Putnam
Tax-Free
Insured
Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-03
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From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the fiscal year ended July 31, 2003, Putnam Tax-Free Insured Fund
posted positive results at net asset value, though it came in behind its
benchmark index and performed only slightly better than its Lipper peer
group average. Please see the facing page for details.
In addition to the pressures imposed on bonds as equity investors
started drifting back into stocks, the municipal bond market faced
difficulties of its own during the period. Besides a significant decline
in state and local tax revenues, accompanied by credit rating downgrades
of both municipalities and the corporate beneficiaries of industrial
development bonds, the market was forced to digest a record level of new
issuance during the period. In the following report, your fund's
management team discusses performance and strategy in detail and
provides its view of prospects for the fiscal year that has just begun.
Despite these challenges, we believe this fund will remain a suitable
choice for investors seeking the relative safety and tax-free features
of insured municipal bonds. As we wrote in our report to you at the
fiscal year's midpoint, we deeply appreciate your continued confidence
in Putnam and we firmly believe that over the long term your patience
will be rewarded.
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 17, 2003
Report from Fund Management
Fund highlights
* During the fiscal year ended July 31, 2003, Putnam Tax-Free Insured Fund's
class A shares had total returns of 2.71% at net asset value (NAV) and
-2.17% at public offering price (POP).
* Due to differing levels of interest-rate sensitivity, the fund
underperformed its primary benchmark, the Lehman Municipal Bond Index,
which returned 3.60% during the fiscal year.
* However, at NAV, the fund's class A shares slightly outperformed the
average return of 2.51% for the Lipper Insured Municipal Debt Funds category.
* See the Performance Summary on page 7 for complete fund performance,
comparative performance, and Lipper data.
Performance commentary
The past year has been a period of significant volatility in the
fixed-income markets, and insured municipal bonds have been affected by
the changing environment. After three years of decline, bond yields
turned dramatically upward in the final six weeks of the fund's fiscal
year and bond prices fell. Your fund was more sensitive to these changes
in price than its benchmark, and, as a result, underperformed. However,
due to careful security selection and a focus on the structure of
individual issues (including their coupon rates, maturities, and call
features), your fund's results at net asset value slightly outperformed
the average return of its Lipper peer group. Although the period was
challenging because lower revenues and budgetary problems in many states
hurt municipal credit ratings, these same events have made
higher-quality insured municipals appear more attractive to us compared
to lower-rated bonds.
FUND PROFILE
Putnam Tax-Free Insured Fund is designed for investors seeking high
current income free from federal income tax. The fund invests in bonds
that are insured as to timely payment of principal and interest,
escrowed by securities guaranteed by the U.S. government, and/or bonds
that are rated AAA (or the equivalent), which is the highest credit
rating available.
Market overview
The fund's fiscal year began with continued strong bond performance from
the summer of 2002, but in mid October, bond prices declined (and yields
rose) as the economic outlook for 2003 brightened. A strong rally in
bond prices took place in the second quarter of 2003 due to an
accommodative Federal Reserve and market concerns about the prospects
for deflation. Municipal price gains were tempered, however, by
significant declines in tax revenues and some downgrades in the credit
quality of many municipalities. Moreover, the slowing economy hurt the
performance of industrial development bonds (IDBs), which are issued by
municipalities but backed by companies benefiting from the financing.
Fortunately for the insured municipal sector, these difficulties did not
have a direct impact, as relatively few insured bonds are IDBs. However,
the severe financial difficulties experienced by some airlines cast a
shadow over the entire municipal market.
The supply of bonds was high in 2002, with more than $357 billion in
municipal bonds issued -- an all-time record. The California Department
of Water Resources was responsible for the single largest bond issue
ever brought to market. In 2003, municipal supply continued to swell and
may be on track to exceed the record set in 2002. In the final months of
the period, an improved outlook for the economy contributed to a sharp
rise in fixed-income yields, which generally hurt performance of all
bond sectors.
On the positive side, insured municipals generally benefited from the
decline in overall credit quality during the year, serving as a haven
for investors seeking high-quality tax-free investments. In addition,
demand for municipals remained firm for much of the period, although it
declined sharply at the end of the period when yields rose.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/03
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Bonds
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Lehman Municipal Bond Index 3.60%
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Lehman Aggregate Bond Index (taxable bonds) 5.42%
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Lehman GNMA Index (mortgage-backed securities) 2.67%
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Lehman Global Aggregate Bond Index (global bonds) 10.56%
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Stocks
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S&P 500 Index (broad stock market) 10.64%
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Russell 2000 Index (small-company stocks) 23.11%
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MSCI EAFE Index (international stocks) 6.30%
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These indexes provide an overview of performance in different
market sectors for the 12 months ended 7/31/03.
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Strategy overview
The fund's management team implemented two key strategies during the
period. First, the fund's interest-rate sensitivity had been defensive,
or less sensitive to interest-rate changes, during the first few months
of the annual period. We reverted back to a neutral stance -- i.e., no
more or less sensitive than the overall market -- after bonds sold off
in October 2002, and we maintained this posture through the spring of
2003. As bond yields declined to historic lows in June, we again adopted
a more defensive (less sensitive) position, as we realized rates would
eventually rise and wanted to reduce the impact of such an event on the
fund's share price. After the large rise in rates in July, we again
returned to a neutral stance.
The fund also benefited during the period from a cross-market hedging
strategy. In October and November 2002, tax-exempt municipal bonds
offered investors nearly the same yield as that offered by Treasury
bonds. To take advantage of this situation, we established a
cross-market arbitrage position, in which we bought intermediate-term
municipal bonds and shorted 10-year Treasury futures contracts. Our
belief was that if interest rates were to rise (causing bond prices to
fall), the fund would have a loss on the municipal bonds but could
benefit from potential gains on the Treasury futures contracts. We felt
that these Treasury gains would more than offset the loss on the
municipal bonds. On the other hand, if rates were to fall (causing bond
prices to rise), a loss on the Treasury futures contracts could be
offset by an even greater gain on the municipal bonds. We saw the latter
scenario occur in the spring, when rates fell to very low levels, and
the strategy made a positive contribution to performance. The fund
realized further gains in the June market selloff, and we closed out
these positions.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
1/31/03 7/31/03
Average effective
maturity in years 10.1 9.2
Duration in years 6.3 6.4
Footnote reads:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective maturity
(a weighted average of the holdings' maturities)
Average effective maturity also takes into account put and call
features, where applicable.
Allocation overview
Because of the size of their respective economies, California and New
York are among the largest and most influential sources of municipal
bond issuance in the country, and they are consequently well represented
in your fund's portfolio. With the decline in the national economy and
rising federal budget deficits, lower tax revenues and federal cost
cutting have hurt state finances and have caused significant budget
shortfalls in many states, and California and New York have been
particularly hard hit.
California's financial situation has become especially acute. A $35
billion state budget shortfall existed in 2003 -- an outgrowth of the
weakened economy as well as the high growth in state spending over the
past five years. Moreover, the decline in tax revenues from the
technology sector, which had contributed so much to state coffers in
past years, was much more significant than anyone had thought possible.
Over the past 12 months, the state has issued massive new municipal
offerings to help bolster its finances. The combination of increased
supply and credit downgrades has caused prices to decline (and yields to
rise). Although the state's insured bonds have not been affected by the
credit downgrades, the general environment has caused these securities
to become cheaper in price (with higher yields). We view this as an
opportunity and have begun to increase our holdings of California
insured bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS AS
OF 7/31/03]
TOP INDUSTRY WEIGHTINGS AS OF 7/31/03
Utilities 18.5%
Transportation 17.6%
Health care 14.1%
Water and sewer 8.4%
Housing 4.3%
Footnote reads:
Weightings are shown as a percentage of net assets. Holdings will
vary over time.
In New York, similar budget problems have occurred, although to a lesser
extent than in California. As with California, record levels of supply,
as well as credit downgrades and generally falling market prices, have
caused New York's insured municipals to become attractively priced, in
our opinion. We have also taken advantage of this situation and have
added more New York insured holdings to the fund.
[GRAPHIC OMITTED: PIE CHART CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA (95.4%)
VMIG1 (4.6%)
Footnote reads:
As a percentage of market value as of 7/31/03. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
The fund's management team
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are Richard Wyke (Portfolio Leader), Paul Drury
(Portfolio Member), David Hamlin (Portfolio Member), Susan McCormack
(Portfolio Member), Kevin Cronin, and Joyce Dragone.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
Our current outlook for the municipal bond market is cautiously
optimistic. As we expected, investors focused on the U.S. economy after
the war in Iraq had ceased to dominate headlines. We believe the sharp
increase in bond yields that occurred in July as a result of economic
strengthening may segue into more normal yield fluctuations, although
yields may trend upward if the economy continues to show signs of
recovery. We also believe that state budgets will continue to face
pressures through the end of the year. We expect that governments will
wrangle with the implementation of costly home-front protection measures
while at the same time pushing tax cuts to stimulate economic growth.
Since improvements in municipal credit quality typically lag a general
economic recovery, we expect municipal credit ratings to remain fragile
for the next several months. However, as long as credit quality remains
tenuous, we think that investors should continue to seek the relative
attractiveness of insured AAA-rated municipal bonds.
We believe that insured municipals continue to offer attractive value,
especially since the large yield increase in recent weeks appears to
have abated, and that investors seeking federally tax-free income from
high-quality municipal bonds should continue to benefit from holding
these securities in a diversified portfolio.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Shares of this fund
are not insured, and their prices will fluctuate with market conditions.
Performance summary
This section provides information about your fund's performance during
its fiscal year, which ended July 31, 2003. In accordance with
regulatory requirements, we also include performance for the most
current calendar quarter-end. Performance should always be considered in
light of a fund's investment strategy. Past performance does not
indicate future results. More recent returns may be less or more than
those shown. Investment return and principal value will fluctuate and
you may have a gain or a loss when you sell your shares. A profile of
your fund's strategy appears on the first page of this report. See page
9 for definitions of some terms used in this section.
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TOTAL RETURN FOR PERIODS ENDED 7/31/03
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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
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1 year 2.71% -2.17% 2.04% -2.79% 1.82% 0.86% 2.40% -0.92%
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5 years 25.57 19.59 23.14 21.20 20.56 20.56 24.05 20.00
Annual average 4.66 3.64 4.25 3.92 3.81 3.81 4.40 3.71
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10 years 65.26 57.44 59.13 59.13 52.72 52.72 59.72 54.54
Annual average 5.15 4.64 4.75 4.75 4.33 4.33 4.79 4.45
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Annual average
(life of fund) 7.08 6.79 6.85 6.85 6.54 6.54 6.87 6.68
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for classes A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively. Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class A, C,
and M shares before their inception are derived from the historical
performance of class B shares, adjusted for the applicable sales charge
(or CDSC) and higher operating expenses for such shares.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/03
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Lipper Insured
Lehman Municipal
Municipal Bond Debt Funds
Index category average*
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1 year 3.60% 2.51%
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5 years 30.59 23.46
Annual average 5.48 4.30
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10 years 78.78 63.46
Annual average 5.98 5.02
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Annual average
(life of fund) 8.00 7.32
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* Index and Lipper results should be compared to fund performance at net asset
value. Over the 1-, 5-, and 10-year periods ended 7/31/03, there were 49,
42, and 23 funds, respectively, in this Lipper category.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment, 7/31/93 to 7/31/03
Fund's class B Lehman Municipal
Date/year shares at CDSC Bond Index
7/31/93 10,000 10,000
7/31/94 9,953 10,187
7/31/95 10,503 10,989
7/31/96 11,361 11,714
7/31/97 12,194 12,915
7/31/98 12,964 13,690
7/31/99 13,049 14,083
7/31/00 13,647 14,691
7/31/01 14,861 16,171
7/31/02 15,655 17,256
7/31/03 $15,913 $17,878
Footnote reads:
Past performance does not indicate future results. At the end of the
same time period, a $10,000 investment in the fund's class A and class M
shares would have been valued at $16,526 and $15,972, respectively
($15,744 and $15,454 at public offering price); a $10,000 investment in
the fund's class C shares would have been valued at $15,272, and no
contingent deferred sales charge would apply.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/03
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Class A Class B Class C Class M
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Distributions (number) 12 12 12 12
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Income 1 $0.588013 $0.487916 $0.464837 $0.543068
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Capital gains 1
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Long-term 0.317400 0.317400 0.317400 0.317400
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Short-term 0.046100 0.046100 0.046100 0.046100
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Total $0.951513 $0.851416 $0.828337 $0.906568
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Share value: NAV POP NAV NAV NAV POP
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7/31/02 $15.46 $16.23 $15.48 $15.49 $15.50 $16.02
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7/31/03 14.93 15.67 14.95 14.95 14.97 15.47
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Current return (end of period)
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Current dividend rate 2 3.77% 3.59% 3.09% 2.93% 3.45% 3.34%
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Taxable equivalent 3 5.8 5.52 4.75 4.51 5.31 5.14
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Current 30-day
SEC yield 4 2.93 2.79 2.26 2.1 2.62 2.53
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Taxable equivalent 3 4.51 4.29 3.48 3.23 4.03 3.89
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1 Capital gains, if any, are taxable for federal and, in most cases, state
purposes. For some investors, investment income may be subject to the
federal alternative minimum tax. Income from federally exempt funds may
be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 35.00% federal tax rate for 2003. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
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TOTAL RETURN FOR PERIODS ENDED 6/30/03 (MOST RECENT CALENDAR QUARTER)
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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
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1 year 8.25% 3.14% 7.55% 2.55% 7.38% 6.38% 7.92% 4.39%
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5 years 31.00 24.77 28.55 26.55 25.86 25.86 29.31 25.10
Annual average 5.55 4.53 5.15 4.82 4.71 4.71 5.28 4.58
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10 years 71.61 63.44 65.32 65.32 58.81 58.81 65.89 60.54
Annual average 5.55 5.04 5.16 5.16 4.73 4.73 5.19 4.85
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Annual average
(life of fund) 7.36 7.06 7.13 7.13 6.82 6.82 7.15 6.95
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Past performance does not indicate future results. More recent
returns may be less or more than those shown. Please see first page of
performance section for performance calculation methods.
