arkansas (0.8%)
-------------------------------------------------------------------------------------------------------------------
4,000,000 AR State Hosp. Equip. Fin. Auth. VRDN
(Baptist Hlth.), MBIA, 4.28s, 11/1/10 VMIG1 4,000,000
California (7.7%)
-------------------------------------------------------------------------------------------------------------------
1,300,000 Beverly Hills, Pub. Fin. Auth. IFB, MBIA, 8.27s, 6/1/15 Aaa 1,340,625
9,500,000 CA State G.O. Bonds, MBIA, 5 1/2s, 4/1/12 Aaa 10,093,750
3,000,000 CA Statewide Cmnty. Dev. Auth. Stepped-coupon,
COP, (Motion Picture & TV Fund), AMBAC,
5.68s (5.35s, 1/25/04), 1/1/24 (STP) Aaa 3,018,750
2,000,000 East Bay, Muni. Util. Dist. Wtr. Syst. Rev. Bonds,
MBIA, 4 3/4s, 6/1/34 Aaa 1,730,000
2,000,000 Los Angeles Cnty. Trans. Comm. Sales Tax Rev.
Bonds, Ser. B, AMBAC, 6 1/2s, 7/1/13 Aaa 2,077,840
4,490,000 Los Angeles Cnty., Pub. Wks. Fin. Auth. Lease Rev.
Bonds (Multiple Cap. Fac.), Ser. B, AMBAC,
5 1/8s, 12/1/17 Aaa 4,372,138
3,500,000 San Diego Cnty., Wtr. Auth. IF COP, FGIC,
7.08s, 4/23/08 Aaa 3,968,125
3,830,000 San Diego, Regl. Bldg. Auth. Lease COP, MBIA,
6.9s, 5/1/23 Aaa 4,165,125
1,200,000 San Jacinto, U. School Dist. COP, VRDN, FSA,
4.1s, 9/1/27 VMIG1 1,200,000
3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds
(Police Admin. & Hldg. Fac.), Ser. A, MBIA,
6 1/4s, 7/1/17 Aaa 4,094,000
2,500,000 Southern CA Pub. Pwr. Auth. Rev. Bonds IFB,
FGIC, 5.82s, 7/1/12 Aaa 2,534,375
----------------
38,594,728
Colorado (5.3%)
-------------------------------------------------------------------------------------------------------------------
4,224,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider
Pooled Loan Program), Ser. A, FSA, 7 1/4s,
7/15/17 Aaa 4,396,762
Denver, City & Cnty. Arpt. Rev. Bonds, Ser. C, MBIA
1,180,000 6 3/4s, 11/15/22 Aaa 1,243,425
1,765,000 6 3/4s, 11/15/13 Aaa 1,859,869
235,000 6 3/4s, 11/15/13, Prerefunded Aaa 249,981
5,055,000 5.6s, 11/15/09 Aaa 5,231,925
6,000,000 Jefferson Cnty., School Dist. G.O. Bonds, MBIA,
6 1/2s, 12/15/10 Aaa 6,765,000
10,500,000 Metropolitan Football Stadium Sales Tax Rev.
Bonds, Ser. A, MBIA, zero %, 1/1/09 AAA 6,851,250
----------------
26,598,212
Connecticut (0.6%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 CT G.O. State Hlth. & Edl. Fac. Auth., IFB
(Yale U.), 7.24s, 6/10/30 Aaa 3,022,500
Delaware (1.0%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 DE State Econ. Dev. Auth. Poll. Control Rev. Bonds
(Delmarva Pwr.), Ser. B, FGIC, 7.15s, 7/1/18 Aaa 5,205,400
District of Columbia (3.3%)
-------------------------------------------------------------------------------------------------------------------
8,440,000 DC G.O. Bonds, Ser. B, MBIA, 6s, 6/1/11 Aaa 9,020,250
9,000,000 DC Convention Ctr. Auth. Rev. Bonds, AMBAC,
4 3/4s, 10/1/28 Aaa 7,683,750
----------------
16,704,000
Florida (8.0%)
-------------------------------------------------------------------------------------------------------------------
3,600,000 Broward Cnty., Port Fac. Rev. Bonds, Ser. C, MBIA,
5 3/8s, 9/1/11 Aaa 3,667,500
1,920,000 FL Hsg. Fin. Agcy. Home Ownership Rev. Bonds,
Ser. 1987 G2, Class B, GNMA Coll., 8.595s,
11/1/18 AAA 2,121,600
13,675,000 Hernando Cnty. Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 Aaa 17,093,750
5,500,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA,
8.29s, 10/29/21 Aaa 5,974,375
5,000,000 Orlando & Orange Cnty., Expressway Auth. Rev.
Bonds, FGIC, 8 1/4s, 7/1/14 Aaa 6,500,000
4,000,000 Sumter Cnty., School Dist. Rev. Bonds (Multi Dist.
Loan Program), FSA, 7.15s, 11/1/15 Aaa 4,815,000
----------------
40,172,225
Georgia (4.4%)
-------------------------------------------------------------------------------------------------------------------
GA Muni. Elec. Pwr. Auth. Rev. Bonds
3,815,000 Ser. V, MBIA, 6 1/2s, 1/1/12 Aaa 4,263,263
1,315,000 Ser. V, MBIA, 6 1/2s, 1/1/12, Prerefunded Aaa 1,482,663
7,500,000 Ser. Y, AMBAC, 6.4s, 1/1/13 Aaa 8,325,000
7,500,000 Ser. B, AMBAC, 6 1/4s, 1/1/12 Aaa 8,221,875
----------------
22,292,801
Illinois (2.6%)
-------------------------------------------------------------------------------------------------------------------
960,000 Chicago, Res. Recvy. Mtge. Rev. Bonds, Ser. B, MBIA,
zero %, 10/1/09 Aaa 507,600
10,000,000 Chicago, Board of Ed. G.O. Bonds, Class B, FGIC,
zero %, 12/1/09 Aaa 6,212,500
5,000,000 Regional Trans. Auth. Rev. Bonds, Ser. A, AMBAC,
8s, 6/1/17 Aaa 6,375,000
----------------
13,095,100
Indiana (2.8%)
-------------------------------------------------------------------------------------------------------------------
6,250,000 Fort Wayne, Hosp. Auth. Rev. Bonds (Parkview Hlth.
Syst., Inc.), MBIA, 4 3/4s, 11/15/28 Aaa 5,179,688
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds
(Columbus Regl. Hosp.), FSA, 7s, 8/15/15 Aaa 8,690,625
----------------
13,870,313
Louisiana (0.2%)
-------------------------------------------------------------------------------------------------------------------
726,038 East Baton Rouge, Mtge. Fin. Auth. Single Fam. Mtge.
Rev. Bonds (Mortgage-Backed Securities
Program), Ser. B, GNMA Coll., 8 1/4s, 2/25/11 Aaa 754,172
Massachusetts (5.6%)
-------------------------------------------------------------------------------------------------------------------
MA State Hlth. & Edl. Facs. Auth. Rev. Bonds
(Harvard Pilgrim Hlth.), Ser. A, FSA
4,500,000 5s, 7/1/14 AAA 4,044,375
1,000,000 4 1/8s, 7/1/02 AAA 976,250
12,105,000 MA State Indl. Fin. Agcy. Rev. Bonds (Tufts U.),
Ser. H, MBIA, 4 3/4s, 2/15/28 Aaa 10,364,906
14,300,000 MA State Tpk. Auth. Hwy. Syst. Rev. Bonds, Ser. A,
MBIA, 5s, 1/1/37 Aaa 12,584,000
----------------
27,969,531
Michigan (3.0%)
-------------------------------------------------------------------------------------------------------------------
2,500,000 Grand Traverse Cnty., Hosp. Rev. Bonds (Munson
Healthcare), Ser. A, AMBAC, 5s, 7/1/28 Aaa 2,193,750
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Mercy
Hlth. Svcs.), Ser. X, MBIA 6s, 8/15/34 AAA 5,037,500
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
4,000,000 AMBAC, 7s, 5/1/21 Aaa 4,685,000
2,750,000 Ser. AA, FGIC, 6.95s, 5/1/11 Aaa 3,200,313
----------------
15,116,563
Missouri (1.6%)
-------------------------------------------------------------------------------------------------------------------
2,500,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac. Rev.
Bonds (Heartland Hlth. Sys. Project), AMBAC,
6.35s, 11/15/17 Aaa 2,581,250
5,000,000 Sikeston Elec. Rev. Bonds, MBIA, 6s, 6/1/14 Aaa 5,406,250
----------------
7,987,500
Nebraska (1.1%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA,
8.778s, 11/15/16 Aaa 3,247,500
2,200,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB,
Ser. 2, GNMA Coll., 4.4s, 9/10/30 Aaa 2,293,588
----------------
5,541,088
Nevada (3.5%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Clark Cnty., Passenger Fac. Rev. Bonds (Las Vegas
McCarran Intl.), MBIA, 4 3/4s, 7/1/22 Aaa 4,412,500
5,800,000 Clark Cnty., School Dist. G.O. Bonds, Ser. A, MBIA,
7s, 6/1/10 (SEG) Aaa 6,684,500
7,350,000 Nevada State G.O. Bonds, MBIA, 4 3/4s, 5/15/26 AAA 6,293,438
----------------
17,390,438
New Hampshire (0.6%)
-------------------------------------------------------------------------------------------------------------------
2,500,000 NH State Tpk. Sys. IFB, FGIC, 8.917s, 11/1/17 Aaa 2,940,625
New Jersey (3.5%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 Middlesex Cnty., Utils. Auth. Swr., Ser. A, MBIA,
6 1/4s, 8/15/10 Aaa 3,266,250
8,000,000 NJ State Tpk. Auth. FRB, 7.054s, 1/1/11
(acquired 4/10/00, cost $9,226,080) (RES) AAA 9,350,000
5,000,000 NJ State Trans. Fund Auth. Rev. Bonds, Ser. A,
AMBAC, 5 1/4s, 6/15/09 Aaa 5,118,750
----------------
17,735,000
New Mexico (0.1%)
-------------------------------------------------------------------------------------------------------------------
375,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds,
Ser. C, FGIC, 8 1/2s, 7/1/07 Aaa 376,793
New York (15.2%)
-------------------------------------------------------------------------------------------------------------------
4,670,000 Long Island Pwr. Auth. FRB, Ser. 66, MBIA, 5.94s,
4/1/10 (acquired 11/3/98, cost $5,283,264) (RES) Aaa 4,845,125
4,000,000 Long Island, Pwr. Auth. NY Elec. Syst. Rev. Bonds,
Ser. A, FSA, 5 1/2s, 12/1/13 Aaa 4,115,000
Metropolitan Trans. Auth. Commuter Fac.
Rev. Bonds, MBIA
4,500,000 5.7s, 7/1/17 Aaa 4,567,500
7,425,000 Ser. A, 5.7s, 7/1/17 Aaa 7,536,375
4,165,000 Nassau Cnty. G.O. Bonds, Ser. F, FSA, 7s, 3/1/13 Aaa 4,659,594
Nassau Cnty., Hlth. Care Syst. Rev. Bonds (Nassau
Hlth. Care Corp.) FSA
4,610,000 6s, 8/1/13 Aaa 4,886,600
2,285,000 6s, 8/1/12 Aaa 2,444,950
5,000,000 NY City G.O. Bonds, Ser. H, MBIA, 5s, 8/1/22 AAA 4,562,500
NY City, Muni. Wtr. & Swr. Syst. Fin. Auth. Rev. Bonds
7,265,000 Ser. B, FGIC, 7 1/2s, 6/15/11 Aaa 8,699,838
2,735,000 Ser. B, FGIC, 7 1/2s, 6/15/11, Prerefunded Aaa 3,271,744
7,000,000 Ser. D, MBIA, 4 3/4s, 6/15/25 Aaa 6,028,750
5,000,000 NY State Dorm. Auth. Rev. Bonds (State U.