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.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
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.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without 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 (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman GNMA Index is an unmanaged index of Government National Mortgage
Association bonds.
Lehman Global Aggregate Bond Index is an unmanaged index used as a broad
measure of international investment-grade bonds.
S&P 500 Index is an unmanaged index of common stock performance.
Russell 2000 Index is an unmanaged index of common stocks that generally
measure performance of small to midsize companies within the Russell
3000 Index.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Independent Auditors' Report, 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.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
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.
Independent auditors' report
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, 2003, 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 of America. 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 of America, 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, 2003, by correspondence with the custodian, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 9, 2003
The fund's portfolio
July 31, 2003
Key to Abbreviations
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AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FHA Insd. Federal Housing Administration Insured
FNMA Coll. Federal National Mortgage Association Collateralized
FSA Financial Security Assurance
GNMA Coll. Government National Mortgage Association Collateralized
G.O. Bonds General Obligation Bonds
MBIA MBIA Insurance Company
PSFG Permanent School Fund Guaranteed
VRDN Variable Rate Demand Notes
Municipal bonds and notes (100.4%) (a)
Principal amount Rating (RAT) Value
Alabama (2.2%)
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$3,000,000 Alabama A&M U. Rev. Bonds, MBIA, 6 1/2s, 11/1/25 Aaa $3,393,750
7,500,000 Jefferson Cnty., Swr. Rev. Bonds, FGIC, 5 3/4s, 2/1/38 Aaa 8,559,375
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11,953,125
Alaska (2.3%)
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AK State Hsg. Fin. Corp. Rev. Bonds, Ser. A
5,740,000 4.4s, 12/1/31 Aaa 5,969,600
6,000,000 MBIA, 5.9s, 12/1/19 Aaa 6,202,500
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12,172,100
Arizona (2.2%)
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7,500,000 Arizona School Fac. Board COP, Ser. A, MBIA,
5s, 9/1/12 Aaa 8,109,375
AZ State Trans. Board Rev. Bonds, Ser. B
2,250,000 5 1/4s, 7/1/15 AAA 2,415,938
1,000,000 5 1/4s, 7/1/14 AAA 1,081,250
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11,606,563
California (10.1%)
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2,105,000 Alvord, G.O. Bonds, Ser. A, MBIA, 5.9s, 2/1/20 AAA 2,383,913
4,500,000 CA Poll. Control Fin. Auth. Poll. Control Rev.
Bonds (Pacific Gas & Electric Corp.), Ser. A,
MBIA, 5.35s, 12/1/16 AAA 4,725,000
20,000,000 CA State Dept. of Wtr. Resources Rev. Bonds,
Ser. A, AMBAC, 5 1/2s, 5/1/13 Aaa 21,825,000
3,000,000 CA Statewide Cmnty. Dev. Auth. COP (Motion Picture
& TV Fund), AMBAC, 5.35s, 1/1/24 Aaa 3,090,000
7,000,000 San Diego Cnty., Wtr. Auth. COP, FGIC,
5.681s, 4/23/08 Aaa 7,875,000
5,000,000 San Francisco, City & Cnty. Arpt. Comm. Rev.
Bonds, Ser. 29 B, FGIC, 5s, 5/1/12 AAA 5,337,500
3,680,000 Santa Ana, Fin. Auth. Lease Rev. Bonds (Police
Admin. & Hldg. Fac.), Ser. A, MBIA, 6 1/4s, 7/1/17 Aaa 4,342,400
3,905,000 Vallejo City, Unified School Dist. G.O. Bonds,
Ser. A, MBIA, 5.9s, 2/1/22 AAA 4,393,125
-------------
53,971,938
Colorado (2.0%)
- -------------------------------------------------------------------------------------------------------------------
1,102,000 CO Hlth. Fac. Auth. Rev. Bonds (Cmnty. Provider
Pooled Loan Program), Ser. A, FSA, 7 1/4s, 7/15/17 Aaa 1,104,920
5,000,000 Denver, City & Cnty. Arpt. Rev. Bonds, MBIA,
5 1/2s, 11/15/25 Aaa 5,181,250
4,000,000 Weld Cnty. School Dist. G.O. Bonds, FSA, 5 1/2s,
12/1/19 Aaa 4,225,000
-------------
10,511,170
District of Columbia (0.8%)
- -------------------------------------------------------------------------------------------------------------------
1,000,000 DC COP, AMBAC, 5 1/4s, 1/1/09 AAA 1,088,750
3,000,000 DC G.O. Bonds, Ser. A, FSA, 5 7/8s, 6/1/05 Aaa 3,228,750
-------------
4,317,500
Florida (5.7%)
- -------------------------------------------------------------------------------------------------------------------
730,000 FL Hsg. Fin. Agcy. Rev. Bonds (Home Ownership Dev.
Program Class B), Ser. 1987 G2, 8.595s, 11/1/18 AAA 761,025
13,675,000 Hernando Cnty., Rev. Bonds (Criminal Justice
Complex Fin.), FGIC, 7.65s, 7/1/16 Aaa 17,914,250
5,000,000 Orlando & Orange Cnty., Expressway Auth. Rev.
Bonds, FGIC, 8 1/4s, 7/1/14 Aaa 6,687,500
3,960,000 Sumter Cnty., School Dist. Rev. Bonds (Multi Dist.
Loan Program), FSA, 7.15s, 11/1/15 Aaa 5,009,400
-------------
30,372,175
Georgia (2.3%)
- -------------------------------------------------------------------------------------------------------------------
8,000,000 Atlanta, Arpt. Rev. Bonds, Ser. B, FGIC, 5 5/8s, 1/1/30 Aaa 8,240,000
3,360,000 Fulton Cnty., Dev. Auth. Rev. Bonds (Klaus Pkg. &
Fam. Hsg. Project), MBIA, 5 1/4s, 11/1/20 Aaa 3,465,000
415,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds, Ser. Y,
AMBAC, 6.4s, 1/1/13 AAA+ 492,813
-------------
12,197,813
Idaho (1.0%)
- -------------------------------------------------------------------------------------------------------------------
5,440,000 ID Hlth. Fac. Auth. VRDN (St. Lukes Med. Ctr.),
FSA, 0.97s, 7/1/30 VMIG1 5,440,000
Illinois (10.1%)
- -------------------------------------------------------------------------------------------------------------------
Chicago, Board of Ed. G.O. Bonds, Ser. A
1,000,000 FGIC, 5 1/4s, 12/1/20 Aaa 1,050,000
1,500,000 MBIA, 5 1/4s, 12/1/19 Aaa 1,550,625
5,500,000 Chicago, G.O. Bonds, Ser. A, AMBAC, 5 5/8s, 1/1/39 Aaa 5,671,875
3,000,000 Chicago, Midway Arpt. Rev. Bonds, Ser. A, FSA, 5s,
1/1/07 Aaa 3,195,000
Chicago, O'Hare Intl. Arpt. Rev. Bonds, Ser. E,
AMBAC
2,625,000 5s, 1/1/06 Aaa 2,775,938
2,535,000 5s, 1/1/05 Aaa 2,639,569
2,150,000 Chicago, Wtr. Rev. Bonds, AMBAC, 5 3/4s, 11/1/30 Aaa 2,348,875
4,000,000 Cook Cnty. G.O. Bonds, Ser. D, AMBAC, 5 1/4s,
11/15/21 Aaa 4,080,000
1,000,000 Du Page Cnty., Cmnty. High School Dist. G.O. Bonds
(Dist. No. 108 - Lake Park), FSA, 5.6s, 1/1/20 Aaa 1,065,000
5,000,000 IL G.O. Bonds, Ser. 1, MBIA, 5 1/4s, 10/1/19 Aaa 5,200,000
3,000,000 IL State G.O. Bonds, FGIC, 6s, 11/1/26 Aaa 3,420,000
3,900,000 Regl. Trans. Auth. G.O. Bonds, FSA, 5 3/4s, 6/1/15 Aaa 4,377,750
Regl. Trans. Auth. Rev. Bonds
5,000,000 Ser. A, AMBAC, 8s, 6/1/17 Aaa 6,468,750
7,220,000 Ser. B, MBIA, 5 3/4s, 6/1/33 Aaa 7,896,875
2,305,000 Ser. B, MBIA, 5 1/2s, 6/1/15 AAA 2,535,500
-------------
54,275,757
Indiana (3.8%)
- -------------------------------------------------------------------------------------------------------------------
6,605,000 Center Grove, Bldg. Rev. Bonds, AMBAC, 5 1/2s,
1/15/26 Aaa 6,728,844
1,000,000 Evansville Vanderburgh Pub. Leasing Corp. Rev.
Bonds (1st Mtge.), MBIA, 5 3/4s, 7/15/18 Aaa 1,075,000
3,135,000 IN Bond Bk. Rev. Bonds, AMBAC, 5s, 2/1/06 Aaa 3,358,369
7,500,000 IN Hlth. Fac. Fin. Auth. Hosp. Rev. Bonds
(Columbus Regl. Hosp.), FSA, 7s, 8/15/15 Aaa 9,103,125
-------------
20,265,338
Iowa (0.9%)
- -------------------------------------------------------------------------------------------------------------------
4,505,000 IA Fin. Auth. Rev. Bonds (Mtge. Backed Securities
Program), Ser. B, GNMA/FNMA Coll., 4.7s, 7/1/23 Aaa 4,707,725
Louisiana (1.4%)
- -------------------------------------------------------------------------------------------------------------------
157,793 East Baton Rouge, Mtge. Fin. Auth. Rev. Bonds
(Single Fam.), Ser. B, GNMA Coll., 8 1/4s, 2/25/11 AAA 159,371
3,000,000 LA Rev. Bonds, Ser. A, AMBAC, 5 3/8s, 6/1/19 Aaa 3,138,750
4,000,000 LA State U. & Agriculture & Mechanical College
Rev. Bonds, MBIA, 5 1/2s, 7/1/26 Aaa 4,200,000
-------------
7,498,121
Massachusetts (2.3%)
- -------------------------------------------------------------------------------------------------------------------
2,850,000 MA Dev. Fin. Agcy. Rev. Bonds, Ser. A, MBIA,
5 1/2s, 1/1/11 Aaa 3,110,063
4,300,000 MA State G.O. Bonds, Ser. D, FGIC, 5 1/2s, 11/1/18 AAA 4,692,375
4,500,000 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Harvard Pilgrim Hlth.), Ser. A, FSA, 5s, 7/1/14 Aaa 4,725,000
-------------
12,527,438
Michigan (3.1%)
- -------------------------------------------------------------------------------------------------------------------
720,000 Detroit, Rev. Bonds, Ser. B, FGIC, 5 1/4s, 7/1/20 AAA 745,200
500,000 Kent, Hosp. Fin. Auth. Rev. Bonds (Spectrum Hlth.