Edl. Facs.), Ser. A, MBIA, 4 3/4s, 5/15/25 Aaa 4,312,500
3,000,000 NY State Energy Res. & Dev. Auth. IFB, MBIA,
6.93s, 7/8/26 Aaa 2,861,250
9,750,000 NY State Energy Res. & Dev. Auth. Poll. Control
Rev. Bonds (Niagra Mohawk Pwr. Corp.), Ser. A,
FGIC, 7.2s, 7/1/29 Aaa 10,688,438
3,000,000 NY State Hwy. & Brdge Auth. Rev. Bonds, Ser. B-1,
FGIC, 5 1/2s, 4/1/09 AAA 3,135,000
----------------
76,615,164
North Carolina (0.8%)
-------------------------------------------------------------------------------------------------------------------
4,000,000 NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds
(No. 1, Catawba Elec.), MBIA, 5.6s, 1/1/20 Aaa 3,860,000
Ohio (--%)
-------------------------------------------------------------------------------------------------------------------
545,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds,
Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 131,481
Oregon (2.4%)
-------------------------------------------------------------------------------------------------------------------
12,295,000 Portland, Swr. Syst. Rev. Bonds, Ser. A, FGIC, 5s, 6/1/12 Aaa 12,172,050
Pennsylvania (3.1%)
-------------------------------------------------------------------------------------------------------------------
3,730,000 Allegheny Cnty., Port. Auth. Rev. Bonds, MBIA,
5 1/2s, 6/1/09 AAA 3,897,850
2,000,000 Keystone Oaks, School Dist IFB, AMBAC,
7.116s, 9/1/16 Aaa 2,165,000
4,590,000 Philadelphia Wtr. & Waste Wtr. Rev. Bonds, MBIA,
5s, 6/15/17 Aaa 4,337,550
3,000,000 Philadelphia, Regl. Port Auth. Lease IFB
(Kidder Peabody), MBIA, 7.363s, 9/1/13 Aaa 3,221,250
2,000,000 Schuylkill Cnty., Redev. Auth. Lease Rev. Bonds,
Ser. A, FGIC, 7 1/8s, 6/1/13 Aaa 2,080,060
----------------
15,701,710
South Carolina (1.2%)
-------------------------------------------------------------------------------------------------------------------
Piedmont, Muni. Pwr. Agcy. Rev. Bonds, Ser. A, MBIA
1,500,000 5 1/2s, 1/1/13 Aaa 1,539,375
1,100,000 5 1/4s, 1/1/12 Aaa 1,109,625
3,500,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. IFB (St. Francis
Hosp.-Franciscan Sisters), AMBAC, 6.07s, 8/1/15 Aaa 3,456,250
----------------
6,105,250
Tennessee (3.2%)
-------------------------------------------------------------------------------------------------------------------
6,895,000 Johnson, Hlth. & Edl. Rev. Bonds (Johnson
City Med. Ctr.), MBIA, 5 1/2s, 7/1/12 AAA 7,136,325
4,840,000 Knox Cnty., Hlth., Ed. & Hsg. Fac. Rev. Bonds
(Fort Sanders Alliance), MBIA, 5 3/4s, 1/1/14 Aaa 5,027,550
4,000,000 TN Energy Acquisition Corp. Gas Rev. Bonds,
Ser. B, AMBAC, 4.05s, 9/1/00 AAA 3,996,000
----------------
16,159,875
Texas (4.8%)
-------------------------------------------------------------------------------------------------------------------
5,680,000 Austin, Arpt. Syst. Rev. Bonds, Ser. A., MBIA,
6.1s, 11/15/11 Aaa 5,985,300
3,490,000 Brownsville, Util. Syst. Rev. Bonds, AMBAC,
6 1/4s, 9/1/11 Aaa 3,821,550
8,815,000 Houston, Wtr. & Swr. Syst. Rev. Bonds, Ser. C,
AMBAC, 6 3/8s, 12/1/17 Aaa 9,068,431
5,000,000 Rio Grande Valley Hlth Fac. Dev. Corp. Rev. Bonds,
MBIA, 6.4s, 8/1/12 Aaa 5,218,750
----------------
24,094,031
Utah (2.6%)
-------------------------------------------------------------------------------------------------------------------
12,400,000 Utah Pwr. Supply Rev. Bonds (Intermountain
Pwr. Agcy.), Ser. A, MBIA, 6.15s, 7/1/14 AAA 13,035,500
Virginia (2.1%)
-------------------------------------------------------------------------------------------------------------------
10,000,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 8.76s, 8/15/23 Aaa 10,786,200
Washington (2.4%)
-------------------------------------------------------------------------------------------------------------------
WA State Pub. Pwr. Supply Syst. Rev. Bonds
6,000,000 (Nuclear No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 7,072,500
5,000,000 (Nuclear No. 1), Ser. A, AMBAC, 5.7s, 7/1/09 Aaa 5,206,245
----------------
12,278,745
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $483,363,244) (b) $ 498,307,520
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $502,959,444.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at July 31, 2000 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, 2000. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the Report
of independent accountants.
(b) The aggregate identified cost on a tax basis is $483,493,718,
resulting in gross unrealized appreciation and depreciation of
$22,598,992 and $7,785,190, respectively, or net unrealized appreciation
of $14,813,802.
(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 income at this rate.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at July 31, 2000 was
$17,842,000 or 3.5% of net assets.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at July 31,
2000.
The rates shown on IFB and IF COP, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, FRB's and VRDN's are the current interest rates at July 31, 2000.
The fund had the following industry group concentrations greater
than 10% at July 31, 2000 (as a percentage of net assets):
Utilities 18.7%
Health care 16.7
Transportation 14.5
Water and sewer 10.8
The fund had the following insurance concentrations greater than
10% at July 31, 2000 (as a percentage of net assets):
MBIA 47.8%
FGIC 21.3
AMBAC 16.4
------------------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
------------------------------------------------------------------------------
Municipal Bond Index
(Short) $24,460,938 $23,535,495 Sep-00 $(925,443)
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $483,363,244) (Note 1) $498,307,520
-------------------------------------------------------------------------------------------
Cash 2,397,913
-------------------------------------------------------------------------------------------
Interest and other receivables 5,130,866
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 145,597
-------------------------------------------------------------------------------------------
Receivable for securities sold 20,000
-------------------------------------------------------------------------------------------
Total assets 506,001,896
Liabilities
-------------------------------------------------------------------------------------------
Payable for variation margin 7,813
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 834,635
-------------------------------------------------------------------------------------------
Payable for securities purchased 1,203,295
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 522,784
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 213,471
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 19,196
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 17,347
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 723
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 169,646
-------------------------------------------------------------------------------------------
Other accrued expenses 53,542
-------------------------------------------------------------------------------------------
Total liabilities 3,042,452
-------------------------------------------------------------------------------------------
Net assets $502,959,444
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $499,281,079
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (153,287)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (10,187,181)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 14,018,833
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $502,959,444
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($260,636,718 divided by 17,945,616 shares) $14.52
-------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $14.52)* $15.24
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($238,507,607 divided by 16,399,728 shares)+ $14.54
-------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($1,122,775 divided by 77,282 shares)+ $14.53
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,692,344 divided by 184,883 shares) $14.56
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $14.56)** $15.05
-------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000
or more and on group sales, the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales, the offering price is reduced.
+ Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended July 31, 2000
<S> <C>
Tax exempt interest income: $30,971,050
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,573,397
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 463,731
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 19,067
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 9,048
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 483,514
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,676,355
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 11,975
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 9,989
-------------------------------------------------------------------------------------------
Other 137,546
-------------------------------------------------------------------------------------------
Total expenses 5,384,622
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (205,225)
-------------------------------------------------------------------------------------------
Net expenses 5,179,397
-------------------------------------------------------------------------------------------
Net investment income 25,791,653
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (4,984,843)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 1,816,025
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (6,067,693)
-------------------------------------------------------------------------------------------
Net loss on investments (9,236,511)
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $16,555,142
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended July 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 25,791,653 $ 27,704,250
--------------------------------------------------------------------------------------------------
Net realized loss on investments (3,168,818) (708,489)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (6,067,693) (21,829,346)
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 16,555,142 5,166,415
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (12,408,735) (11,291,598)
--------------------------------------------------------------------------------------------------
Class B (13,201,082) (16,324,557)
--------------------------------------------------------------------------------------------------
Class C (51,758) (1)
--------------------------------------------------------------------------------------------------
Class M (96,809) (91,950)
--------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (1,869,573)
--------------------------------------------------------------------------------------------------
Class B -- (2,780,386)
--------------------------------------------------------------------------------------------------
Class M -- (18,696)
--------------------------------------------------------------------------------------------------
Increase (decrease) from
capital share transactions (Note 4) (61,470,408) 32,439,522
--------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (70,673,650) 5,229,176
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 573,633,094 568,403,918
--------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income of $153,287 and
$356,689, respectively) $502,959,444 $573,633,094
--------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.72 $15.40 $15.50 $14.94 $14.86
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .73 .72 .74(c) .79 .81
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.20) (.56) (.04) .67 .08
------------------------------------------------------------------------------------------------
Total from
investment operations .53 .16 .70 1.46 .89
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.73) (.72) (.73) (.80) (.81)
------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.12) (.07) (.10) --
------------------------------------------------------------------------------------------------
Total distributions (.73) (.84) (.80) (.90) (.81)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.52 $14.72 $15.40 $15.50 $14.94
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.86 .96 4.63 10.09 6.06
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $260,637 $243,845 $230,283 $219,265 $196,948
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .81 .94 .94 .92 .90
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.15 4.65 4.80 5.22 5.37
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 22.45 35.60 40.38 36.13 54.58
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.74 $15.42 $15.52 $14.96 $14.87
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .68 .72 .77(c) .74 .71
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.20) (.56) (.04) .68 .09
------------------------------------------------------------------------------------------------
Total from
investment operations .48 .16 .73 1.42 .80
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.68) (.72) (.76) (.76) (.71)
------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.12) (.07) (.10) --
------------------------------------------------------------------------------------------------
Total distributions (.68) (.84) (.83) (.86) (.71)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.54 $14.74 $15.42 $15.52 $14.96
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.44 1.00 4.83 9.76 5.44
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $238,508 $327,920 $336,286 $339,354 $354,431
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.21 .90 .74 1.22 1.58
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.75 4.69 5.00 4.93 4.72
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 22.45 35.60 40.38 36.13 54.58
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 26, 1999+
operating performance July 31 to July 31
------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $14.72 $14.83
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .62 .01
------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.19) (.11)
------------------------------------------------------------------------------------------------
Total from
investment operations .43 (.10)
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.62) (.01)
------------------------------------------------------------------------------------------------
From net realized gain
on investments -- --
------------------------------------------------------------------------------------------------
Total distributions (.62) (.01)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.53 $14.72
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.11 (0.66)*
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,123 $1
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.61 .03*
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.33 .08*
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 22.45 35.60
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.76 $15.39 $15.50 $14.94 $14.86
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .69 .66 .69(c) .74 .76
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.20) (.51) (.04) .67 .08
------------------------------------------------------------------------------------------------
Total from
investment operations .49 .15 .65 1.41 .84
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.69) (.66) (.69) (.75) (.76)
------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.12) (.07) (.10) --
------------------------------------------------------------------------------------------------
Total distributions (.69) (.78) (.76) (.85) (.76)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.56 $14.76 $15.39 $15.50 $14.94
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.55 .91 4.24 9.76 5.74
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,692 $1,866 $1,835 $892 $325
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.11 1.24 1.24 1.22 1.19
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.82 4.35 4.50 4.87 4.99
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 22.45 35.60 40.38 36.13 54.58
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
July 31, 2000
Note 1
Significant accounting policies
Putnam Tax-Free Insured Fund (the "fund") is a series of Putnam Tax-Free
Income Trust (the "trust") which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The fund pursues its objective of seeking high
current income exempt from federal income tax by investing in tax exempt
securities that are covered by insurance guaranteeing the timely payment
of principal and interest, are rated AAA or Aaa, or are backed by the
U.S. government.