Care), Ser. A, MBIA, 5 1/2s, 1/15/17 AAA 531,875
5,000,000 MI State Hosp. Fin. Auth. Rev. Bonds (Mercy Hlth.
Svcs.), Ser. A, AMBAC, 6s, 8/15/34 Aaa 5,437,500
4,000,000 MI State Strategic Fund Ltd. Rev. Bonds (Detroit
Edison Co.), AMBAC, 7s, 5/1/21 Aaa 4,940,000
3,500,000 MI State Strategic Fund, Ltd. Rev. Bonds (Detroit
Ed CC Conv), AMBAC, 4.85s, 9/1/30 Aaa 3,714,375
1,065,000 St. Joseph School Dist. G.O. Bonds, 5 1/2s, 5/1/18 Aaa 1,120,913
-------------
16,489,863
Minnesota (3.0%)
- -------------------------------------------------------------------------------------------------------------------
15,000,000 Southern MN Muni. Pwr. Agcy. Syst. Rev. Bonds,
Ser. A, AMBAC, 5 1/4s, 1/1/16 Aaa 16,218,750
Mississippi (0.7%)
- -------------------------------------------------------------------------------------------------------------------
MS Dev. Bk. Special Obligation Rev. Bonds (Waste
Wtr. & Solid Waste Mgt.), Ser. A, FSA
1,855,000 5 3/8s, 2/1/19 Aaa 1,940,794
1,755,000 5 3/8s, 2/1/18 Aaa 1,849,331
-------------
3,790,125
Missouri (1.6%)
- -------------------------------------------------------------------------------------------------------------------
8,500,000 MO State Hlth. & Edl. Fac. Auth. VRDN (Cox Hlth.
Syst.), AMBAC, 0.92s, 6/1/22 VMIG1 8,500,000
Nebraska (1.1%)
- -------------------------------------------------------------------------------------------------------------------
6,000,000 NE Investment Fin. Auth. Rev. Bonds, MBIA, 6.66s,
12/8/16 Aaa 6,054,540
Nevada (1.5%)
- -------------------------------------------------------------------------------------------------------------------
4,000,000 Clark County Rev. Bonds, Ser. B, FGIC, 5 1/4s, 7/1/20 Aaa 4,080,000
3,665,000 Washoe Cnty., Arpt. Auth. Rev. Bonds, FSA,
5s, 7/1/11 Aaa 3,871,156
-------------
7,951,156
New Hampshire (1.1%)
- -------------------------------------------------------------------------------------------------------------------
5,000,000 NH State Tpk. Syst. Rev. Bonds, FGIC, 6.806s,
11/1/17 Aaa 5,731,250
New Jersey (1.9%)
- -------------------------------------------------------------------------------------------------------------------
10,000,000 NJ Econ. Dev. Auth. Rev. Bonds (School Fac.
Construction), Ser. F, FGIC, 5 1/4s, 6/15/21 Aaa 10,317,000
New Mexico (0.2%)
- -------------------------------------------------------------------------------------------------------------------
1,000,000 Albuquerque, Arpt. Rev. Bonds, AMBAC, 5s, 7/1/07 Aaa 1,077,500
40,000 NM Mtge. Fin. Auth. Single Fam. Mtge. Rev. Bonds,
Ser. C, FGIC, 8 1/2s, 7/1/07 Aaa 40,300
-------------
1,117,800
New York (9.7%)
- -------------------------------------------------------------------------------------------------------------------
Metropolitan Trans. Auth. Rev. Bonds, Ser. A
7,135,000 FGIC, 5 1/2s, 11/15/19 Aaa 7,777,150
2,000,000 AMBAC, 5 1/2s, 11/15/14 AAA 2,212,500
Nassau Cnty., Hlth. Care Syst. Rev. Bonds (Nassau
Hlth. Care Corp.), FSA
4,610,000 6s, 8/1/13 Aaa 5,232,350
2,285,000 6s, 8/1/12 Aaa 2,564,913
NY City, VRDN, 1993 Ser. B, FGIC
3,000,000 0.87s, 10/1/21 VMIG1 3,000,000
2,600,000 0.87s, 10/1/20 VMIG1 2,600,000
5,250,000 NY City, Muni. Wtr. & Swr. Fin. Auth. VRDN,
Ser. G, FGIC, 0.85s, 6/15/24 VMIG1 5,250,000
NY State Dorm. Auth. Rev. Bonds
5,535,000 (City U. Syst. Construction), Ser. A, FGIC,
5 1/4s, 7/1/13 Aaa 6,012,394
1,750,000 (NY U.), Ser. B, MBIA, 5s, 7/1/11 Aaa 1,881,250
9,750,000 NY State Energy Research & Dev. Auth. Poll.
Control Rev. Bonds (Niagara Mohawk Pwr. Corp.),
Ser. A, FGIC, 7.2s, 7/1/29 Aaa 10,404,128
4,445,000 Triborough, Bridge & Tunnel Auth. Rev. Bonds,
AMBAC, 5 1/4s, 11/15/15 Aaa 4,833,938
-------------
51,768,623
North Carolina (1.2%)
- -------------------------------------------------------------------------------------------------------------------
6,000,000 Metropolitan Pier & Exposition Auth. Rev. Bonds
(McCormack Place Expansion Project), FGIC, 5 1/2s,
12/15/24 Aaa 6,217,500
Ohio (1.6%)
- -------------------------------------------------------------------------------------------------------------------
6,765,000 Cleveland, Wtr. Wks. Rev. Bonds, Ser. J, FSA, 5s,
1/1/06 Aaa 7,230,094
1,535,000 Morley Library Dist. G.O. Bonds (Lake Cnty. Dist.
Library), AMBAC, 5 1/4s, 12/1/19 Aaa 1,602,156
45,000 OH Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds,
Ser. 85-A, FGIC, zero %, 1/15/15 Aaa 14,513
-------------
8,846,763
Oklahoma (0.6%)
- -------------------------------------------------------------------------------------------------------------------
3,000,000 OK City Arpt. Trust Rev. Bonds, Ser. A, FSA,
5 1/4s, 7/1/21 AAA 3,056,250
Pennsylvania (3.1%)
- -------------------------------------------------------------------------------------------------------------------
1,500,000 Delaware Valley, Regl. Fin. Auth. Rev. Bonds,
Ser. A, AMBAC, 5 1/2s, 8/1/28 Aaa 1,593,750
6,000,000 Philadelphia, Regl. Port Auth. Lease Rev. Bonds
(Kidder Special MLD), MBIA, 6.2s, 9/1/13 Aaa 6,168,660
Philadelphia, School Dist. G.O., Ser. A, FSA
6,400,000 5 1/2s, 2/1/31 Aaa 6,640,000
2,000,000 5 1/2s, 2/1/18 Aaa 2,145,000
-------------
16,547,410
Puerto Rico (0.8%)
- -------------------------------------------------------------------------------------------------------------------
4,000,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. JJ, MBIA,
5 1/4s, 7/1/14 Aaa 4,390,000
South Carolina (1.3%)
- -------------------------------------------------------------------------------------------------------------------
7,000,000 SC Jobs Econ. Dev. Auth. Rev. Bonds, AMBAC, 5.23s,
8/1/15 Aaa 7,197,680
Tennessee (1.0%)
- -------------------------------------------------------------------------------------------------------------------
4,840,000 Knox Cnty., Hlth. Edl. & Hsg. Fac Board Rev. Bonds
(Ft. Sanders Alliance), MBIA, 5 3/4s, 1/1/14 Aaa 5,384,500
Texas (10.1%)
- -------------------------------------------------------------------------------------------------------------------
2,100,000 Austin Rev. Bonds, MBIA, 5 1/4s, 5/15/19 Aaa 2,223,375
5,195,000 Austin, Arpt. Syst. Rev. Bonds, Ser. A, MBIA,
6.1s, 11/15/11 Aaa 5,662,550
5,000,000 Austin, Elec. Util. Syst. Rev. Bonds, Ser. A,
AMBAC, 5 1/2s, 11/15/16 Aaa 5,487,500
2,500,000 Dallas Indpt. School Dist. G.O. Bonds, PSFG,
5 1/4s, 2/15/19 Aaa 2,587,500
5,280,000 Houston, Arpt. Syst. Rev. Bonds, FSA, 5s, 7/1/21 Aaa 5,260,200
1,500,000 Houston, Indpt. School Dist. G.O. Bonds, PSFG,
Ser. A, 6.3s, 8/15/14 Aaa 1,766,250
9,250,000 Houston, Wtr. & Swr. Rev. Bonds, Ser. A, FSA,
5 3/4s, 12/1/32 Aaa 10,117,188
5,000,000 Rio Grande Valley Hlth. Fac. Dev. Corp. Rev.
Bonds, MBIA, 6.4s, 8/1/12 Aaa 5,058,300
4,000,000 San Antonio Wtr. Rev. Bonds, FSA, 5 1/2s, 5/15/20 Aaa 4,235,000
5,000,000 Tarrant Cnty., Hlth. Fac. Dev. Rev. Bonds (TX
Hlth. Res. Sys.), Ser. A, MBIA, 5 3/4s, 2/15/15 AAA 5,562,500
2,500,000 TX State G.O. Bonds, FSA, 5s, 10/1/11 AAA 2,693,750
3,150,000 Victoria G.O. Bonds, FGIC, 5 1/2s, 8/15/20 Aaa 3,295,688
-------------
53,949,801
Utah (3.1%)
- -------------------------------------------------------------------------------------------------------------------
2,330,000 UT State Housing Fin. Agcy. Single Family Mtge.
Rev. Bonds, FHA Insd., 6s, 1/1/31 Aaa 2,391,163
UT State Pwr. Supply Rev. Bonds (Intermountain
Pwr. Agcy.), Ser. A, MBIA
7,900,000 6.15s, 7/1/14 (prerefunded) Aaa 8,966,500
4,495,000 6.15s, 7/1/14 Aaa 5,000,681
-------------
16,358,344
Washington (6.6%)
- -------------------------------------------------------------------------------------------------------------------
2,680,000 Central Puget Sound, Regl. Trans. Auth. Rev.
Bonds, FGIC, 5 1/4s, 2/1/18 AAA 2,840,800
2,400,000 Kitsap Cnty., Pub. Trans. Benefit Area Auth. G.O.
Bonds, AMBAC, 5s, 5/1/13 Aaa 2,550,000
10,000,000 Port of Seattle Rev. Bonds, Ser. A, FGIC, 5 1/2s,
10/1/22 Aaa 10,375,000
$6,060,000 Tacoma, Elec. Syst. Rev. Bonds, AMBAC, 5 3/8s,
1/1/12 Aaa 6,484,200
WA State Pub. Pwr. Supply Syst. Rev. Bonds
6,000,000 (Nuclear No. 3), Ser. B, MBIA, 7 1/8s, 7/1/16 Aaa 7,470,000
5,000,000 (Nuclear No. 1), Ser. A, AMBAC, 5.7s, 7/1/09 Aaa 5,518,750
-------------
35,238,750
- -------------------------------------------------------------------------------------------------------------------
Total Investments (cost $522,757,179) $536,942,868
- -------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $534,625,505.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at July 31, 2003 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, 2003. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the
Independent auditors' report.
The rates shown on VRDN are the current interest rates shown at
July 31, 2003.