The fund offers class A, class B, class C 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 C shares have a higher ongoing distribution fee than
class B shares and have a one-year 1.00% contingent deferred sales
charge and do not convert to Class A shares. Class M shares are sold
with a maximum front end sales charge of 3.25% and pay an ongoing
distribution fee that is higher than class A shares but lower than class
B and class C 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 of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. 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.
Restricted securities are stated at fair value following procedures
approved by the Trustees. Such valuations and procedures are reviewed
periodically 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). Gains or losses on securities sold are determined
on the identified cost basis.
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, 2000, 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, 2000, the fund had a capital loss carryover of approximately
$4,392,000 available to offset future capital gains, if any. The amount
of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$ 468,000 July 31, 2007
3,924,000 July 31, 2008
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid 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 losses on wash sale transactions, post-October
loss deferrals, dividends payable, unrealized gains and losses on
certain futures contracts, and straddle loss deferrals.
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,
2000, the fund reclassified $170,133 to decrease distributions in excess
of net investment income and $166,951 to decrease paid-in-capital, with
an increase to accumulated net realized losses of $3,182. 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, original issue discount, and stepped-coupon bonds are
accreted according to the yield-to-maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Investment Management, Inc., ("Putnam
Management") the fund's manager, a wholly owned subsidiary of Putnam
Investments, Inc., for management and investment advisory services is
paid quarterly based on the average net assets of the fund. Such fee is
based upon the lesser of (i) an annual rate of 0.50% of the average net
asset value of the fund or (ii) the following annual rates: 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million, 0.45% of the next $500 million and 0.40% of the next $5
billion, 0.375% of the next $5 billion, 0.355% of the next $5 billion,
0.34% of the next $5 billion and 0.33% thereafter.
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, 2000, fund expenses were reduced by $205,225
under expense offset arrangements with PFTC and brokerage service
arrangements. 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 $768
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. 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
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 a 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, class C 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 Retail Management, Inc., 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 Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.20%, 0.60%,
1.00% and 0.50% of the average net assets attributable to class A, class
B, class C and class M shares, respectively.
For the year ended July 31, 2000, Putnam Retail Management, Inc., acting
as underwriter received net commissions of $22,629 and $437 from the
sale of class A and class M shares, respectively, and received $574,692
and $2,646 in contingent deferred sales charges from redemptions of
class B and class C shares, respectively. A deferred sales charge of up
to 1.00% is assessed on certain redemptions of class A shares that were
purchased without an initial sales charge as part of an investment of $1
million or more. For the year ended July 31, 2000, Putnam Retail
Management, Inc., acting as underwriter received $4,973 on class A
redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 2000, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $115,655,761 and $194,157,377, respectively. There were no
purchases or sales of U.S. government obligations.
Note 4
Capital shares
At July 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 4,424,657 $63,056,184
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 526,911 7,493,245
---------------------------------------------------------------------------
4,951,568 70,549,429
Shares
repurchased (3,573,947) (50,652,460)
---------------------------------------------------------------------------
Net increase 1,377,621 $19,896,969
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 3,977,221 $60,892,766
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 502,787 7,716,895
---------------------------------------------------------------------------
4,480,008 68,609,661
Shares
repurchased (2,863,444) (43,724,849)
---------------------------------------------------------------------------
Net increase 1,616,564 $24,884,812
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 1,691,258 $ 24,090,627
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 544,853 7,757,959
---------------------------------------------------------------------------
2,236,111 31,848,586
Shares
repurchased (8,087,340) (115,113,926)
---------------------------------------------------------------------------
Net decrease (5,851,229) $(83,265,340)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 4,994,939 $77,030,641
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 772,327 11,885,935
---------------------------------------------------------------------------
5,767,266 88,916,576
Shares
repurchased (5,322,327) (81,482,473)
---------------------------------------------------------------------------
Net increase 444,939 $ 7,434,103
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 237,262 $3,368,809
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,508 35,573
---------------------------------------------------------------------------
239,770 3,404,382
Shares
repurchased (162,555) (2,336,106)
---------------------------------------------------------------------------
Net increase 77,215 $1,068,276
---------------------------------------------------------------------------
For the period July 26, 1999
(commencement of operations) to
July 31, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 67 $1,000
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
67 1,000
Shares
repurchased -- --
---------------------------------------------------------------------------
Net increase 67 $1,000
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 108,153 $1,535,934
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,021 57,389
---------------------------------------------------------------------------
112,174 1,593,323
Shares
repurchased (53,745) (763,636)
---------------------------------------------------------------------------
Net increase 58,429 $ 829,687
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 52,454 $814,919
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,593 70,350
---------------------------------------------------------------------------
57,047 885,269
Shares
repurchased (49,771) (765,662)
---------------------------------------------------------------------------
Net increase 7,276 $119,607
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
WELCOME TO WWW.PUTNAMINVESTMENTS.COM
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* your current account value, portfolio value and transaction history
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much
more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly. So be sure to bookmark us at
http://www.putnaminvestments.com
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds.
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.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Technology Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Fund
Balanced Retirement Fund
Classic Equity 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
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund
U.S. Government Income Trust
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
ASSET ALLOCATION 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 Growth and Income Fund II
[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 not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Richard P. Wyke
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam Tax-Free
Insured Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
PRST STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN043-63664 035/438/629/849 9/00
Putnam
Tax-Free
High Yield
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-00
[SCALE LOGO OMITTED]
FROM THE TRUSTEES
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
September 20, 2000
REPORT FROM FUND MANAGEMENT
Blake E. Anderson
Compared with the stock market's swinging pendulum of performance during
the past several months, the municipal bond market has offered
tax-conscious investors relative calm. In fact, since mid May, municipal
bond performance has gradually improved. Unfortunately the Federal
Reserve Board's diligent inflation-fighting interest-rate increases have
limited the appreciation potential for all fixed-income investments.
Nonetheless, Putnam Tax-Free High Yield Fund's 2000 fiscal year has
provided numerous opportunities that we have turned to the fund's
advantage.
Total return for 12 months ended 7/31/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
----------------------------------------------------------------------
-0.24% -4.95% -0.82% -5.52% -1.05% -1.99% -0.62% -3.81%
----------------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* BOND MARKET INCHES UPWARD; MUNI PRICES STAY RELATIVELY STRONG
As the period began, municipal bonds were laboring under difficult
market conditions. Later in the year, rising interest rates and a
seasonal surge in demand brought on by January's large number of coupon
payments and bond calls put quite a damper on performance. In April, the
entire fixed-income market enjoyed a brief bump up in price as the stock
market began to sell off and nervous investors flocked to bonds. The
rally was short-lived, however, as inflation concerns and fears of
continued interest-rate increases by the Fed proceeded to push down
prices throughout the fixed-income market. The good news is that
municipal bond prices held up better than Treasuries -- and continue to
offer solid opportunity for investors with tax considerations.
Beginning in June, municipal bond performance began to pick up relative
to U.S. Treasuries, the traditional taxable investment used as a
benchmark for munis. The market began to anticipate the next big
seasonal surge in demand, which typically occurs after the July 1 coupon
payments and bond calls. Consequently municipal bond prices began to
rise again, and your fund's holdings appreciated.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 21.6%
Housing 9.6%
Utilities 8.2%
Transportation 6.2%
Waste management 3.5%
Footnote reads:
*Based on net assets as of 7/31/00. Holdings will vary over time.
In fact, the entire fixed-income market began to strengthen in mid May.
Market participants began to anticipate correctly that the Fed would not
raise short-term interest rates again in June, and that the tightening
cycle was nearing its end. Investors began to ease back into the bond
market, believing that the Fed had inflation under control and that the
economy was beginning to slow.
On balance, munis performed well relative to comparable taxable
investments over the period. They did modestly underperform Treasuries,
however, largely because of the unusual technical factors affecting
Treasury performance rather than difficulties with munis. Federal
government tax surpluses and a program of buying back large numbers of
long-term Treasuries have reduced Treasury supply and created a uniquely
favorable performance situation for these bonds.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa/AAA -- 28.0%
Aa/AA -- 5.6%
A -- 7.0%
Baa/BBB -- 15.7%
Ba/BB -- 20.3%
B -- 19.6%
Other -- 3.8%
Footnote reads:
*As a percentage of market value as of 7/31/00. A bond rated BBB/Baa or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality.
Ratings will vary over time.
* WIDENING SPREADS PROVIDE OPPORTUNITY
Over the past year, we have continued to seek opportunities to add
lower-rated higher-yielding securities to the portfolio in order to
bring the fund more in line with its competitive universe. This process
takes time, however, and in the meantime, the portfolio's quality
remains somewhat higher than that of its competitors. As credit spreads
widened between investment-quality bonds and lower-quality bonds over
the period, the fund's higher-quality portfolio helped protect the share
price.
Widening credit spreads also provide us with additional opportunities to
strengthen the fund's income stream. When weakness in the bond market
persisted during the early part of the period, we took advantage of
falling bond prices to purchase some bonds with higher yields and longer
maturities, simultaneously selling bonds in the intermediate range of
maturities. This strategy slightly extended portfolio duration, which
proved beneficial when the outperformance by longer-term Treasuries
helped lift the performance of longer-term bonds, inluding municipals.
During periods of municipal market strength, we selectively sold some
holdings to capture profits for the fund.
Putnam has an experienced team of credit analysts who enable us to
evaluate even those credits that are unrated by major rating agencies.
This allows us to purchase undervalued securities and securities whose
current ratings may not fully reflect their performance potential. In
recent months, yields on BAA-rated bonds have been about 75 to 100 basis
points more than yields on AAA-rated bonds -- an attractive yield
difference that, in our view, compensates investors for the slightly
higher risk inherent in a BBB-rated bond.
"Against a backdrop of continued economic growth, today's wide spread
between yields on lower quality, high-yield securities and investment
grade issues presents a very attractive opportunity for us to add
holdings with solid fundamentals that will be well-positioned to
appreciate when credit spreads begin to tighten."
-- Blake E. Anderson, portfolio manager
In our search for higher-yielding lower-quality bonds, we discovered
opportunities in the health-care and transportation sectors. In the
health-care sector, hospital bonds have provided some of the best
opportunities recently. In fact, credit spreads have begun to tighten in
this sector and some of the fund's holdings have enjoyed solid price
appreciation. For example, in February, we purchased some Baa2-rated
bonds issued by the Johnson City, Tennessee Health & Educational
Facility Hospital Board (Mountain States Hospital), a well-managed
system that dominates its market. We were able to obtain these bonds at
exceptionally attractive yields. Among transportation issues, airline
bonds have provided the best opportunities as higher fuel prices and
uncertainty surrounding merger talks among United, U.S. Airways, and
American Airlines have led to widening credit spreads and bargain
prices. Nonetheless, airline financial fundamentals remain strong and
the fund's holdings are performing well.
* STAYING FLEXIBLE AMID UNCERTAINTY
Although our efforts to bring the fund's high-yield weighting closer to
that of its benchmark, duration remained relatively neutral as the fund
began fiscal 2001. The market seems to be looking for positive news such
as signs that the economy is slowing gradually. In the meantime, the
economy's strength and wide credit spreads make this a good time to add
attractively priced lower-quality bonds to the portfolio. This strategy
not only can help the fund's income stream but also should position the
fund to capture price appreciation when credit spreads begin to shrink
again.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 7/31/00, there is no guarantee the fund will
continue to hold these securities in the future. The lower credit rating
of high-yield bonds reflects a greater possibility that adverse changes
in the economy or poor performance by the issuers of these bonds may
affect the issuer's ability to pay principal and interest.
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 7/31/00
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year -0.24% -4.95% -0.82% -5.52% -1.05% -1.99% -0.62% -3.81%
------------------------------------------------------------------------------
5 years 25.80 19.78 22.22 20.34 20.69 20.69 24.01 20.02
Annual average 4.70 3.68 4.10 3.77 3.83 3.83 4.40 3.72
------------------------------------------------------------------------------
10 years 83.24 74.57 75.84 75.84 68.83 68.83 78.49 72.64
Annual average 6.24 5.73 5.81 5.81 5.38 5.38 5.96 5.61
------------------------------------------------------------------------------
Life of fund 192.32 178.36 180.50 180.50 159.03 159.03 184.72 175.54
Annual average 7.47 7.12 7.17 7.17 6.60 6.60 7.28 7.04
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/00
Lehman Brothers Municipal Consumer
Bond Index price index
------------------------------------------------------------------------------
1 year 4.31% 3.60%
------------------------------------------------------------------------------
5 years 33.70 13.10
Annual average 5.98 2.49
------------------------------------------------------------------------------
10 years 97.83 32.44
Annual average 7.06 2.85
------------------------------------------------------------------------------
Life of fund 226.37 59.91
Annual average 8.25 3.20
------------------------------------------------------------------------------
Past performance is not indicative of future results. More recent
returns may be worth more or less than those shown. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-,
10-year, and life of fund 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. For class C shares, returns for periods
prior to their inception are derived from the historical performance of
class B shares, adjusted to reflect both the CDSC currently applicable
to class C shares, which is 1% for the first year and is eliminated
thereafter, and the higher operating expenses applicable to class C
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 7/31/90
Lehman Brothers
Fund's class B Municipal Bond Consumer price
Date shares Index index
7/31/90 10,000 10,000 10,000
7/31/91 10,698 10,874 10,445
7/31/92 12,260 12,367 10,775
7/31/93 13,448 13,461 11,074
7/31/94 13,632 13,716 11,380
7/31/95 14,387 14,797 11,710
7/31/96 15,118 15,773 12,055
7/31/97 16,517 17,393 12,316
7/31/98 17,416 18,434 12,523
7/31/99 17,730 18,965 12,784
7/31/00 $17,584 $19,783 $13,244
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class C shares
would have been valued at $16,883 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class A and
class M shares would have been valued at $18,324 and $17,849,
respectively ($17,457 and $17,264 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions (number) 12 12 12 12
------------------------------------------------------------------------------
Income $0.81111 $0.73277 $0.70187 $0.770281
------------------------------------------------------------------------------
Capital gains1 -- -- -- --
------------------------------------------------------------------------------
Total $0.81111 $0.73277 $0.70187 $0.770281
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
7/31/99 $14.13 $14.83 $14.15 $14.13 $14.14 $14.61
------------------------------------------------------------------------------
7/31//00 13.27 13.93 13.29 13.27 13.27 13.72
------------------------------------------------------------------------------
Current return (end of period)
------------------------------------------------------------------------------
Current dividend rate2 6.08% 5.79% 5.47% 5.27% 5.76% 5.57%
------------------------------------------------------------------------------
Taxable equivalent3 10.07 9.59 9.06 8.73 9.54 9.22
------------------------------------------------------------------------------
Current 30-day SEC yield4 5.77 5.49 5.15 4.93 5.45 5.27
------------------------------------------------------------------------------
Taxable equivalent3 9.55 9.09 8.53 8.16 9.02 8.73
------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases,
state tax purposes. For some investors, investment income may also be
subject to the federal alternative minimum tax. Investment income may be
subject to state and local taxes.
2 Most recent distribution, annualized and divided by NAV or POP at end
of period.
3 Assumes maximum 39.6% federal rate. Results for investors subject to
lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/00 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (9/20/93) (9/9/85) (2/1/99) (12/29/94)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year -0.93% -5.65% -1.49% -6.16% -1.68% -2.61% -1.23% -4.46%
------------------------------------------------------------------------------
5 years 25.38 19.39 21.81 19.94 20.28 20.28 23.59 19.61
Annual average 4.63 3.61 4.02 3.70 3.76 3.76 4.33 3.65
------------------------------------------------------------------------------
10 years 83.63 74.87 76.28 76.28 69.21 69.21 78.92 73.12
Annual average 6.27 5.75 5.83 5.83 5.40 5.40 5.99 5.64
------------------------------------------------------------------------------
Life of fund 189.73 175.90 178.16 178.16 156.92 156.92 182.27 173.17
Annual average 7.45 7.09 7.15 7.15 6.58 6.58 7.26 7.02
------------------------------------------------------------------------------
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 C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
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 or C shares and assumes redemption at the
end of the period. Your fund's class B 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. The CDSC for class C shares is 1% for
one year after purchase.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index assumes reinvestment of all
distributions and interest payments and does not take into account
brokerage fees or taxes. Securities in the fund do not match those in
the index and performance of the fund will differ. It is not possible
to invest directly in an index.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended July 31, 2000
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 fund's portfolio (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, 2000, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United
States. 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 auditing standards
generally accepted in the United States, 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,
2000, by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 8, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
July 31, 2000
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
FRB -- Floating Rate Bonds
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
PSFG -- Permanent School Fund Guaranteed
TRAN -- Tax Revenue Anticipation Notes
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (97.5%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C>
Alabama (1.4%)
-------------------------------------------------------------------------------------------------------------------
$ 5,000,000 Anniston, Indl. Dev. Rev. Bonds
(Hoover Group Inc.), 8 1/2s, 9/1/10 B/P $ 5,312,500
3,500,000 Baldwin Cnty., Eastern Shore Hlth. Care
Auth. Rev. Bonds, 5 3/4s, 4/1/27 Baa3 2,734,375
10,000,000 Jackson Cnty., Hlth. Care
Auth. Hosp. Rev. Bonds, 5.7s, 5/1/19 BBB- 8,062,500
1,955,000 Jackson Cnty., Hlth. Care Auth. Hosp.
TRAN, 7 7/8s, 5/1/19 AAA/P 2,155,388
3,750,000 Jefferson Cnty., Swr. Rev. Bond (Rites-PA),
Ser. 487 R, FRB, 5.9s, 2/1/38 (acquired 3/23/99,
cost $4,290,150) (RES) AAA 3,646,875
----------------
21,911,638
Alaska (1.4%)
-------------------------------------------------------------------------------------------------------------------
10,000,000 AK Hsg. Fin. Auth. IFB, 6.5s, 12/1/19
(acquired 3/3/98, cost $11,113,800) (RES) AAA/P 10,150,000
AK State Hsg. Fin. Corp. Rev. Bonds
2,325,000 7.7s, 12/1/35 (acquired 10/22/97,
cost $2,473,800) (RES) AA/P 2,301,750
10,410,000 Ser. A, 5.55s, 6/1/34 (acquired 11/26/97,
cost $10,540,125) (RES) Aaa 9,746,363
----------------
22,198,113
Arizona (0.7%)
-------------------------------------------------------------------------------------------------------------------
6,000,000 Phoenix, Indl. Dev. Auth. Arpt. Fac. Rev. Bonds
(America West Airlines), 6 1/4s, 6/1/19 B1 5,535,000
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 3,566,094
2,300,000 Scottsdale, Indl. Dev. Auth. 1st Mtge. Rev. Bonds
(Westminster Village), Ser. A, 8s, 6/1/11 BB-/P 2,377,625
----------------
11,478,719
Arkansas (1.7%)
-------------------------------------------------------------------------------------------------------------------
7,600,000 AR State Hosp. Dev. Fin. Auth. Rev. Bonds
(WA Regl. Med. Ctr.), 7 3/8s, 2/1/29 Baa3 7,486,000
Northwest Regl. Apt. Auth. Rev. Bonds
15,650,000 7 5/8s, 2/1/27 BB/P 16,315,125
3,000,000 7s, 2/1/10 BB/P 3,056,250
----------------
26,857,375
California (9.1%)
-------------------------------------------------------------------------------------------------------------------
ABAG Fin. Auth. COP
(American Baptist Homes), Ser. A
7,000,000 5.85s, 10/1/27 BBB- 5,862,500
3,000,000 5 3/4s, 10/1/17 BBB- 2,595,000
5,000,000 CA Poll. Control Fin. Auth. Rev. Bonds
(Laidlaw Environmental), Ser. A, 6.7s, 7/1/07
(In default) (NON) D/P 500,000
2,630,000 Colton, Comnty. Fac. Dist. Special Tax Bonds
(Mt. Vernon Corridor), 7 1/2s, 9/1/20 B/P 2,662,875
8,000,000 Corona, COP (Vista Hosp. Syst.),
Ser. B, 9 1/2s, 7/1/20 (acquired from 10/23/92
to 5/29/97, cost $8,225,000) (In default) (NON) (RES) B-/P 3,800,000
Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds
5,700,000 (Air Canada), 8 3/4s, 10/1/14 Ba3 6,220,125
5,070,000 (United Airlines, Inc.), 6 7/8s, 11/15/12 Baa3 5,234,775
5,000,000 Los Angeles, Wastewater Syst. IFB, FGIC, 6s,
11/1/06 (acquired 11/8/93, cost $5,417,200) (RES) Aaa 5,506,250
Redondo Beach, Redev. Agcy. Multi-Fam. Hsg.
Rev. Bonds (Heritage Point)
3,060,000 Ser. B, 8 1/2s, 9/1/23 B+/P 3,102,075
5,010,000 Ser. A, 6 1/2s, 9/1/23 BBB-/P 4,690,613
5,000,000 San Bernardino Cnty., COP (Med. Ctr. Fin.),
Ser. A, MBIA, 6 1/2s, 8/1/17 Aaa 5,643,750
21,000,000 San Bernardino Cnty., IF COP
(PA-100-Med. Ctr. Fin.), MBIA, 8.15s, 8/1/28
(acquired 6/27/95, cost $22,664,040) (RES) AAA/P 25,541,250
7,660,000 San Diego, Regl. Bldg. Auth. Lease COP, MBIA,
5.7s, 5/1/23 Aaa 8,330,250
10,000,000 San Joaquin Hills, Trans. Corridor Agcy. Toll Road
Rev. Bonds, Ser. A, MBIA, zero %, 1/15/32 Aaa 1,587,500
10,000,000 San Luis Obispo, COP (Vista Hosp. Sys. Inc.),
8 3/8s, 7/1/29 (acquired 7/28/97,
cost $10,000,000) (In default) (NON) (RES) B-/P 4,750,000
10,000,000 Santa Clara Cnty., Hsg. Auth. Rev. Bonds
(Blossom River Apts), Ser. A, 6 1/2s, 9/1/39 B+/P 9,087,500
9,650,000 Southern CA Pub. Pwr. Auth. IFB (Transmission),
7.18s, 7/1/12 Aa3 10,253,125
19,100,000 Vallejo, COP (Marine World Foundation),
7.2s, 2/1/26 BB+ 20,413,125
10,315,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BB+ 10,057,125
Valley Hlth. Syst. Hosp. Rev. Bonds
1,500,000 6 1/2s, 5/15/25 BBB- 1,387,500
3,000,000 Ser. A, 6 1/2s, 5/15/15 BBB- 2,786,250
4,000,000 Ventura, Port. Dist. COP, 6 3/8s, 8/1/28 B/P 3,800,000
----------------
143,811,588
Colorado (4.5%)
-------------------------------------------------------------------------------------------------------------------
13,000,000 Arapahoe Cnty., Cap. Impt. Trust Fund Hwy.