The fund had the following industry group concentrations greater
than 10% at July 31, 2003 (as a percentage of net assets):
Utilities 18.5%
Transportation 17.6
Health care 14.1
The fund had the following insurance concentrations greater than
10% at July 31, 2003 (as a percentage of net assets):
FGIC 26.7%
AMBAC 26.4
MBIA 24.7
FSA 18.4
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
July 31, 2003
Assets
- -------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$522,757,179) (Note 1) $536,942,868
- -------------------------------------------------------------------------------------------
Interest and other receivables 5,469,360
- -------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 566,914
- -------------------------------------------------------------------------------------------
Receivable for securities sold 9,654,108
- -------------------------------------------------------------------------------------------
Total assets 552,633,250
Liabilities
- -------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 229,685
- -------------------------------------------------------------------------------------------
Distributions payable to shareholders 674,292
- -------------------------------------------------------------------------------------------
Payable for securities purchased 13,875,200
- -------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,571,092
- -------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 235,594
- -------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 88,621
- -------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 48,132
- -------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 802
- -------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 191,279
- -------------------------------------------------------------------------------------------
Other accrued expenses 93,048
- -------------------------------------------------------------------------------------------
Total liabilities 18,007,745
- -------------------------------------------------------------------------------------------
Net assets $534,625,505
Represented by
- -------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $518,250,393
- -------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 7,773
- -------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 2,181,650
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 14,185,689
- -------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares
outstanding $534,625,505
Computation of net asset value and offering price
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($368,419,228 divided by 24,677,358 shares) $14.93
- -------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $14.93)* $15.67
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($150,265,772 divided by 10,050,007 shares)** $14.95
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($13,792,795 divided by 922,292 shares)** $14.95
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,147,710 divided by 143,465 shares) $14.97
- -------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $14.97)*** $15.47
- -------------------------------------------------------------------------------------------
* 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.
Statement of operations
Year ended July 31, 2003
Interest income: $25,634,822
- -------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,792,117
- -------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 544,579
- -------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 21,477
- -------------------------------------------------------------------------------------------
Administrative services (Note 2) 12,259
- -------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 758,867
- -------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,387,522
- -------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 135,727
- -------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 10,653
- -------------------------------------------------------------------------------------------
Other 224,790
- -------------------------------------------------------------------------------------------
Total expenses 5,887,991
- -------------------------------------------------------------------------------------------
Expense reduction (Note 2) (43,524)
- -------------------------------------------------------------------------------------------
Net expenses 5,844,467
- -------------------------------------------------------------------------------------------
Net investment income 19,790,355
- -------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 11,488,157
- -------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,654,361)
- -------------------------------------------------------------------------------------------
Net realized loss on swap contracts (Note 1) (213,087)
- -------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and swap contracts
during the year (15,397,222)
- -------------------------------------------------------------------------------------------
Net loss on investments (5,776,513)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,013,842
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Year ended July 31
Increase (decrease) in net assets 2003 2002
- -------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------
Net investment income $19,790,355 $22,524,584
- -------------------------------------------------------------------------------------------------------
Net realized gain on investments 9,620,709 14,091,133
- -------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (15,397,222) (4,723,797)
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,013,842 31,891,920
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------------------------------
From ordinary income
Class A -- (22,214)
- -------------------------------------------------------------------------------------------------------
Class B -- (12,299)
- -------------------------------------------------------------------------------------------------------
Class C -- (750)
- -------------------------------------------------------------------------------------------------------
Class M -- (108)
- -------------------------------------------------------------------------------------------------------
From tax-exempt income
Class A (14,369,544) (14,826,726)
- -------------------------------------------------------------------------------------------------------
Class B (5,127,156) (7,029,484)
- -------------------------------------------------------------------------------------------------------
Class C (404,425) (393,775)
- -------------------------------------------------------------------------------------------------------
Class M (74,312) (72,597)
- -------------------------------------------------------------------------------------------------------
From net realized long-term gain on investments
Class A (7,592,845) --
- -------------------------------------------------------------------------------------------------------
Class B (3,337,034) --
- -------------------------------------------------------------------------------------------------------
Class C (271,570) --
- -------------------------------------------------------------------------------------------------------
Class M (44,356) --
- -------------------------------------------------------------------------------------------------------
From net realized short-term gain on investments
Class A (1,102,803) --
- -------------------------------------------------------------------------------------------------------
Class B (484,680) --
- -------------------------------------------------------------------------------------------------------
Class C (39,443) --
- -------------------------------------------------------------------------------------------------------
Class M (6,442) --
- -------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 4,531,446 8,830,656
- -------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (14,309,322) 18,364,623
Net assets
- -------------------------------------------------------------------------------------------------------
Beginning of year 548,934,827 530,570,204
- -------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income and distributions in excess of net investment
income of $7,773 and $248,103, respectively) $534,625,505 $548,934,827
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $15.46 $15.18 $14.52 $14.72 $15.40
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .58 .67 .71 .73 .72
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.16) .27 .66 (.20) (.56)
- ------------------------------------------------------------------------------------------------
Total from
investment operations .42 .94 1.37 .53 .16
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.59) (.66) (.71) (.73) (.72)
- ------------------------------------------------------------------------------------------------
From net realized gain
on investments (.36) -- -- -- (.12)
- ------------------------------------------------------------------------------------------------
Total distributions (.95) (.66) (.71) (.73) (.84)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.93 $15.46 $15.18 $14.52 $14.72
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.71 6.38 9.63 3.86 0.96
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $368,419 $363,096 $322,302 $260,637 $243,845
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .84 .82 .83 .81 .94
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.76 4.39 4.74 5.15 4.65
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 42.88 54.72 36.91 22.45 35.60
- ------------------------------------------------------------------------------------------------
(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).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $15.48 $15.20 $14.54 $14.74 $15.42
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .48 .59 .65 .68 .72
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.16) .27 .66 (.20) (.56)
- ------------------------------------------------------------------------------------------------
Total from
investment operations .32 .86 1.31 .48 .16
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.49) (.58) (.65) (.68) (.72)
- ------------------------------------------------------------------------------------------------
From net realized gain
on investments (.36) -- -- -- (.12)
- ------------------------------------------------------------------------------------------------
Total distributions (.85) (.58) (.65) (.68) (.84)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.95 $15.48 $15.20 $14.54 $14.74
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.04 5.81 9.18 3.44 1.00
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $150,266 $171,801 $196,934 $238,508 $327,920
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.49 1.35 1.23 1.21 .90
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.10 3.86 4.34 4.75 4.69
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 42.88 54.72 36.91 22.45 35.60
- ------------------------------------------------------------------------------------------------
(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).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ------------------------------------------------------------------------------------------------
For the period
July 26, 1999+
Per-share Year ended July 31 to July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $15.49 $15.21 $14.53 $14.72 $14.83
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .46 .55 .59 .62 .01
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) .27 .68 (.19) (.11)
- ------------------------------------------------------------------------------------------------
Total from
investment operations .29 .82 1.27 .43 (.10)
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.47) (.54) (.59) (.62) (.01)
- ------------------------------------------------------------------------------------------------
From net realized gain
on investments (.36) -- -- -- --
- ------------------------------------------------------------------------------------------------
Total distributions (.83) (.54) (.59) (.62) (.01)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.95 $15.49 $15.21 $14.53 $14.72
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.82 5.53 8.89 3.11 (0.66)*
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $13,793 $11,885 $9,638 $1,123 $1
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.64 1.62 1.63 1.61 .03*
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.95 3.58 3.88 4.33 .08*
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 42.88 54.72 36.91 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).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $15.50 $15.22 $14.56 $14.76 $15.39
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .54 .62 .66 .69 .66
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.16) .28 .67 (.20) (.51)
- ------------------------------------------------------------------------------------------------
Total from
investment operations .38 .90 1.33 .49 .15
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.55) (.62) (.67) (.69) (.66)
- ------------------------------------------------------------------------------------------------
From net realized gain
on investments (.36) -- -- -- (.12)
- ------------------------------------------------------------------------------------------------
Total distributions (.91) (.62) (.67) (.69) (.78)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.97 $15.50 $15.22 $14.56 $14.76
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.40 6.05 9.28 3.55 0.91
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,148 $2,154 $1,696 $2,692 $1,866
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.14 1.12 1.13 1.11 1.24
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.45 4.08 4.45 4.82 4.35
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 42.88 54.72 36.91 22.45 35.60
- ------------------------------------------------------------------------------------------------
(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).
The accompanying notes are an integral part of these financial statements.
Notes to financial statements
July 31, 2003
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 primarily 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 and class M 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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in 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 valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees. Such services use information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Such valuations and procedures are reviewed
periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are recorded 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. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis. The premium in
excess of the call price, if any, is amortized to the call date;
thereafter, any remaining premium is amortized to maturity.
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. The fund and the broker
agree to exchange an amount of cash equal to the daily fluctuation in
the value of the futures contract. Such receipts or payments are known
as "variation margin." 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. Futures and written option contracts outstanding at period end
are listed after The fund's portfolio.
D) Total return swap contracts The fund may enter into total return swap
contracts, which are arrangements to exchange a market linked return for
an interest payment, both based on a notional principal amount. To the
extent that the total return of the security or index underlying the
transaction exceeds or falls short of the offsetting interest rate
obligation, the fund will receive a payment from or make a payment to
the counterparty, respectively. Total return swap contracts are marked
to market daily based upon quotations from market makers and the change,
if any, is recorded as unrealized gain or loss. Payments received or
made at the end of the measurement period are recorded as realized gains
or losses. The fund could be exposed to credit or market risk due to
unfavorable changes in the fluctuation of interest rates or in the price
of the underlying security or index, the possibility that there is no
liquid market for these agreements or that the counterparty may default
on its obligation to perform. Total return swap contracts outstanding at
period end are listed after The fund's portfolio.
E) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund maintain an asset coverage
ratio of at least 300% and borrowings must not exceed prospectus
limitations. For the period ended July 31, 2003, the fund had no
borrowings against the line of credit. Effective August 6, 2003, the
fund will no longer participate in a committed line of credit.
F) 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.
G) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, 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,
dividends payable, realized gains and losses on certain futures
contracts, market discount 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,
2003, the fund reclassified $440,958 to increase undistributed net
investment income and $644,152 to increase paid-in-capital, with an
decrease to accumulated net realized gains of $1,085,110.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $21,284,615
Unrealized depreciation (7,098,926)
------------
Net unrealized appreciation 14,185,689
Undistributed tax exempt income 610,689
Undistributed short-term gain 1,286,250
Undistributed long-term gain 4,092,734
Cost for federal income
tax purposes $522,757,179
H) 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.
Note 2
Management fee, administrative services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on 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, 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, LLC. 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, 2003, the payable to the subcustodian
bank represents the amount due for cash advanced for the settlement of a
security purchased.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the year ended July 31, 2003, the
fund's expenses were reduced by $43,524 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,007 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, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, 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 at an
annual rate of 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 the
annual rates of 0.20%, 0.85%, 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, 2003, Putnam Retail Management, acting as
underwriter, received net commissions of $41,327 and $75 from the sale
of class A and class M shares, respectively, and received $274,433 and
$729 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, 2003, Putnam Retail Management,
acting as underwriter, received $6,512 and no monies on class A and
class M redemptions, respectively.