Rev. Bonds, Ser. E-470, 7s, 8/31/26 (SEG) Aaa 14,690,000
CO Edl. Fac. Auth. Rev. Bonds (Ocean Journey, Inc.)
11,000,000 8 3/8s, 12/1/26 B+/P 12,196,250
5,000,000 8.3s, 12/1/17 B+/P 5,537,500
Denver, City & Cnty. Arpt. Rev. Bonds, Ser. A
17,925,000 8 3/4s, 11/15/23 A2 19,022,906
6,475,000 8 3/4s, 11/15/23, Prerefunded Aaa 6,928,250
3,915,000 7 1/4s, 11/15/25 A2 4,223,306
6,350,000 Douglas Cnty., School Distr. G.O. Bonds
(North Regl. 1, Douglas & Elebert Cntys.),
MBIA, 7s, 12/15/12 Aaa 7,477,125
----------------
70,075,337
Connecticut (1.8%)
-------------------------------------------------------------------------------------------------------------------
6,185,000 CT State Dev. Auth. Hlth. Care Rev. Bonds
(Alzheimers Resource Ctr.), Ser. A, 10s, 8/15/21 AAA/P 6,706,396
6,000,000 CT State Dev. Auth. Poll. Control Rev. Bonds
(Western MA), Ser. A, 5.85s, 9/1/28 Ba1 5,332,500
CT State Dev. Auth. Rev. Bonds (East Hills Woods)
4,944,567 Ser. A, 7 3/4s, 11/1/17 CCC/P 4,481,014
457,428 Ser. B, zero %, 3/1/21 CCC/P 76,619
5,500,000 CT State Hlth. & Edl. Fac. Auth. IFB (Yale U.),
7.24s, 6/10/30 Aaa 5,541,250
6,500,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Edgehill), Ser. A, 6 7/8s, 7/1/27 BB/P 6,548,750
----------------
28,686,529
District of Columbia (3.5%)
-------------------------------------------------------------------------------------------------------------------
DC G.O. Bonds, Ser. A
17,000,000 6 3/8s, 6/1/26 Baa3 18,572,500
10,000,000 6s, 6/1/26 Ba1 9,650,000
DC Rev. Bonds (National Public Radio)
4,400,000 7.7s, 1/1/23 BB+/P 4,653,000
2,500,000 7 5/8s, 1/1/18 BB+/P 2,637,500
18,570,000 DC COP, 7.3s, 1/1/13 BBB- 19,568,138
----------------
55,081,138
Florida (4.1%)
-------------------------------------------------------------------------------------------------------------------
9,260,000 Brevard Cnty., Hlth. Auth. Rev. Bonds
(Courtenay Springs Village), 7 3/4s, 11/15/24 AAA/P 10,533,250
5,180,000 FL State Gen. Svcs. Rev. Bonds, 8 1/4s, 7/1/11
(acquired 9/2/98, cost $6,687,794) (RES) AAA/P 6,105,925
24,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds
(FL Crushed Stone Co.), 8 1/2s, 12/1/14 A-/P 25,950,000
5,970,000 Hillsborough Cnty., Aviation Auth. Special Purpose
Fac. Rev. Bonds (U.S. Airways), 8.6s, 1/15/22 B3 6,201,338
3,835,000 Palm Beach Cnty., Student Hsg. Rev. Bonds
(Palm Beach Cmnty. College), Ser. A, 8s, 3/1/23 B- 3,523,406
2,580,000 Putnam Cnty. Pwr. Rev. Bonds, VRDN 3.5s, 9/1/24 Aa3 2,580,000
Sanford, Arpt. Auth. Indl. Dev. Rev. Bonds
(FL Terminals Inc.), Ser. A
3,125,000 7 3/4s, 5/1/21 BB/P 3,261,719
2,880,000 7 1/2s, 5/1/15 BB/P 2,991,600
4,000,000 St. Johns Cnty., FL Hlth. Care Indl. Dev. Auth.
Rev. Bonds (Genmoor St. Johns Project),
Ser. A, 8s, 1/1/30 B+/P 3,965,000
----------------
65,112,238
Georgia (4.4%)
-------------------------------------------------------------------------------------------------------------------
5,100,000 Cobb Cnty., Dev. Auth. Indl. Dev. Rev. Bonds
(Boise Cascade Corp.), 7s, 9/1/14 Baa3 5,253,000
De Kalb Cnty., Hsg. Auth. Muni. Rev. Bonds
(Briarcliff Park Apts.)
8,000,000 Ser. B, 10s, 4/1/17 AAA 8,960,000
5,900,000 Ser. A, 7 1/2s, 4/1/17 AAA/P 6,305,625
9,500,000 Forsyth Cnty., Dev. Auth. Indl. Rev. Bonds
(Hoover Group Inc.), 8 1/2s, 12/1/05 B 10,307,500
6,000,000 Forsyth Cnty., Hosp. Auth. Rev. Bonds
(GA Baptist Hlth. Care Syst.), 6 3/8s, 10/1/28 B/P 4,972,500
9,200,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds,
Ser. B, FSA, 6 3/8s, 1/1/16 Aaa 10,131,500
400,000 Marietta, Hsg. Auth. Multi-Fam. VRDN
(HSG Wood Pointe Apts.), 4.35s, 10/1/07 A+ 400,000
Rockdale Cnty., Dev. Auth. Solid Waste Disp.
Rev. Bonds (Visay Paper Inc.)
5,875,000 7 1/2s, 1/1/26 BB+/P 6,043,906
13,365,000 7.4s, 1/1/16 BB+/P 13,749,244
3,160,000 Savannah, Econ. Dev. Auth. Poll. Control
Rev. Bonds (Stone Container Corp.),
8 1/8s, 7/1/15 B/P 3,353,550
----------------
69,476,825
Illinois (3.9%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Chicago, Gas Supply Rev. Bonds
(Peoples Gas & Lt.), Ser. A, 6 7/8s, 3/1/15 Aa3 5,250,000
1,980,000 Chicago, O'Hare Intl. Arpt. Special Fac. Rev. Bonds
(United Air Lines, Inc.), Ser. 84A, 8.85s, 5/1/18 Baa2 2,050,231
3,000,000 East Chicago, Ind. Exempt Fac Rev. Bonds
(Ispat Inland, Inc.), 7s, 1/1/14 B1 2,820,000
Huntley, Special Tax. Rev. Bonds
2,765,000 (Svc. Area No. 9) Ser. A, 7 3/4s, 3/1/28 BB+/P 2,768,456
3,025,000 (Svc. Area No. 8) 7 3/4s, 3/1/29 BB/P 3,032,563
4,053,000 Ser. A., 6.45s, 3/1/28 BB+/P 3,703,429
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 $4,777,700) (in default) (NON) (RES) D/P 3,850,000
1,120,000 (Mercy Hsg. Corp.), 7s, 8/1/24 Baa1 1,233,400
IL Dev. Fin. Auth. Rev. Bonds
(Cmnty. Rehab. Providers Fac.)
1,670,000 8 1/4s, 8/1/12 B/P 1,730,538
2,430,000 Ser. A, 7 7/8s, 7/1/20 (acquired 1/25/96,
cost $2,430,000) (RES) D/P 2,187,000
4,575,000 Ser. A, 7 7/8s, 7/1/20, Prerefunded AAA/P 5,266,969
3,065,000 Ser. A, 7 1/2s, 3/1/14 AAA/P 3,371,500
630,000 Ser. A, 7 1/4s, 3/1/04 B/P 658,350
IL Hlth. Fac. Auth. Rev. Bonds
5,725,000 (Victor C. Neumann Associates), 7 1/4s, 7/1/18 B/P 5,317,094
3,000,000 (Glen Oaks Med. Ctr.), Ser. B, 7s, 11/15/19 AAA 3,251,250
3,000,000 (Hinsdale Hosp.), Ser. A, 7s, 11/15/19 AAA/P 3,251,250
5,000,000 (Glen Oaks Med. Ctr.), Ser. B, 6.95s, 11/15/13 AAA 5,831,250
5,170,000 (Hinsdale Hosp.), Ser. A, 6.95s, 11/15/13 AAA/P 6,029,513
----------------
61,602,793
Indiana (1.9%)
-------------------------------------------------------------------------------------------------------------------
East Chicago, Poll. Control Rev. Bonds
(Inland Steel Co.)
12,000,000 7 1/8s, 6/1/07 B1 11,970,000
14,295,000 6.8s, 6/1/13 B1 13,776,806
3,600,000 Plainfield Indl. Econ. Dev. Rev. Bonds
(Earl M. Jorgensen Co.), 8 1/2s, 9/1/04 B-/P 3,766,500
----------------
29,513,306
Iowa (1.8%)
-------------------------------------------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives)
22,000,000 9 1/4s, 7/1/25 BB/P 26,757,500
1,320,000 9.15s, 7/1/09 BB/P 1,551,000
210,000 Marion Cnty., 1st Mtge. Rev. Bonds
(AHF/Kentucky Iowa, Inc.), 10 1/4s, 1/1/20 B-/P 210,788
----------------
28,519,288
Kentucky (0.4%)
-------------------------------------------------------------------------------------------------------------------
Jefferson Cnty., Hosp. IFB, MBIA.
3,500,000 8.53s, 10/23/14 Aaa 3,788,750
1,500,000 8.53s, 10/23/14 Prerefunded Aaa 1,665,000
1,215,000 Lexington-Fayette Cnty., Urban Govt. 1st Mtge.
Rev. Bonds (AHF/Kentucky Iowa, Inc.),
10 1/4s, 1/1/20 B-/P 1,219,556
----------------
6,673,306
Louisiana (5.2%)
-------------------------------------------------------------------------------------------------------------------
2,900,000 Beauregard, Parish Rev. Bonds
(Boise Cascade Corp.), 7 3/4s, 6/1/21 Baa3 2,988,102
8,050,000 Hodge, Combined Util. Rev. Bonds
(Stone Container Corp.), 9s, 3/1/10 B/P 8,225,651
7,000,000 LA Hlth. Ed. Auth. Rev. Bonds (Lambert House),
Ser. A, 6.2s, 1/1/28 B/P 5,565,000
5,335,000 LA Local Govt. Env. Facs.Comnty. Dev. Auth.
Rev. Bonds (St. James Place), Ser. A, 8s, 11/1/19 B-/P 5,361,675
2,000,000 LA Pub. Fac. Auth. 1st Mtge. Rev. Bonds
(St. James Place), 10s, 11/1/21 B-/P 2,165,000
20,500,000 Lake Charles, Harbor & Term. Dist. Port Fac.