Note 3
Purchases and sales of securities
During the year ended July 31, 2003, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $249,767,649 and $229,297,041, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At July 31, 2003, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 5,792,511 $89,388,859
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 632,380 9,775,790
- ---------------------------------------------------------------------------
6,424,891 99,164,649
Shares repurchased (5,234,878) (81,026,185)
- ---------------------------------------------------------------------------
Net increase 1,190,013 $18,138,464
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 5,287,000 $80,564,387
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 627,697 9,555,417
- ---------------------------------------------------------------------------
5,914,697 90,119,804
Shares repurchased (3,655,278) (55,541,228)
- ---------------------------------------------------------------------------
Net increase 2,259,419 $34,578,576
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 1,840,319 $28,474,156
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 193,767 3,000,465
- ---------------------------------------------------------------------------
2,034,086 31,474,621
Shares repurchased (3,081,309) (47,565,208)
- ---------------------------------------------------------------------------
Net decrease (1,047,223) $(16,090,587)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 1,981,921 $30,282,305
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 257,484 3,925,681
- ---------------------------------------------------------------------------
2,239,405 34,207,986
Shares repurchased (4,095,145) (62,470,374)
- ---------------------------------------------------------------------------
Net decrease (1,855,740) $(28,262,388)
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 469,861 $7,304,731
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 19,513 302,204
- ---------------------------------------------------------------------------
489,374 7,606,935
Shares repurchased (334,567) (5,197,211)
- ---------------------------------------------------------------------------
Net increase 154,807 $2,409,724
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 631,077 $9,635,108
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 22,172 337,912
- ---------------------------------------------------------------------------
653,249 9,973,020
Shares repurchased (519,632) (7,877,353)
- ---------------------------------------------------------------------------
Net increase 133,617 $2,095,667
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 24,513 $380,235
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,962 61,418
- ---------------------------------------------------------------------------
28,475 441,653
Shares repurchased (23,949) (367,808)
- ---------------------------------------------------------------------------
Net increase 4,526 $73,845
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 49,056 $748,766
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,733 56,984
- ---------------------------------------------------------------------------
52,789 805,750
Shares repurchased (25,256) (386,949)
- ---------------------------------------------------------------------------
Net increase 27,533 $418,801
- ---------------------------------------------------------------------------
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.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $7,282,309 as long term capital gain, for its
taxable year ended July 31, 2003.
The Form 1099 you receive in January 2004 will show the tax status of
all distributions paid to your account in calendar 2003.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
President, Baxter Associates, Inc. (a consulting and private investments
firm)
Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and
digital imaging firm), Ryerson Tull, Inc. (a steel service corporation),
Advocate Health Care, and the National Center for Nonprofit Boards.
Chairman Emeritus of the Board of Trustees, Mount Holyoke College. Until
2002, Mrs. Baxter was a director of Intermatic Corporation, a
manufacturer of energy control products. Also held various positions in
investment banking and corporate finance, including Vice President and
principal of the Regency Group and Vice President and consultant to
First Boston Corp.
Charles B. Curtis (4/27/40), Trustee since 2001
President and Chief Operating Officer, Nuclear Threat Initiative (a
private foundation dealing with national security issues), also serves
as Senior Advisor to the United Nations Foundation
Member of the Council on Foreign Relations and the Trustee Advisory
Council of the Applied Physics Laboratory at Johns Hopkins University.
Until 2003, Mr. Curtis was a member of the Electric Power Research
Institute Advisory Council, and the University of Chicago Board of
Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was
a member of the Board of Directors of the Gas Technology Institute and
the Board of Directors of the Environment and Natural Resources Program
Steering Committee, John F. Kennedy School of Government, Harvard
University. Until 2001, Mr. Curtis was a Member of the Department of
Defense's Policy Board and Director of EG&G Technical Services, Inc.
(fossil energy research and development support). Prior to May 1997, Mr.
Curtis was Deputy Secretary of Energy. He served as Chairman of the
Federal Energy Regulatory Commission from 1977 to 1987 and has held
positions on the staff of the U.S. House of Representatives, the U.S.
Treasury Department, and the Securities and Exchange Commission. Mr.
Curtis is also a lawyer with over 15 years of experience.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Vice-Chairman and Managing Director, First Reserve Corporation (a
registered investment advisor investing in companies in the world-wide
energy industry on behalf of institutional investors)
Director of Devon Energy Corporation (formerly known as Snyder Oil
Corporation), TransMontaigne Oil Company, Continuum Health Partners of
New York, Sarah Lawrence College, and various private companies owned by
First Reserve Corporation. Trustee of TH Lee, Putnam Investment Trust (a
closed-end investment company). Prior to acquiring First Reserve in
1983, Mr. Hill held executive positions with several advisory firms and
various positions with the federal government, including Associate
Director of the Office of Management and Budget and Deputy Director of
the Federal Energy Administration.
Ronald J. Jackson (12/17/43), Trustee since 1996
Private investor
Former Chairman, President, and Chief Executive Officer of Fisher-Price,
Inc. (a toy manufacturer). Previously served as President and Chief
Executive Officer of Stride-Rite, Inc. and Kenner Parker Toys. Also held
financial and marketing positions with General Mills, Parker Brothers,
and Talbots. President of the Kathleen and Ronald J. Jackson Foundation
(charitable trust). Member of the Board of Overseers of WGBH (public
television and radio). Member of the Board of Overseers of the Peabody
Essex Museum.
Paul L. Joskow (6/30/47), Trustee since 1997
Elizabeth and James Killian Professor of Economics and Management and
Director of the Center for Energy and Environmental Policy Research,
Massachusetts Institute of Technology
Director, National Grid Transco (formerly National Grid Group, a
UK-based holding company with interests in electric and gas transmission
and distribution and telecommunications infrastructure), and the
Whitehead Institute for Biomedical Research (a non-profit research
institution). President of the Yale University Council. Prior to
February 2002, March 2000, and September 1998, Dr. Joskow was a Director
of State Farm Indemnity Company (an automobile insurance company),
Director of New England Electric System (a public utility holding
company) and a consultant to National Economic Research Associates,
respectively.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Chairman, Cambus-Kenneth Bloodstock (a limited liability company
involved in thoroughbred horse breeding and farming), President Emeritus
of Mount Holyoke College
Director, Northeast Utilities, and Talbots (a distributor of women's
apparel). Trustee of Centre College. Prior to 2001, Dr. Kennan was a
member of the Oversight Committee of Folger Shakespeare Library. Prior
to September 2000, June 2000, and November 1999, Dr. Kennan was a
Director of Chastain Real Estate, Bell Atlantic, and Kentucky Home Life
Insurance, respectively. Prior to 1995, Dr. Kennan was a Trustee of
Notre Dame University. For 12 years, she was on the faculty of Catholic
University.
John H. Mullin, III (6/15/41), Trustee since 1997
Chairman and CEO of Ridgeway Farm (a limited liability company engaged
in timber and farming)
Director Alex. Brown Realty, Inc., Sonoco Products, Inc. (a packaging
company), The Liberty Corporation (a company engaged in the broadcasting
industry), and Progress Energy, Inc. (a utility company, formerly known
as Carolina Power & Light). Trustee Emeritus of Washington & Lee
University. Prior to October 1997, January 1998, and May 2001, Mr.
Mullin was a Director of Dillon, Read & Co. Inc., The Ryland Group,
Inc., and Graphic Packaging International Corp., respectively.
Robert E. Patterson (3/15/45), Trustee since 1984
Senior Partner of Cabot Properties, L.P. and Chairman of Cabot
Properties, Inc.
Chairman of the Joslin Diabetes Center, Trustee of SEA Education
Association, and Director of Brandywine Trust Company (a trust company).
Prior to February 1998, Mr. Patterson was Executive Vice President and
Director of Acquisitions of Cabot Partners Limited Partnership. Prior to
December 2001, Mr. Patterson was President and Trustee of Cabot
Industrial Trust (publicly traded real estate investment trust). Prior
to 1990, Mr. Patterson was Executive Vice President of Cabot, Cabot &
Forbes Realty Advisors, the predecessor of Cabot Partners, and prior to
that was Senior Vice President of the Beal Companies.
W. Thomas Stephens (9/2/42), Trustee since 1997
Corporate Director
Director of Xcel Energy Incorporated (public utility company),
TransCanada Pipelines, Norske Canada, Inc. (paper manufacturer), and
Qwest Communications (communications company). Until 2003, Mr. Stephens
was a Director of Mail-Well, a printing and envelope company. Prior to
July 2001 and October 1999, Mr. Stephens was Chairman of Mail-Well and
MacMillan-Bloedel (forest products company). Prior to 1996, Mr. Stephens
was Chairman and Chief Executive Officer of Johns Manville.
W. Nicholas Thorndike (3/28/33), Trustee since 1992
Director of various corporations and charitable organizations, including
Courier Corporation (a book manufacturer and publisher) and Providence
Journal Co. (a newspaper publisher)
Trustee of Northeastern University and Honorary Trustee of Massachusetts
General Hospital. Prior to September 2000, April 2000, and December
2001, Mr. Thorndike was a Director of Bradley Real Estate, Inc., a
Trustee of Eastern Utilities Associates, and a Trustee of Cabot
Industrial Trust, respectively. Previously served as Chairman of the
Board and managing partner of Wellington Management/Thorndike Doran
Paine & Lewis, and Chairman and Director of Ivest Fund.
Lawrence J. Lasser* (11/1/42), Trustee since 1992 and Vice President
since 1981
President and Chief Executive Officer of Putnam Investments and Putnam
Management
Director of Marsh & McLennan Companies, Inc. and the United Way of
Massachusetts Bay. Member of the Board of Governors of the Investment
Company Institute, Trustee of the Museum of Fine Arts, Boston, a Trustee
and Member of the Finance and Executive Committees of Beth Israel
Deaconess Medical Center, Boston, and a Member of the CareGroup Board of
Managers Investment Committee, the Council on Foreign Relations, and the
Commercial Club of Boston.
George Putnam, III* (8/10/51), Trustee since 1984 and President since
2000
President, New Generation Research, Inc. (a publisher of financial
advisory and other research services relating to bankrupt and distressed
companies) and New Generation Advisers, Inc. (a registered investment adviser)
Director of The Boston Family Office, L.L.C. (registered investment
advisor), Trustee of St. Mark's School, and Trustee of Shore Country Day
School. Until 2002, Mr. Putnam was a Trustee of the SEA Education
Association. Previously, Mr. Putnam was an attorney with the firm of
Dechert Price & Rhoads.
A.J.C. Smith* (4/13/34), Trustee since 1986
Director of Marsh & McLennan Companies, Inc.
Director of Trident Corp. (a limited partnership with over 30
institutional investors). Trustee of the Carnegie Hall Society, the
Educational Broadcasting Corporation and the National Museums of
Scotland. Chairman of the Central Park Conservancy. Member of the Board
of Overseers of the Joan and Sanford I. Weill Graduate School of Medical
Sciences of Cornell University. Fellow of the Faculty of Actuaries in
Edinburgh, the Canadian Institute of Actuaries, and the Conference of
Actuaries. Associate of the Society of Actuaries. Member of the American
Actuaries, the International Actuarial Association and the International
Association of Consulting Actuaries. Prior to May 2000 and November
1999, Mr. Smith was Chairman and CEO, respectively, of Marsh & McLennan
Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA
02109.
As of July 31, 2003, there were 104 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her
resignation, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the fund, Putnam
Management, Putnam Retail Management or Marsh & McLennan Companies,
Inc., the parent company of Putnam, LLC and its affiliated companies.
Messrs. Putnam, III, Lasser and Smith are deemed "interested persons" by
virtue of their positions as officers or shareholders of the fund or
Putnam Management, Putnam Retail Management or Marsh & McLennan
Companies, Inc. George Putnam, III is the President of your fund and
each of the other Putnam funds. Lawrence J. Lasser is the President and
Chief Executive Officer of Putnam Investments and Putnam Management. Mr.
Lasser and Mr. Smith serve as Directors of Marsh & McLennan Companies,
Inc.
Officers
In addition to George Putnam, III, the other officers of the fund are
shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Treasurer and
Principal Financial Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Patricia C. Flaherty (12/1/46)
Senior Vice President
Since 1993
Senior Vice President, Putnam Investments
and Putnam Management
Karnig H. Durgarian (1/13/56)
Vice President and Principal Executive Officer
Since 2002
Senior Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Managing Director, Putnam Investments. Prior to July 2001, Partner,
PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Gordon H. Silver (7/3/47)
Vice President
Since 1990
Senior Managing Director, Putnam Investments, Putnam Management
and Putnam Retail Management
Mark C. Trenchard (6/5/62)
Vice President
Since 2002
Senior Vice President, Putnam Investments
William H. Woolverton (1/17/51)
Vice President and Chief Legal Officer
Since 2003
Managing Director, Putnam Investments, Putnam Management and Putnam
Retail Management
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square, Boston, MA 02109.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Auditors
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
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, Treasurer and Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Karnig H. Durgarian
Vice President and Principal Executive Officer
Steven D. Krichmar
Vice President and Principal Financial Officer
Michael T. Healy
Assistant Treasurer and Principal Accounting Officer
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President
William H. Woolverton
Vice President and Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
Insured Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.