Rev. Bonds (Trunkline Co.), 7 3/4s, 8/15/22 A3 21,909,375
7,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 CC 6,991,250
St. James Parish, Solid Waste Disp. Rev. Bonds
(Kaiser Aluminum)
9,000,000 7 3/4s, 8/1/22 B-/P 9,213,750
19,000,000 7.7s, 12/1/14 Ba1 19,760,000
----------------
82,179,803
Maryland (0.2%)
-------------------------------------------------------------------------------------------------------------------
2,500,000 Denton, 1st Mtge. Rev. Bonds
(Shore Nursing Rehab. Ctr.), 9s, 4/1/20 B-/P 2,550,000
Massachusetts (7.2%)
-------------------------------------------------------------------------------------------------------------------
Atlas Boston Tax Exempt Rev. Bonds
3,170,000 Ser. 99-1, 7 1/4s, 1/1/35 (acquired 11/18/99,
cost $3,170,000) (RES) B/P 3,181,888
6,000,000 Ser. 1, 6.65s, 1/1/35 (acquired 11/18/99,
cost $6,000,000) (RES) BBB/P 6,030,000
MA State Dev. Fin. Agcy. Rev. Bonds
4,210,000 (Alden Place), 6 3/4s, 7/1/30 B/P 3,667,963
6,110,000 (Merrimack Place), 6 3/4s, 7/1/30 B/P 5,323,338
9,665,000 MA State G.O. Bonds, Ser. 35, 8.22s, 11/1/11
(acquired 8/13/98, cost $11,993,298) (RES) Aa3 11,344,294
MA State Hlth. & Edl. Fac. Auth. IFB
5,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 8.9s, 8/12/21 Aaa 5,363,050
5,600,000 (Boston U.), Ser. L, MBIA, 6.27s, 7/1/25 Aaa 5,600,000
2,000,000 (Beth Israel-Deaconess Hosp.), AMBAC,
8.63s, 10/1/31 Aaa 2,140,000
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
3,325,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba1 3,476,121
4,900,000 (Winchester Hospital), Ser. E, 6 3/4s, 7/1/30 BBB 4,814,250
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
4,000,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 4,235,040
30,535,000 Ser. A, 9s, 7/1/15 BB-/P 32,290,457
MA State Indl. Fin. Agcy. Rev. Bonds
8,800,000 (Orchard Cove Inc.), 9s, 5/1/22 AAA/P 9,680,000
2,255,000 (MA Tpk.), 9s, 10/1/20 AAA/P 2,311,758
3,000,000 (Emerson College), 8 1/4s, 1/1/17 BBB-/P 3,206,250
5,000,000 (Evanswood Bethzatha Corp.), 8s, 1/15/27
(acquired 12/13/96, cost $5,000,000) (RES) D/P 3,150,000
3,500,000 (1st Mtge. Evanswood Bethzatha-A),
7 7/8s, 1/15/20 (acquired 2/20/97,
cost $3,502,030) (RES) CCC/P 2,205,000
2,065,000 (Sr. Living Fac. Forge Hill), 7s, 4/1/17 B/P 1,837,850
3,830,000 Worcester Mtge. Rev. Bonds (Briarwood Issue),
9 1/4s, 12/1/22 BB-/P 4,122,038
----------------
113,979,297
Michigan (4.1%)
-------------------------------------------------------------------------------------------------------------------
2,456,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds
(Glacier Hills Inc.), 8 3/8s, 1/15/19 (SEG) B+/P 2,485,226
19,705,000 Detroit, Dev. Fin. Auth. Tax Increment Rev. Bonds,
Ser. A, 9 1/2s, 5/1/21 BBB+/P 22,192,756
4,100,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 5 1/2s, 5/1/21 A2 3,654,125
Garden Cty, Hosp. Fin. Auth. Rev. Bonds
3,000,000 (Garden City Hosp.), Ser. A, 5 3/4s, 9/1/17 BB/P 2,433,750
3,000,000 (Garden City Hosp. OB Group),
Ser. A, 5 5/8s, 9/1/10 BB/P 2,576,250
2,675,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.), 8.3s, 9/1/02 Ba3 2,806,637
7,500,000 MI State Strategic Fund Ltd. Oblig. IFB, 9.308s,
9/1/25 (acquired 3/9/98, cost $9,018,750) (RES) Aaa 8,175,000
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 6,731,250
5,000,000 Midland Cnty. Econ. (Poll. Ctrl.) Ser B. Dev. Corp.
Rev. Bonds, 6 3/4s, 7/23/09 Ba3 5,050,000
5,600,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth.), 6s, 1/1/39
(acquired 12/31/98, cost $5,825,760) (RES) B-/P 4,256,000
4,000,000 Wayne Charter Cnty., Special Arpt. Facs.
Rev. Bonds (Northwest Airlines), 6s, 12/1/29 BB+/P 3,520,000
----------------
63,880,994
Minnesota (1.2%)
-------------------------------------------------------------------------------------------------------------------
2,810,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical, Inc.), 10 1/4s, 9/1/20 BB/P 2,987,114
5,000,000 Intl. Falls, Env. Fac. Rev. Bonds
(Boise Cascade Corp.), 7.2s, 10/1/24 Baa3 5,081,250
2,200,000 Minneapolis Rev. Bonds (Walker Methodist
Sr. Svcs.), Ser. A, 6s, 11/15/28 BB-/P 1,842,500
5,435,000 Minneapolis, Single Family Rev. Bonds (Phase V),
FNMA Coll. & GNMA Coll. 6 1/4s, 4/1/22 Aaa 5,577,669
3,200,000 Shakopee Multi-Fam. Adj. Rate Rev. Bonds VRDN
(Riva Ridge Apts.), 8 1/2s, 12/1/08 B-/P 3,200,000
----------------
18,688,533
Mississippi (0.3%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Perry Cnty., Poll. Control FRB, 2.7s, 3/1/02 Aa2 5,000,000
Missouri (0.1%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Kansas City Indl. Dev. Auth. Hosp. VRDN
(Health Service System), MBIA, 3 1/4s, 10/15/15 Aaa 1,000,000
Montana (1.0%)
-------------------------------------------------------------------------------------------------------------------
4,000,000 MT State Brd. Inv. Exempt Fac. Rev. Bonds
(Still Water Mining Project), 8s, 7/1/20 Ba2 3,965,000
13,850,000 MT State Hlth. Fac. Auth. Hosp. Fac. IFB, AMBAC,
6.09s, 2/25/25 Aaa 12,343,813
----------------
16,308,813
Nebraska (1.2%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Kearney, Indl. Dev. Rev. Bonds (Great Platte
River Road), 6 3/4s, 1/1/28 B/P 4,025,000
2,000,000 NE Investment Fin. Auth. Hosp. IFB, MBIA,
8.78s, 11/15/16 Aaa 2,165,000
12,100,000 NE Investment Fin. Auth. Single Fam. Mtge. IFB,
Ser. D, GNMA Coll., 6.6s, 3/1/26 Aaa 12,190,750
----------------
18,380,750
New Hampshire (2.6%)
-------------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
2,285,000 (Franklin Regl. Hosp.), 8 3/4s, 9/1/19 BBB-/P 2,360,816
9,000,000 (1st Mtge.-Rivermead Peterborough),
8 1/2s, 7/1/24 AAA 10,293,750
5,900,000 (Havenwood-Heritage Heights), 7.35s, 1/1/18 BB/P 6,010,625
3,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 BB/P 2,373,750
3,750,000 (Lakes Region Hosp.), 5 3/4s, 1/1/08 A-/P 3,525,000
9,200,000 NH State Bus. Fin. Auth. Poll. Control &
Solid Waste Rev. Bonds (Crown Paper Co.),
7 3/4s, 1/1/22 (In default) (NON) D/P 7,544,000
NH State Bus. Fin. Auth. Rev. Bonds
2,500,000 (Alice Pecd Day Hlth. Syst.), Ser. A, 7s, 10/1/29 BB+/P 2,162,500
4,000,000 (Franklin Regl. Hosp. Assn. PJ), Ser. A, 6.05s, 9/1/29 BBB-/P 3,270,000
3,550,000 (Proctor Academy), Ser. A, 5.6s, 6/1/28 Baa2 3,168,375
----------------
40,708,816
New Jersey (3.4%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth. Rev. Bonds, 8.4s, 4/1/24
(acquired 4/12/94, cost $5,000,000) (RES) CCC/P 5,037,500
5,250,000 NJ Econ. Dev. Auth. Assisted Living Rev. Bonds
(Meridian Assisted Living), 6 3/4s, 8/1/30 B/P 4,567,500
NJ Econ. Dev. Auth. Rev. Bonds
7,000,000 (Winchester Gardens), Ser. A, 8 5/8s, 11/1/25 B/P 7,411,250
12,000,000 (Newark Arpt. Marriot Hotel), 7s, 10/1/14 BBB/P 12,225,000
6,000,000 NJ Econ. Dev. Auth. Special Fac. Rev. Bonds
(Continental Airlines, Inc.), 6 1/4s, 9/15/29 Ba2 5,422,500
4,000,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
(Trinitas Hosp. Oblig. Group), 7 1/2s, 7/1/30 BBB- 4,005,000
4,000,000 NJ State Hsg. & Mtge. Fin. Agcy. Rev. IFB, Ser. I, 7.6s,
11/1/07 (acquired from 8/24/95 to 2/11/93,
cost $4,143,120) (RES) A+/P 4,260,000
5,000,000 NJ State Transn. Tr. fd. Rites-PA 583, Rev. Bonds.
MBIA, 6/15/10 AAA/P 6,275,000
4,000,000 Salem Cnty., Indl. Poll. Ctrl. Fin. Auth. Rev. Bonds,
8.841s, 10/1/29 (acquired 10/28/94,
cost $3,785,680) (RES) Aaa 4,435,000
----------------
53,638,750
New Mexico (0.9%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Farmington Poll. Control Rev. Bonds VRDN,
Ser. A, 3.05s, 5/1/24 AA 5,000,000
9,000,000 Farmington, Poll. Control Rev. Bonds
(Tucson Elec. Pwr Co. San Juan),
Ser. A, 6.95s, 10/1/20 AA- 8,988,750
----------------
13,988,750
New York (9.0%)
-------------------------------------------------------------------------------------------------------------------
3,400,000 Colonie, Indl. Dev. Agcy. Rev. Bonds
(Cap. Compost & Waste), Ser. A, 6 3/4s, 6/1/21 B-/P 3,089,750
5,000,000 Dutchess Cnty., Indl. Dev. Agcy. Rev. Bonds
(Bard College Civic Fac.), 5 3/4s, 8/1/30 A3 4,881,250
Metropolitan Trans. Auth. Svcs. Contract Fac.
Rev. Bonds
6,820,000 FRB, 9.07s, 4/1/12 (acquired 4/27/00,
cost $7,955,530) (RES) A3 8,286,300
4,000,000 (Commuter Fac.), Ser. O, 5 3/4s, 7/1/13 Baa1 4,150,000
8,250,000 (Trans. Fac.), Ser. O, 5 3/4s, 7/1/13 Baa1 8,559,375
11,500,000 NY City, G.O. Bonds, Ser. D, 5 1/4s, 8/1/21 A3 10,738,125
NY City, Indl. Dev. Agcy. Rev. Bonds
1,000,000 (Visy Paper Inc.), 7.95s, 1/1/28 B/P 1,031,250
9,000,000 (Paper Inc.), 7.8s, 1/1/16 B/P 9,258,750
4,000,000 (Field Hotel Assoc.), 6s, 11/1/28 B/P 3,445,000
5,000,000 NY City, Muni. Assistance Corp. IFB,
Ser. 337B, 6.76s, 7/1/08 (acquired 3/19/98,
cost $6,225,100) (RES) AA/P 5,787,500
5,000,000 NY City, Muni. Assistance Corp. Rev. Bonds
(PA 337A), 6.2s, 7/1/07 (acquired 3/19/98,
cost $6,169,900) (RES) AA/P 5,743,750
6,280,000 NY City, Rev. Bonds, 6s, 8/1/06
(acquired 9/12/97, cost $7,384,526) (RES) AAA/P 7,112,100
10,750,000 NY State Dorm. Auth. IFB, MBIA, 7.45s, 7/1/13
(acquired 10/22/97, cost $12,362,500) (RES) AAA/P 11,959,375
2,200,000 NY State Dorm. Auth. VRDN
(Oxford U. Press Inc.), 4.25s, 7/1/23 Aaa 2,200,000
8,000,000 NY State Energy Res. & Dev. Auth. Poll.
Control IFB, FGIC, 9.52s, 7/1/29
(acquired 12/19/94, cost $8,353,120) (RES) Aaa 9,330,000
5,000,000 NY State Energy Res. & Dev. Auth. Poll.
Control Rev. Bonds (Lilco Project),
Ser. B, 5.15s, 3/1/16 Baa3 4,618,750
11,185,000 NY State Env. Fac. Corp. Poll. Control Rev. Bonds
(PA 198), 7.95s, 6/15/10 (acquired 10/22/97,
cost $13,449,962) (RES) Aaa 13,212,281
5,500,000 NY State Med. Care Fac. Fin. Agcy. Rev. Bonds,
Ser. A, FHA Insd., 6 1/2s, 8/15/29 Aaa 6,022,500
7,000,000 NY State Urban Dev. Corp. Rev. Bonds,
7 1/2s, 4/1/20 Aaa 7,282,310
5,000,000 Onondaga Cnty., Indl. Dev. Agcy. Rev. Bonds
(Solvay Paperboard LLC), 7s, 11/1/30 B+/P 4,862,500
3,500,000 Suffolk Cnty., Indl. Dev. Agcy. Rev. Bonds
(Southampton Hosp.), Ser. A, 7 1/4s, 1/1/30 B-/P 3,180,625
8,000,000 Suffolk Cnty., Indl. Dev. Agcy. Fac. Civic Fac.
Rev. Bonds (Southampton Hosp. Assn.),
Ser. B, 7 5/8s, 1/1/30 B-/P 7,610,000
----------------
142,361,491
North Carolina (0.3%)
-------------------------------------------------------------------------------------------------------------------
4,000,000 NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds,
Ser. B, MBIA, 7s, 1/1/08 Aaa 4,470,000
Ohio (0.4%)
-------------------------------------------------------------------------------------------------------------------
6,150,000 OH State Solid Waste Rev. Bonds,
8 1/2s, 8/1/22 (CSC Ltd.) (In default) (NON) D/P 5,842,500
Oklahoma (0.9%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 OK Dev. Fin. Auth. Indl. Dev. Rev. Bonds
(Doane Products Co.), 6 1/4s, 7/15/23 BB-/P 2,606,250
6,750,000 OK Dev. Fin. Auth. Rev. Bonds
(Hillcrest Healthcare), Ser. A, 5 5/8s, 8/15/29 Ba1 4,876,875
6,000,000 Ottawa Cnty., Fin. Auth. Indl. Rev. Bonds
(Doane Prods Co.), 7 1/4s, 6/1/17 BB-/P 6,090,000
----------------
13,573,125
Oregon (0.8%)
-------------------------------------------------------------------------------------------------------------------
14,900,000 Multnomah Cnty., Hosp. Fac. Auth. Rev. Bonds
(Terwilliger Plaza Project), 6 1/2s, 12/1/29 BB-/P 12,851,250
Pennsylvania (5.8%)
-------------------------------------------------------------------------------------------------------------------
Allegheny Cnty., Indl. Dev. Auth. Arpt. Special Fac.
Rev. Bonds (U.S. Airways)
1,330,000 Ser. A, 8 7/8s, 3/1/21 B3 1,366,575
5,035,000 Ser. B, 8 1/2s, 3/1/21 B3 5,135,700
3,500,000 Carbon Cnty., Indl. Dev. Auth. Rev. Bonds
(Panter Creek Partners PJ), 6.65s, 5/1/10 BBB- 3,535,000
12,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s, 1/15/25 BB-/P 11,187,500
5,370,000 PA Convention Ctr. Auth. Rev. Bonds,
Ser. A, FSA, 6 3/4s, 9/1/19 Aaa 5,725,763
PA Econ. Dev. Fin. Auth. Qualified Res. Properties
Rev. Bonds
4,400,000 (RSI Properties/Buttler LLC), Ser. A, 8s, 9/1/27
(acquired 9/3/97, cost $4,400,000)
(In default) (NON) (RES) D/P 2,794,000
3,500,000 (RSI Properties/Greensburg LLC)
(acquired 9/3/97, cost $3,500,000)
Ser. B, 8s, 9/1/27 (In default) (NON) (RES) D/P 2,222,500
4,800,000 PA Hsg. Fin. Agcy. IFB, 7.6s, 4/1/25 Aa2 4,950,000
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
13,000,000 (Colver), Ser. E, 8.05s, 12/1/15 BBB-/P 13,845,000
6,250,000 (Northhampton), Ser. B, 6 3/4s, 1/1/07 BBB-/P 6,281,250
7,250,000 (Northampton Generating), Ser. A, 6.6s, 1/1/19 BBB- 7,014,375
8,900,000 PA State Higher Ed. Assistance Agcy. Student Loan,
Ser. A&B, 7 1/4s, 7/1/18 (acquired from 1/15/98
to 3/18/98, cost $9,098,120) (In default) (NON) (RES) Ca 2,937,000
2,500,000 PA State Higher Ed. Assistance Agcy. Student Loan
IFB, AMBAC, 9.06s, 9/1/26 Aaa 2,983,700
5,000,000 Philadelphia Auth. For Indl. Dev. Special Fac.
Rev. Bonds (U.S. Airways Project),
8 1/8s, 5/1/30 B/P 5,031,250
5,300,000 Philadelphia, Muni. Auth. Rev. Bonds,
Ser. C, 8 5/8s, 11/15/16 Aaa 5,671,000
4,760,000 Philadelphia, Wtr. & Wastewtr. Rev. Bonds, FGIC,
10s, 6/15/05 Aaa 5,807,200
4,000,000 Pottsville Hosp. Auth Rev. Bonds
(Pottsville Hosp. Warne Clinic), 7s, 7/1/14 BB/P 4,395,000
----------------
90,882,813
South Carolina (2.4%)
-------------------------------------------------------------------------------------------------------------------
10,000,000 Charleston Cnty., Indl. Rev. Bonds
(Zeigler Coal Holding), 6.95s, 8/10/28 B-/P 5,500,000
11,150,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 B/P 11,191,813
SC Jobs Econ. Dev. Auth. Rev. Bonds
3,800,000 (Palmetto Hlth. Alliance), Ser. A, 7 3/8s, 12/15/21 Aaa 3,871,250
10,355,000 (St. Francis Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 11,209,288
5,000,000 Spartanburg Cnty., Hosp. Fac. IFB, FSA,
8.23s, 4/13/22 Aaa 5,512,500
----------------
37,284,851
Tennessee (1.6%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Elizabethton, Hlth. & Edl. Facs. Board Rev. Bonds
(Hosp. Ref. & Impt.), Ser. B, 8s, 7/1/33 AAA 1,046,250
Johnson City, Hlth. & Edl. Facs. Hosp. Board.
Rev. Bonds (Mtn. States Hlth.)
17,000,000 Ser. A, 7 1/2s, 7/1/33 Baa2 17,021,250
7,000,000 Ser. A, 7 1/2s, 7/1/25 AAA 7,043,750
----------------
25,111,250
Texas (4.6%)
-------------------------------------------------------------------------------------------------------------------
5,350,000 Abilene, Health Fac. Dev. Corp. Rev. Bonds
(Sears Methodist Retirement),
Ser. A, 5.9s, 11/15/25 BB+/P 4,219,813
5,000,000 Amarillo, Hlth. Fac. Corp. Rev. Bonds
(Sears Panhandle Retirement),
Ser. B, 7 3/4s, 8/15/26 AAA 5,800,000
5,090,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 AAA/P 5,618,088
Dallas Cnty., G.O. Bonds, (Flood Control Dist. (SEG)1)
10,000,000 8.5s, 4/1/16 (acquired 11/18/94,
cost $6,706,000) (In default) (NON) (RES) D/P 9,000,000
500,000 zero %, 8/1/00 D/P 487,500
6,655,000 Harris Cnty., Hlth. Facs. Dev. Rev. Bonds
(Christus Health), Ser. A, 5 3/4s, 7/1/14 AAA 6,796,419
15,000,000 Houston, City G.O. Bonds, Ser. C, 7s, 3/1/08 Aa3 16,743,750
10,000,000 Houston, Indpt. School Dist., Ltd. G. O. Bonds,
Ser. A, PSFG, 4 3/4s, 2/15/26 Aaa 8,500,000
3,000,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds
(Mem. Hlth. Syst. of East TX), 5.7s, 2/15/28 BBB- 2,325,000
5,265,000 Round Rock, Hotel Occupancy Tax
Rev. Bonds (Convention Ctr. Complex),
5.85s, 12/1/24 BB/P 4,659,525
8,000,000 TX State Hsg. & Cmnty. Affairs Home Mtge. IFB,
Ser. C, GNMA Coll, FNMA Coll, 9.1s, 7/2/24 AAA 9,060,000
----------------
73,210,095
Utah (0.4%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Salt Lake City, Hosp. Rev. Bonds (IHC Hosps. Inc.),
MBIA, 6 1/4s, 2/15/23 Aaa 5,106,250
5,500,000 Tooele Cnty., Poll. Control Rev. Bonds
(Laidlaw Environmental), Ser. A, 7.55s, 7/1/27
(In default) (NON) D/P 550,000
----------------
5,656,250
Virginia (2.0%)
-------------------------------------------------------------------------------------------------------------------
4,500,000 Fredericksburg, Indl. Dev. Auth. Hosp. Fac. IFB,
FGIC, 8.75s, 8/15/23 Aaa 4,853,790
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB (Bon Secours
Hlth. Syst.), FSA, 7.25s, 8/23/27 Aaa 2,137,500
10,435,000 Hopewell, Indl. Dev. Rev. Bonds
(Stone Container Corp.), 8 1/4s, 6/1/16 B/P 10,969,784
6,500,000 Pocahontas Pk. Way Assn. Toll Rd. Rev. Bonds,
Ser. A, 5 1/2s, 8/15/28 Baa3 5,265,000
9,010,000 Suffolk, Redev. & Hsg. Auth. Rev. Bonds
(Beach-Oxford Apts.), 6 1/4s, 10/1/33 B+/P 8,221,625
----------------
31,447,699
Washington (1.0%)
-------------------------------------------------------------------------------------------------------------------
3,500,000 Spokane Cnty., Indl. Dev. Corp. Solid Waste Disp.
Rev. Bonds (Kiaser Alummin. & Chemical Corp.),
7.6s, 3/1/27 B-/P 3,513,125
2,600,000 WA State Hsg. Fin. Comm. Multi-Fam. Rev. Bonds
(Clare House Apts.), Ser. A, 5 3/4s, 7/1/30 Aa3 2,466,750
5,000,000 WA State Pub. Pwr. Supply Syst. Rev. Bonds
(Nuclear No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 5,893,750
5,500,000 Washington Cnty., Hsg. & Redev. Auth. Rev. Bonds
(Healtheast), 5 1/2s, 11/15/27 Ba1 3,966,875
----------------
15,840,500
West Virginia (0.3%)
-------------------------------------------------------------------------------------------------------------------
5,000,000 Weirton, Poll. Control Rev. Bonds
(Weirton Steel Corp.), 8 5/8s, 11/1/14 B2 5,043,750
----------------
Total Municipal Bonds and Notes
(cost $1,559,894,853) 1,534,878,273
PREFERRED STOCKS (1.4%) (a)
NUMBER OF SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
8,000,000 Charter Mac Equity Trust, 144A Ser A,
6.625%, cum. pfd. (acquired 6/11/99,
cost $8,000,000) (RES) $ 7,830,000
8,000,000 Munimae Tax Exempt Bond Subsidiary, LLC 144A,
Ser B, 7.75%, cum. pfd. 8,270,000
6,000,000 Munimae Tax Exempt Bond Subsidiary, LLC 144A,
Ser A, 6.875%, cum. pfd. (acquired 5/7/99,
cost $6,000,000) (RES) 5,947,500
----------------
Total Preferred Stocks (cost $22,000,000) $ 22,047,500
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,581,894,853) (b) $ 1,556,925,773
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,573,705,196.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at July 31, 2000 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, 2000. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the Report
of independent accountants.
(b) The aggregate identified cost on a tax basis is $1,581,894,853,
resulting in gross unrealized appreciation and depreciation of
$59,874,886 and $84,843,966, respectively, or net unrealized
depreciation of $24,969,080
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at July 31, 2000 was
$221,822,401 or 14.1% of net assets.