AN043-203374 035/438/629/849 9/03
Not FDIC Insured, May Lose Value, No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal financial
officers have concluded, based on their evaluation of the effectiveness
of the design and operation of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this report
on Form N-CSR, that the design and operation of such procedures are
effective to provide reasonable assurance that information required to
be disclosed by the investment company in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
the Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 10. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: September 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Karnig H. Durgarian
---------------------------
Karnig H. Durgarian
Principal Executive Officer
Date: September 26, 2003
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Financial Officer
Date: September 26, 2003
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: September 26, 2003
Putnam
Tax-Free
High Yield
Fund
Item 1. Report to Stockholders:
- -------------------------------
The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
7-31-03
[GRAPHIC OMITTED: HARMONICA]
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III]
John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the fiscal year ended July 31, 2003, Putnam Tax Free High Yield
Fund posted positive results at net asset value, though it
underperformed both its benchmark index and its Lipper peer group
average. You will find the details on the facing page.
As you will see in the accompanying report from the fund's management
team, the high-yield municipal bond market advanced strongly in the
latter weeks of the fiscal year, outperforming the high-grade market for
the first time in two years. However, the upturn came too late in the
period to make a significant impact on results for the fund's full
fiscal year. In their report, the managers discuss this market turn as
well as other factors that drove the fund's performance throughout the
fiscal year. They also offer their insights into prospects for fiscal
2004.
Despite the challenges that will undoubtedly face your fund's managers
in coming months, we remain convinced that investors seeking the
opportunity for high current income and tax-free features of lower-rated
high-yield municipal bonds will continue to find these attributes in
this fund. As we wrote in our report to you at the fiscal year's
midpoint, we deeply appreciate your continued confidence in Putnam and
we firmly believe that over the long term your patience will be
rewarded.
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 17, 2003
Report from Fund Management
Fund highlights
* During the fiscal year ended July 31, 2003, Putnam Tax-Free High Yield
Fund's class A shares had total returns of 1.34% at net asset value
and -3.46% at maximum public offering price.
* Primarily as a result of credit quality differences in their respective
portfolios, the fund lagged its benchmark, the Lehman Municipal Bond
Index, which returned 3.60% for the period.
* Disappointing results from two airline-related holdings were largely
responsible for the fund's trailing the 2.83% average return of its
Lipper category, High-Yield Municipal Debt Funds.
* See the Performance Summary on page 8 for complete fund performance,
comparative performance, and Lipper data.
Performance commentary
A positive change in investor sentiment during the latter part of the
fiscal year caused the high-yield market to outperform the
investment-grade market for the first time since 2001. Even the
struggling airline industry -- the source of many industrial development
bonds that are part of the municipal market -- began to strengthen.
Although the fund's portfolio benefited during the latter part of the
period, the improvement was not sufficient to offset declines from
earlier in the period and so allow the fund to overtake the Lehman
Municipal Bond Index, which is composed primarily of investment-grade
rated bonds.
FUND PROFILE
Putnam Tax-Free High Yield Fund seeks to provide a high level of current
income free from federal income tax by investing in a diversified
portfolio of lower-rated and investment-grade municipal bonds. The fund
is intended and may be appropriate for investors seeking tax-advantaged
income who are willing to accept some credit risk.
In large measure, the fund's underperformance relative to its Lipper
peer group is attributable to two industrial development bonds (IDBs)
issued for US Airways and United Airlines, both of which filed for
bankruptcy during the first half of the fiscal year. Although the
airline industry as a whole has been in a recovery mode since early this
summer, prices of these two airline-backed issues have not followed
suit. These bonds are discussed in more detail on page 4.
Market overview
During the past 12 months, as economic growth continued at a sluggish
pace and the jobless rate mounted, concerns about inflation gave way to
worries about the prospect of deflation. Deflation is a decrease in the
price of goods and services brought about by decreasing demand, which
can lead to higher unemployment and a stalled economy. During the first
half of the year, these concerns, plus the prospect of war in Iraq,
drove risk-averse investors toward the relative security of high-quality
bonds. Meanwhile, lower-grade bonds languished.
By June, the Federal Reserve Board was sufficiently concerned about the
economy to cut short-term interest rates by a quarter of a percentage
point, causing the federal funds rate to reach 1% -- a 45-year low. Both
municipal bond yields and Treasury yields fell significantly through mid
June. However, as the fund's fiscal year neared its end in July, rates
on longer-term bonds rebounded dramatically over a short period, sending
prices down.
Prices in the tax-free market were also affected by the burgeoning
supply of new issues nationwide, which has broken all-time records. Over
$357 billion in municipal debt was issued in 2002, and supply has
continued to swell in 2003, as municipalities with mounting budget
problems were anxious to take advantage of low interest rates.
Industrial development bonds (IDBs), which are issued by municipalities
and backed by the credit of companies, have also influenced the tax-free
markets, slumping with the economy and then picking up late in the
fiscal year. However, the municipal market is still overshadowed by
growing federal and local budget deficits.
- ---------------------------------------------------------------------------
MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 7/31/03
- ---------------------------------------------------------------------------
Bonds
- ---------------------------------------------------------------------------
Lehman Municipal Bond Index 3.60%
- ---------------------------------------------------------------------------
Lehman Aggregate Bond Index (taxable bonds) 5.42%
- ---------------------------------------------------------------------------
Lehman Government Bond Index 4.45%
- ---------------------------------------------------------------------------
Lehman Intermediate Treasury Bond Index 3.89%
- ---------------------------------------------------------------------------
Stocks
- ---------------------------------------------------------------------------
S&P 500 Index (broad stock market) 10.64%
- ---------------------------------------------------------------------------
S&P Utilities Index (utilities stocks) 4.11%
- ---------------------------------------------------------------------------
Russell 2000 Growth Index (small-company growth stocks) 27.97%
- ---------------------------------------------------------------------------
These indexes provide an overview of performance in different market
sectors for the 12 months ended 7/31/03.
- ---------------------------------------------------------------------------
Strategy overview
We began the fiscal year expecting interest rates to rise, so we
positioned the fund with a relatively short average duration, a measure
of interest-rate sensitivity, to help reduce the impact of changes in
bond prices. However, interest rates drifted irregularly downward over
the year. In mid June, when the Fed made its most recent move, rates
plummeted. Ten-year Treasuries neared the 3% range; consequently, we
became more defensive as we believed that the low rates were not
sustainable as the prospects for economic growth were improving. Our
defensive move was justified in July, as rates rebounded, but as the
fiscal year ended we were moving the fund back into a duration-neutral
position. We continue to believe the future bias for interest rates is
up, not down, but we also believe much of the movement is already behind
us.
Our emphasis on high-yielding securities in pursuit of high total
returns continues. However, diversification is the key to our strategy
- -- balancing position sizes so they don't overwhelm the portfolio,
either on the upside or the downside. We prefer to own smaller positions
in more issues, rather than larger positions in fewer issues. This means
owning bonds issued in different geographical areas, industries, quality
ratings, maturities and different names, spreading risks out as much as
possible.
For example, we recently trimmed the fund's holdings in tobacco
settlement bonds to about 1.7% of total net assets. These bonds continue
to provide diversification as well as income for the fund. We also
reduced exposure to IDBs issued for airlines. As the prospect for
economic recovery improved toward the end of the year, airlines have
rebounded and we were able to sell some airline-related IDBs in the
rising market.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS COMPARED]
TOP INDUSTRY WEIGHTINGS COMPARED
as of as of
1/31/03 7/31/03
Health care 30.7% 32.0%
Utilities 14.9% 15.3%
Transportation 10.4% 7.4%
Forest and
paper products 5.8% 5.5%
Housing 2.2% 3.0%
Footnote reads:
This chart shows how the fund's top weightings have changed over the
last six months. Weightings are shown as a percentage of net assets.
Holdings will vary over time.
How fund holdings affected performance
Tobacco settlement bonds hurt performance during the year. These bonds
are issued by municipalities and secured by cash payments made in
satisfaction of legal judgments against the tobacco industry. Because
they are subject to special risks, they generally offer higher yields
than other bonds of comparable quality. Tobacco companies' profits are
under siege from continuing litigation and the prospect of declining
cigarette sales. In addition, because they have been so popular as a
source of financing for cash-strapped cities and states, we are
concerned that the market may be reaching the saturation point. Because
of these factors, we reduced our exposure to tobacco bonds. They did,
however, detract from performance during the period.
Airline-related IDBs were also a negative. IDBs are municipal bonds
issued to finance local expansion by various businesses. The bonds are
backed by the credit of the company benefiting from the financing, not
the issuing municipality. As a result, their prices are affected by
investor perceptions of the backing company or industry group.
Airline-backed IDBs, generally issued to finance airport facility
expansion, have been severely affected by declining air traffic and the
fiscal woes of the airline industry, including two high-profile
bankruptcies. Although the airline industry began to rebound late in the
year, the bonds issued for US Airways and United Airlines -- both of
which were held by the fund -- did not benefit from this rally.
Other industrial bonds in the fund's portfolio also had a difficult
first half. And although the second half of the fiscal year brought
positive changes for many of these issues, others continued to languish.
In addition to the two airlines mentioned above, the fund's holdings in
NY IDA Field Hotel proved disappointing. We purchased these bonds,
backed by revenues from a hotel located near John F. Kennedy
International Airport, in 1998. The terrorist attacks of September 11,
2001, the drop in air travel, the recession, and other factors all
negatively affected the travel industry, and this hotel's finances
deteriorated as a result. We eliminated the position this spring at a
substantial loss, when it seemed likely to us that the hotel was facing
bankruptcy.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA (22.0%)
A (11.9%)
Baa/BBB (26.6%)
Ba/BB (21.3%)
B (13.2%)
CCC (2.4%)
D (1.9%)
VMIG1 (0.7%)
Footnote reads:
As a percentage of market value as of 7/31/03. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
The utilities industry has gone through some difficult times, but it is
a variegated market that has been one of our target industries in our
efforts to broaden the fund's diversification. An example of a new name
among the fund's utilities holdings is Mason, West Virginia PCR,
Appalachian Power. Rated Baa1 by Moody's and BBB+ by Standard & Poor's,
the bonds have a coupon of 5.50% and mature in 2022. The company
provides electric power to residents of West Virginia and Virginia. We
liked Mason because it is a low-cost provider, which means we believe it
is well positioned in a deregulated market, and we believe it has what
we call a positive credit trajectory. Although there are no assurances,
we believe the company has the potential for a credit upgrade at some
time in the future. The fund has continued to benefit from its position
in California Department of Water Resources, Power Supply revenue bonds,
discussed in the semiannual report. These bonds are backed by a
surcharge on commercial and residential electric bills, not tax
receipts, and the proceeds are intended to replenish the state's general
fund. Rated A3, these issues expose the fund to a higher ratings
category while providing geographical and industry diversification as
well as what we believe is an attractive income stream.
When a bond issuer's credit rating is upgraded, or when a bond is
refunded, the value of the outstanding issue is likely to increase,
adding capital appreciation potential to current income. In July, the
fund benefited when a general obligation bond (GO) in the portfolio was
prerefunded. The bonds were issued by Lackawanna, Pennsylvania for
Scranton, and at the time we purchased them in 2001 they were not rated.
Although the issuer was experiencing financial difficulties, we believed
their problems would prove temporary. When conditions improved, the
issuer wanted to take advantage of lower interest rates. The two bond
series in the fund were issued at 7.00%, due in 2022 and 7.10%, due in
2031. After the refinancing, their market value rose dramatically.
Credit downgrades have also been a small negative factor in fund
performance. With budget deficits facing so many towns, cities, and
states, GOs now convey higher risk, especially those issued in
municipalities where budget stresses are greatest, like California and
New York. In addition, California and New York represent approximately
one quarter of the total municipal market.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
The fund's management team
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are Paul Drury (Portfolio Leader), David Hamlin
(Portfolio Member), Susan McCormack (Portfolio Member), Richard Wyke
(Portfolio Member), Kevin Cronin, and Joyce Dragone.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
Our current outlook for the municipal bond market is cautiously
optimistic. The conflict in Iraq is largely over, and investors are more
focused on economic concerns on the home front. While serious issues and
the threat of terrorism remain, the level of uncertainty in the world
seems to have eased.