(SEG) A portion of these securities were pledged and segregated with the
custodian to cover margin requirements for futures contracts at July 31,
2000.
144A after the name of a security represents those exempt from
registration under Rule 144A of the Securities Act of 1933. These
securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The rates shown on IFB and IF COP, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, FRB's and VRDN's are the current interest rates at July 31, 2000.
The fund had the following industry group concentrations greater
than 10% at July 31,2000 (as a percentage of net assets):
Health care 21.6%
--------------------------------------------------------------------------------------
Futures Contracts Outstanding at July 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
--------------------------------------------------------------------------------------
Municipal Bond Index (Long) $17,220,500 $17,165,525 Sep-00 $54,975
--------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
July 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,581,894,853) (Note 1) $1,556,925,773
-------------------------------------------------------------------------------------------
Cash 1,662,739
-------------------------------------------------------------------------------------------
Interest and other receivables 25,679,034
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 683,239
-------------------------------------------------------------------------------------------
Receivable for securities sold 1,464,377
-------------------------------------------------------------------------------------------
Receivable for variation margin 5,500
-------------------------------------------------------------------------------------------
Total assets 1,586,420,662
Liabilities
-------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 209,347
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 3,281,413
-------------------------------------------------------------------------------------------
Payable for securities purchased 4,898,285
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,824,984
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 751,075
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 122,830
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 39,184
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,385
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 501,189
-------------------------------------------------------------------------------------------
Other accrued expenses 85,774
-------------------------------------------------------------------------------------------
Total liabilities 12,715,466
-------------------------------------------------------------------------------------------
Net assets $1,573,705,196
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,708,424,572
-------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (10,682)
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (109,794,589)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (24,914,105)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $1,573,705,196
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,114,841,645 divided by 84,010,481 shares) $13.27
-------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $13.27)* $13.93
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($441,173,815 divided by 33,192,238 shares)** $13.29
-------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($3,945,068 divided by 297,244 shares)** $13.27
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($13,744,668 divided by 1,035,519 shares) $13.27
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $13.27)*** $13.72
-------------------------------------------------------------------------------------------
* 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, 2000
<S> <C>
Tax exempt interest income: $ 116,393,247
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 9,460,007
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,289,429
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 40,920
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 17,281
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,278,394
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 4,338,790
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 31,819
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 97,195
-------------------------------------------------------------------------------------------
Other 523,805
-------------------------------------------------------------------------------------------
Total expenses 18,077,640
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (307,042)
-------------------------------------------------------------------------------------------
Net expenses 17,770,598
-------------------------------------------------------------------------------------------
Net investment income 98,622,649
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (13,643,439)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 681,325
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures during the year (100,449,900)
-------------------------------------------------------------------------------------------
Net loss on investments (113,412,014)
-------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (14,789,365)
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended July 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 98,622,649 $ 106,682,753
--------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (12,962,114) 1,802,993
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (100,449,900) (66,831,127)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (14,789,365) 41,654,619
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (68,370,451) (58,872,974)
--------------------------------------------------------------------------------------------------
Class B (29,836,648) (46,390,286)
--------------------------------------------------------------------------------------------------
Class C (163,929) (47,801)
--------------------------------------------------------------------------------------------------
Class M (1,105,621) (1,163,341)
--------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (239,835,527) (13,029,929)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (354,101,541) (77,849,712)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 1,927,806,737 2,005,656,449
--------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
and undistributed net investment income of
$10,682 and $710,692, respectively) $1,573,705,196 $1,927,806,737
--------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.13 $14.61 $14.56 $14.05 $14.14
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .80 .81 .80(c) .84 .90
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.85) (.48) .06 .52 (.10)
------------------------------------------------------------------------------------------------
Total from
investment operations (.05) .33 .86 1.36 .80
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.81) (.81) (.81) (.85) (.89)
------------------------------------------------------------------------------------------------
Total distributions (.81) (.81) (.81) (.85) (.89)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.27 $14.13 $14.61 $14.56 $14.05
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.24) 2.25 6.08 9.97 5.76
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,114,842 $1,157,920 $934,747 $625,602 $540,607
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .86 .87 .88 .85 .84
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.95 5.56 5.60 5.94 6.27
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.05 12.16 39.62 56.22 67.70
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.15 $14.62 $14.56 $14.05 $14.14
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .73 .74 .73(c) .75 .80
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.86) (.47) .05 .51 (.09)
------------------------------------------------------------------------------------------------
Total from
investment operations (.13) .27 .78 1.26 .71
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.73) (.74) (.72) (.75) (.80)
------------------------------------------------------------------------------------------------
Total distributions (.73) (.74) (.72) (.75) (.80)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.29 $14.15 $14.62 $14.56 $14.05
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.82) 1.81 5.47 9.26 5.08
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $441,174 $743,456 $1,052,827 $1,427,365 $1,421,448
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.44 1.37 1.53 1.50 1.50
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.36 5.03 4.95 5.30 5.62
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.05 12.16 39.62 56.22 67.70
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
----------------------------------------------------------------------------------
For the period
Per-share Year ended Feb. 1, 1999 +
operating performance July 31 to July 31
----------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $14.13 $14.73
----------------------------------------------------------------------------------
Investment operations
----------------------------------------------------------------------------------
Net investment income .69 .36
----------------------------------------------------------------------------------
Net realized and unrealized
loss on investments (.85) (.60)
----------------------------------------------------------------------------------
Total from
investment operations (.16) (.24)
----------------------------------------------------------------------------------
Less distributions:
----------------------------------------------------------------------------------
From net
investment income (.70) (.36)
----------------------------------------------------------------------------------
Total distributions (.70) (.36)
----------------------------------------------------------------------------------
Net asset value,
end of period $13.27 $14.13
----------------------------------------------------------------------------------
Ratios and supplemental data
----------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (1.05) 1.58*
----------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,945 $2,738
----------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.66 .83*
----------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.16 2.47*
----------------------------------------------------------------------------------
Portfolio turnover (%) 12.05 12.16
----------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended July 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.14 $14.61 $14.55 $14.04 $14.13
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .77 .77 .78(c) .80 .84
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.87) (.47) .05 .51 (.08)
------------------------------------------------------------------------------------------------
Total from
investment operations (.10) .30 .83 1.31 .76
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.77) (.77) (.77) (.80) (.85)
------------------------------------------------------------------------------------------------
Total distributions (.77) (.77) (.77) (.80) (.85)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.27 $14.14 $14.61 $14.55 $14.04
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.62) 2.01 5.84 9.64 5.44
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $13,745 $23,693 $18,082 $16,192 $9,984
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.16 1.17 1.18 1.15 1.13
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.65 5.27 5.30 5.63 5.87
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.05 12.16 39.62 56.22 67.70
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during the period.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
July 31, 2000
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, class C 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 C shares have a higher ongoing distribution fee than
class B shares and have a one-year 1.00% contingent deferred sales
charge and do not convert to Class A shares. Class M shares are sold
with a maximum front end sales charge of 3.25% and pay an ongoing
distribution fee that is higher than class A shares but lower than class
B and class C 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 of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. 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.
Restricted securities are stated at fair value following procedures
approved by the Trustees. Such valuations and procedures are reviewed
periodically by the Trustees. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Gains or losses on securities sold are determined
on the identified cost basis.
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 maintains an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
July 31, 2000, 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 2000, the fund had a capital loss carryover of approximately
$89,456,000 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
21,345,000 July 31, 2006
23,391,000 July 31, 2007
7,814,000 July 31, 2008
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 straddle loss deferrals.
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,
2000, the fund reclassified $132,626 to increase undistributed net
investment income and $132,626 to increase accumulated net realized
loss. 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% next $500 million, 0.45% of the next $5 billion, 0.425%
of the next $5 billion, 0.405% of the next $5 billion, 0.39% of the next
$5 billion, and 0.38% thereafter.
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.
Under the subcustodian contract between the subcustodian bank and PFTC,
the subcustodian bank has a lien on the securities of the fund to the
extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At July 31, 2000, the payable to the subcustodian
bank represents the amount due for cash advance for the settlement of a
security purchased.
For the year ended July 31, 2000, fund expenses were reduced by $307,042
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 $1,515
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. 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
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 a 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, class C 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 Retail Management, Inc., 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 Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.20%, 0.80%,
1.00% and 0.50% of the average net assets attributable to class A, class
B, class C and class M shares respectively. Prior to September 14, 1999,
the Trustees had approved payment by the fund at an annual rate of 0.70%
of the average net assets attributable to class B shares.
For the year ended July 31, 2000, Putnam Retail Management, Inc., acting
as underwriter received net commissions of $60,937 and $1,460 from the
sale of class A and class M shares, respectively, and received
$1,383,162 and $4,519 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended July 31, 2000, Putnam Retail Management,
Inc., acting as underwriter received $18,293 on class A redemptions.
Note 3
Purchases and sales of securities
For the year ended July 31, 2000, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $203,493,477 and $443,118,169, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At July 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 21,175,407 $286,092,268
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,644,772 35,519,326
---------------------------------------------------------------------------
23,820,179 321,611,594
Shares
repurchased (21,728,411) (291,969,108)
---------------------------------------------------------------------------
Net increase 2,091,768 $ 29,642,486
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 26,657,687 $387,542,411
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,079,752 30,232,335
---------------------------------------------------------------------------
28,737,439 417,774,746
Shares
repurchased (10,805,263) (156,947,516)
---------------------------------------------------------------------------
Net increase 17,932,176 $260,827,230
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 4,067,770 $ 55,059,743
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 994,474 13,414,288
---------------------------------------------------------------------------
5,062,244 68,474,031
Shares
repurchased (24,402,232) (330,787,906)
---------------------------------------------------------------------------
Net decrease (19,339,988) $(262,313,875)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 8,229,439 $ 120,037,661
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,436,882 20,945,266
---------------------------------------------------------------------------
9,666,321 140,982,927
Shares
repurchased (29,142,932) (424,090,007)
---------------------------------------------------------------------------
Net decrease (19,476,611) $(283,107,080)
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 161,316 $2,164,589
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,710 90,085
---------------------------------------------------------------------------
168,026 2,254,674
Shares
repurchased (64,584) (869,084)
---------------------------------------------------------------------------
Net increase 103,442 $1,385,590
---------------------------------------------------------------------------
For the period February 1, 1999
(commencement of operations) to
July 31, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 325,358 $4,723,411
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,596 22,886
---------------------------------------------------------------------------
326,954 4,746,297
Shares
repurchased (133,152) (1,923,313)
---------------------------------------------------------------------------
Net increase 193,802 $2,822,984
---------------------------------------------------------------------------
Year ended July 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 130,263 $ 1,734,189
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 56,361 785,297
---------------------------------------------------------------------------
186,624 2,519,486
Shares
repurchased (826,843) (11,069,214)
---------------------------------------------------------------------------
Net decrease (640,219) $(8,549,728)
---------------------------------------------------------------------------
Year ended July 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 787,333 $11,482,697
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 48,082 698,515
---------------------------------------------------------------------------
835,415 12,181,212
Shares
repurchased (397,318) (5,754,275)
---------------------------------------------------------------------------
Net increase 438,097 $ 6,426,937
---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
WELCOME TO WWW.PUTNAMINVESTMENTS.COM
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* your current account value, portfolio value and transaction history
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much
more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly. So be sure to bookmark us at
http://www.putnaminvestments.com
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds.
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.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Technology Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Fund
Balanced Retirement Fund
Classic Equity 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
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund
U.S. Government Income Trust
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
ASSET ALLOCATION 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 Growth and Income Fund II
[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 not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Blake E. Anderson
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
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 and
Putnam Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com.
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
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PUTNAM
INVESTMENTS
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN042 63663 036/679/851 9/00