We believe municipal budgets will continue to face significant pressures
in the months ahead, as governments wrangle with how to implement costly
home-front protection measures while pushing tax cuts to stimulate
economic growth. Historically, improvement in the credit quality of
state and local governments has lagged a general economic recovery, so
we expect municipal credit quality to remain fragile for some time to
come.
There are a number of factors that support the prospect for economic
growth, including low inventories and increased productivity, as well as
the low cost of borrowing, in historical terms. The weakened U.S. dollar
may also provide a stimulus for U.S. businesses, reinforcing
expectations for a global improvement in economic activity. Although
long-term interest rates have already risen, and we continue to believe
the future bias is upward, inflation prospects are currently low and
there are viable signs of economic recovery. Moreover, credit spreads --
the difference in yield between high- and low-quality bonds -- remain
wide, suggesting that credit risk may be worth taking in moderate
amounts.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. Lower-rated bonds
may offer higher yields in return for more risk.
Performance summary
This section provides information about your fund's performance during
its fiscal year, which ended July 31, 2003. In accordance with
regulatory requirements, we also include performance for the most
current calendar quarter-end. Performance should always be considered in
light of a fund's investment strategy. Past performance does not
indicate future results. More recent returns may be less or more than
those shown. Investment return and principal value will fluctuate and
you may have a gain or a loss when you sell your shares. A profile of
your fund's strategy appears on the first page of this report. See page
10 for definitions of some terms used in this section.
- -----------------------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 7/31/03
- -----------------------------------------------------------------------------------------------
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 1.34% -3.46% 0.82% -3.96% 0.46% -0.50% 0.96% -2.30%
- -----------------------------------------------------------------------------------------------
5 years 13.35 7.95 10.51 8.82 8.80 8.80 11.66 8.04
Annual average 2.54 1.54 2.02 1.71 1.70 1.70 2.23 1.56
- -----------------------------------------------------------------------------------------------
10 years 51.43 44.23 43.11 43.11 39.54 39.54 46.19 41.48
Annual average 4.24 3.73 3.65 3.65 3.39 3.39 3.87 3.53
- -----------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.81 6.51 6.47 6.47 5.94 5.94 6.60 6.40
- -----------------------------------------------------------------------------------------------
Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively. Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Performance for class A, C,
and M shares before their inception is derived from the historical
performance of class B shares, adjusted for the applicable sales charge
(or CDSC) and higher operating expenses for such shares.
- ------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 7/31/03
- ------------------------------------------------------------
Lipper
Lehman High-Yield
Municipal Municipal
Bond Debt Funds
Index category average*
- ------------------------------------------------------------
1 year 3.60% 2.83%
- ------------------------------------------------------------
5 years 30.59 15.50
Annual average 5.48 2.89
- ------------------------------------------------------------
10 years 78.78 59.73
Annual average 5.98 4.77
- ------------------------------------------------------------
Annual average
(life of fund) 8.00 6.82
- ------------------------------------------------------------
* Index and Lipper results should be compared to fund performance at net
asset value. Over the 1-, 5-, and 10-year periods ended 7/31/03 there
were 75, 50, and 19 funds, respectively, in this Lipper category.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment, 7/31/93 to 7/31/03
Date/year Fund's class B shares Lehman Municipal Bond Index
7/31/93 10,000 10,000
7/31/94 10,080 10,187
7/31/95 10,577 10,989
7/31/96 11,346 11,714
7/31/97 12,189 12,915
7/31/98 12,968 13,690
7/31/99 13,184 14,083
7/31/00 13,164 14,691
7/31/01 13,995 16,171
7/31/02 14,161 17,256
7/31/03 $14,311 $17,878
Footnote reads:
Past performance does not indicate 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 $13,954 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class A and M
shares would have been valued at $15,143 and $14,619, respectively,
($14,423 and $14,148 at public offering price).
- -----------------------------------------------------------------------------------------
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 7/31/03
- -----------------------------------------------------------------------------------------
Class A Class B Class C Class M
- -----------------------------------------------------------------------------------------
Distributions (number) 12 12 12 12
- -----------------------------------------------------------------------------------------
Income 1 $0.737497 $0.672763 $0.636806 $0.699862
- -----------------------------------------------------------------------------------------
Capital gains 1 -- -- -- --
- -----------------------------------------------------------------------------------------
Total $0.737497 $0.672763 $0.636806 $0.699862
- -----------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
- -----------------------------------------------------------------------------------------
7/31/02 $12.88 $13.52 $12.90 $12.89 $12.89 $13.32
- -----------------------------------------------------------------------------------------
7/31/03 12.31 12.92 12.33 12.31 12.31 12.72
- -----------------------------------------------------------------------------------------
Current return (end of period)
- -----------------------------------------------------------------------------------------
Current dividend rate 2 5.73% 5.46% 5.07% 4.91% 5.43% 5.25%
- -----------------------------------------------------------------------------------------
Taxable equivalent 3 8.82 8.40 7.80 7.55 8.35 8.08
- -----------------------------------------------------------------------------------------
Current 30-day SEC yield 4 5.16 4.92 4.50 4.34 4.85 4.70
- -----------------------------------------------------------------------------------------
Taxable equivalent 3 7.94 7.57 6.92 6.68 7.46 7.23
- -----------------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 35% federal tax rate for 2003. 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 6/30/03 (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 3.77% -1.12% 3.25% -1.64% 3.03% 2.05% 3.46% 0.13%
- -------------------------------------------------------------------------------------------------
5 years 16.06 10.55 13.07 11.35 11.49 11.49 14.33 10.64
Annual average 3.02 2.03 2.49 2.17 2.20 2.20 2.72 2.04
- -------------------------------------------------------------------------------------------------
10 years 55.36 47.98 46.90 46.90 43.28 43.28 50.02 45.10
Annual average 4.50 4.00 3.92 3.92 3.66 3.66 4.14 3.79
- -------------------------------------------------------------------------------------------------
Annual average
(life of fund) 6.97 6.68 6.64 6.64 6.12 6.12 6.76 6.57
- -------------------------------------------------------------------------------------------------
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.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
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.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without 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 (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Lehman Intermediate Treasury Bond Index is an unmanaged index of
Treasury bonds with maturities between 1 and up to 10 years.
S&P 500 Index is an unmanaged index of common stock performance.
S&P Utilities Index is an unmanaged index of common stock issued by
utilities companies.
Russell 2000 Growth Index is an unmanaged index of those companies in
the Russell 2000 Index chosen for their growth orientation.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in particular,
not to sell information about you or your accounts to outside marketing
firms. We have safeguards in place designed to prevent unauthorized
access to our computer systems and procedures to protect personal
information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Independent Auditors' Report, 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.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
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.
Independent auditors' report
To the Trustees of Putnam Tax-Free Income Trust and
Shareholders of Putnam Tax-Fee High Yield 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 High Yield Fund (the "fund") at
July 31, 2003, 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 of America. 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 of America, 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, 2003, by correspondence with the custodian, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
September 10, 2003
The fund's portfolio
July 31, 2003
Key to Abbreviations
- -------------------------------------------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
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 MBIA Insurance Company
TRAN Tax Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
Municipal bonds and notes (97.4%) (a)
Principal amount Rating (RAT) Value
Alabama (1.7%)
- -------------------------------------------------------------------------------------------------------------------
$5,000,000 Anniston, Indl. Dev. Rev. Bonds
(Hoover Group, Inc.), 8 1/2s, 9/1/10 CCC/P $3,400,000
5,120,000 DCH Hlth. Care Auth. Rev. Bonds, 5 1/4s, 6/1/18 A1 5,049,600
10,000,000 Jackson Cnty., Hlth. Care Auth. Rev. Bonds,
5.7s, 5/1/19 BB+ 8,712,500
1,800,000 Jackson Cnty., Hlth. Care Auth. TRAN, 7 7/8s, 5/1/19 AAA/P 1,917,198
2,000,000 Phoenix City., Indl. Dev. Board Rev. Bonds (Mead
Coated Board), Ser. A, 5.3s, 4/1/27 Baa2 1,670,000
-------------
20,749,298
Arizona (1.9%)
- -------------------------------------------------------------------------------------------------------------------
6,000,000 Casa Grande, Indl. Dev. Auth. Rev. Bonds (Casa
Grande Regl. Med. Ctr.), Ser. A, 7 5/8s, 12/1/29 B-/P 6,180,000
Cochise Cnty., Indl. Dev. Auth. Rev. Bonds
6,530,000 (Sierra Vista Regl. Hlth. Ctr.), 7 3/4s, 12/1/30 BB+/P 6,995,263
1,510,000 (Sierra Vista Cmnty. Hosp.), Ser. A, 6 3/4s, 12/1/26 BB+/P 1,498,675
5,500,000 Pima Cnty., Indl. Dev. Auth. Hlth. Care Fac. Rev.
Bonds, Ser. A, 8 1/2s, 11/15/32 B/P 5,665,000
Scottsdale, Indl. Dev. Auth. Rev. Bonds,
(Westminster Village 1st Mtge.), Ser A
1,500,000 8 1/4s, 6/1/15 BB-/P 1,569,375
2,300,000 8s, 6/1/11 BB-/P 2,400,625
-------------
24,308,938
Arkansas (1.2%)
- -------------------------------------------------------------------------------------------------------------------
7,600,000 AR State Hosp. Dev. Fin. Auth. Rev. Bonds
(WA Regl. Med. Ctr.), 7 3/8s, 2/1/29 Baa3 8,189,000
6,650,000 Northwest Regl. Arpt. Auth. Rev. Bonds,
7 5/8s, 2/1/27 BB/P 7,248,500
-------------
15,437,500
California (9.9%)
- -------------------------------------------------------------------------------------------------------------------
5,000,000 ABAG Fin. Auth. COP (American Baptist Homes),
Ser. A, 5.85s, 10/1/27 BB+ 4,400,000
Alameda, Corridor Trans. Auth. Rev. Bonds
19,795,000 MBIA, zero %, 10/1/35 Aaa 3,092,969
17,845,000 MBIA, zero %, 10/1/33 Aaa 3,122,875
15,000,000 Ser. 99-A, MBIA, zero %, 10/1/30 Aaa 3,131,250
10,000,000 Anaheim, Pub. Fin. Auth. Lease Rev. Bonds (Pub.
Impts.), Ser. C, FSA, zero %, 9/1/36 Aaa 1,475,000
7,500,000 CA State Dept. of Wtr. Resources Rev. Bonds,
Ser. A, 5 3/8s, 5/1/22 A3 7,368,750
3,400,000 CA State Dept. of Wtr. Resources Rev. Bonds,
Ser. A, 5 1/4s, 5/1/20 A3 3,353,250
3,250,000 CA State G.O. Bonds, 5 1/4s, 2/1/20 A2 3,225,625
1,000,000 CA Statewide Cmnty. Dev. Auth. Multi-Fam. Rev.
Bonds (Hsg. Equity Res.), Ser. B, 5.2s, 12/1/29 Baa1 1,061,250
8,000,000 Corona, COP (Vista Hosp. Syst.), Ser. B, 9 1/2s,
7/1/20 (In default) (NON) D/P 3,200,000
300,000 Foothill/Eastern Corridor Agcy. Rev. Bonds
(CA Toll Roads), 5 3/4s, 1/15/40 Baa3 307,500
7,835,000 Gilroy, Rev. Bonds (Bonfante Gardens Park),
8s, 11/1/25 B/P 6,424,700
1,000,000 Irvine, Impt. Board Act of 1915 Special Assmt.
Bonds (Assmt. Dist. No. 00-18-GRP 3), 5.55s, 9/2/26 BBB-/P 948,750
Los Angeles, Regl. Arpt. Impt. Corp. Lease Rev. Bonds
7,500,000 Ser. C, 7 1/2s, 12/1/24 CCC 6,196,875
2,895,000 (United Airlines, Inc.), 6 7/8s,
11/15/12 (In default) (NON) D/P 1,729,763
1,625,000 Orange Cnty., Cmnty. Fac. Dist. Special Tax Bonds
(No. 02-1 Ladera Ranch), Ser. A, 5.55s, 8/15/33 BB+/P 1,495,000
Redondo Beach, Redev. Agcy. Multi-Fam. Hsg. Rev.
Bonds (Heritage Point)
2,925,000 Ser. B, 8 1/2s, 9/1/23 BBB-/P 2,954,250
4,740,000 Ser. A, 6 1/2s, 9/1/23 BBB-/P 4,787,400
1,500,000 Roseville, Special Tax (Cmnty. Fac. Dist.
No. 1-Crocker), 6s, 9/1/33 BB/P 1,421,250
700,000 Sacramento, Special Tax (North Natomas Cmnty. Fac.
01-03), 6s, 9/1/28 BB/P 674,625
21,000,000 San Bernardino Cnty., IF COP, MBIA, 11.55s, 8/1/28
(acquired 6/27/95, cost $22,664,040) (RES) AAA/P 26,145,000
1,500,000 San Joaquin Hills, Trans. Corridor Agcy. Rev.
Bonds, Ser. A, 5 1/2s, 1/15/28 Baa3 1,419,375
10,000,000 San Luis Obispo, COP (Vista Hosp. Syst., Inc.),
8 3/8s, 7/1/29 (In default) (NON) D/P 4,000,000
2,770,000 Santaluz Cmnty., Fac. Dist. No. 2 Special Tax
(Impt. Area No. 1), 6 3/8s, 9/1/30 BB+/P 2,787,313
350,000 Southern CA Pub. Pwr. Auth. IFB (Transmission),
10.55s, 7/1/12 Aa3 358,981
4,560,000 Sunnyvale, Special Tax Rev. Bonds (Cmnty. Fac.
Dist. No. 1), 7 3/4s, 8/1/32 BB-/P 4,411,800
17,100,000 Vallejo, COP (Marine World Foundation), 7.2s,
2/1/26 BBB-/P 17,527,500
7,405,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 B+ 5,146,475
1,500,000 Valley Hlth. Syst. Hosp. Rev. Bonds (Refunding &
Impt.), Ser. A, 6 1/2s, 5/15/25 B+ 967,500
-------------
123,135,026
Colorado (1.7%)
- -------------------------------------------------------------------------------------------------------------------
13,000,000 Arapahoe Cnty., Cap. Impt. Trust Fund Hwy. Rev.
Bonds, Ser. E-470, 7s, 8/31/26 Aaa 14,901,250
5,000,000 CO Hlth. Fac. Auth. Rev. Bonds
(Evangelical Lutheran), 5.9s, 10/1/27 A3 4,937,500
1,500,000 CO Springs, Hosp. Rev. Bonds, 6 3/8s, 12/15/30 A3 1,567,500
CO State Edl. Fac. Auth. Rev. Bonds
(Ocean Journey, Inc.)
7,514,084 8 3/8s, 12/1/26 (In default) (NON) D/P 262,993
3,415,493 8.3s, 12/1/17 (In default) (NON) D/P 119,542
-------------
21,788,785
Connecticut (1.5%)
- -------------------------------------------------------------------------------------------------------------------
CT State Dev. Auth. Rev. Bonds (East Hills Woods)
4,439,954 Ser. A, 7 3/4s, 11/1/17 CCC/P 3,690,712
457,428 Ser. B, zero %, 3/1/21 CCC/P 32,592
2,000,000 CT State Dev. Auth. First Mtg. Gross Rev. Hlth.
Care Rev. Bonds (The Elm Street Park Baptist, Inc.
Project), 5.85s, 12/1/33 BBB+ 1,960,000
6,000,000 CT State Dev. Auth. Poll. Control Rev. Bonds
(Western MA), Ser. A, 5.85s, 9/1/28 A3 6,217,500
6,500,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Edgehill), Ser. A, 6 7/8s, 7/1/27 AAA/P 7,033,455
-------------
18,934,259
District of Columbia (2.2%)
- -------------------------------------------------------------------------------------------------------------------
17,000,000 DC G.O. Bonds, Ser. A, 6 3/8s, 6/1/26 AAA 19,380,000
DC Tobacco Settlement Fin. Corp. Rev. Bonds
4,500,000 6 3/4s, 5/15/40 A- 3,858,750
5,500,000 6 1/2s, 5/15/33 A- 4,647,500
-------------
27,886,250
Florida (6.3%)
- -------------------------------------------------------------------------------------------------------------------
9,260,000 Brevard Cnty., Hlth. Fac. Auth. Rev. Bonds
(Courtenay Springs Village), 7 3/4s, 11/15/24 AAA/P 10,232,300
5,000,000 Capital Trust Agcy. Rev. Bonds (Seminole Tribe
Convention), Ser. A, 10s, 10/1/33 B/P 5,843,750
3,105,000 Capital Trust Agcy. Multi-Fam. Rev. Bonds (American
Opportunity-Senior), Ser. A, 5 7/8s, 12/1/38 Baa1 2,817,788
1,000,000 Fishhawk, Cmnty. Dev. Dist. II Rev. Bonds, Ser. B,
5s, 11/1/07 BB-/P 990,000
8,170,000 FL Gulf Coast U. VRDN, 0.93s, 8/1/30 (First Union
National Bank) VMIG1 8,170,000
5,180,000 FL State Fin. Dept. Gen. Svcs. IFB (Rites-PA
414A), FSA, 9.09s, 7/1/11 (acquired 9/2/98,
cost $6,687,794) (RES) AAA/P 6,708,100
24,000,000 Hernando Cnty., Indl. Dev. Rev. Bonds (FL Crushed
Stone Co.), 8 1/2s, 12/1/14 A-/P 24,770,400
3,300,000 Lee Cnty., Indl. Dev. Auth. Hlth. Care Fac. Rev.
Bonds (Shell Point Village), Ser. A, 5 1/2s, 11/15/29 BBB 3,011,250
Orange Cnty., Hlth. Fac. Auth. Rev. Bonds
2,400,000 (Orlando Regl. Hlth. Care), 5 3/4s, 12/1/32 A2 2,400,000
3,750,000 (Adventist Hlth. Syst.), 5 5/8s, 11/15/32 A3 3,689,063
Sanford, Arpt. Auth. Indl. Dev. Rev. Bonds
(FL Terminals Inc.), Ser. A
3,125,000 7 3/4s, 5/1/21 B-/P 3,035,156
2,880,000 7 1/2s, 5/1/15 B-/P 2,800,800
4,000,000 St. Johns Cnty., Hlth. Care Indl. Dev. Auth. Rev. Bonds
(Glenmoor St. Johns Project), Ser. A, 8s, 1/1/30 B/P 3,800,000
1,000,000 Verandah, West Cmnty. Dev. Dist. Rev. Bonds
(Cap. Impt.), Ser. A, 6 5/8s, 5/1/33 BB-/P 976,250
-------------
79,244,857
Georgia (4.0%)
- -------------------------------------------------------------------------------------------------------------------
8,000,000 Burke Cnty., Poll. Control Dev. Auth. Mandatory
Put Bonds (GA Power Co.), 4.45s, 1/1/32 A2 8,350,000
3,400,000 Effingham Cnty., Indl. Dev. Auth. Rev. Bonds
(Pacific Corp.), 6 1/2s, 6/1/31 Ba3 2,992,000
6,000,000 Forsyth Cnty., Hosp. Auth. Rev. Bonds (GA Baptist
Hlth. Care Syst.), 6 3/8s, 10/1/28 AAA/P 6,900,000
9,500,000 Forsyth Cnty., Indl. Dev. Auth. Rev. Bonds
(Hoover Group, Inc.), 8 1/2s, 12/1/05 Ba3 6,745,000
2,500,000 Fulton Cnty., Hsg. Auth. Multi-Fam. Hsg. VRDN
(Spring Creek Crossing), 0.85s, 10/1/24 A-1 2,500,000
Rockdale Cnty., Dev. Auth. Solid Waste Disp. Rev.
Bonds (Visay Paper, Inc.)
6,875,000 7 1/2s, 1/1/26 BB+/P 6,935,156
11,800,000 7.4s, 1/1/16 BB+/P 11,932,750
3,160,000 Savannah, Econ. Dev. Auth. Poll. Control Rev.
Bonds (Stone Container Corp.), 8 1/8s, 7/1/15 B/P 3,286,400
-------------
49,641,306
Illinois (2.6%)
- -------------------------------------------------------------------------------------------------------------------
1,500,000 Chicago Special Assmt. Bonds (Lake Shore East),
6 3/4s, 12/1/32 B+/P 1,507,500
Chicago, O'Hare Intl. Arpt. Rev. Bonds
(United Air Lines, Inc.)
5,000,000 Ser. A, 6 3/4s, 11/1/11 (In default) (NON) D/P 1,075,000
2,700,000 Ser. B, 5.2s, 4/1/11 (In default) (NON) D/P 583,875
5,000,000 Chicago, Wtr. Rev. Bonds, AMBAC, 5 3/4s, 11/1/30 Aaa 5,462,500
4,000,000 East Chicago, Poll. Control Rev. Bonds (Inland
Steel Co.), 7 1/8s, 6/1/07 CCC 2,160,000
1,050,000 IL Dev. Fin. Auth. Rev. Bonds (Mercy Hsg. Corp.),
7s, 8/1/24 Baa1 1,132,635
IL Hlth. Fac. Auth. Rev. Bonds
880,000 (Cmnty. Rehab. Providers Fac.), 8 1/4s,
8/1/12 (In default) (NON) D/P 832,700
4,330,000 (Cmnty. Rehab. Providers Fac.), Ser. A, 7 7/8s, 7/1/20 AAA/P 4,941,613
2,385,000 (Cmnty. Rehab. Providers Fac.), Ser. A, 7 7/8s,
7/1/20 (In default) (NON) D/P 1,019,588
3,065,000 (Cmnty. Rehab. Providers Fac.), Ser. A, 7 1/2s, 3/1/14 AAA/P 3,207,921
4,225,000 (Victor C. Neumann Associates), 7 1/4s, 7/1/18 B/P 3,982,063
215,000 (Cmnty. Rehab. Providers Fac.), Ser. A, 7 1/4s, 3/1/04 B/P 222,583
6,000,000 (Elmhurst Memorial Hlth. Care), 5 5/8s, 1/1/28 A2 5,880,000
-------------
32,007,978
Indiana (0.5%)
- -------------------------------------------------------------------------------------------------------------------
1,800,000 Plainfield, Indl. Econ. Dev. Rev. Bonds (Earl M.
Jorgensen Co.), 8 1/2s, 9/1/04 B-/P 1,819,386
4,000,000 Rockport, Poll. Control Rev. Bonds
(Indiana-Michigan Pwr.), Ser. A, 4.9s, 6/1/25 Baa2 4,075,000
-------------
5,894,386
Iowa (2.2%)
- -------------------------------------------------------------------------------------------------------------------
IA Fin. Auth. Hlth. Care Fac. Rev. Bonds
(Care Initiatives)
21,770,000 9 1/4s, 7/1/25 BBB-/P 25,770,238
895,000 9.15s, 7/1/09 BBB-/P 1,034,844
200,000 Marion Cnty., 1st Mtge. Rev. Bonds (AHF/Kentucky
Iowa, Inc.), 5 1/8s, 1/1/20 (In default) (NON) D/P 90,000
-------------
26,895,082
Kansas (0.3%)
- -------------------------------------------------------------------------------------------------------------------
Lenexa, Hlth. Care Rev. Bonds (LakeView Village)
2,250,000 Ser. C, 6 7/8s, 5/15/32 BB+ 2,317,500
1,200,000 Ser. B, 6 1/4s, 5/15/26 BB+ 1,179,000
-------------
3,496,500
Kentucky (1.9%)
- -------------------------------------------------------------------------------------------------------------------
3,500,000 Jefferson Cnty., Hosp. IFB, MBIA, 11.652s, 10/23/14 Aaa 3,640,000
10,435,000 Kenton Cnty., Arpt. Board Rev. Bonds
(Special Fac. - Delta Airlines, Inc.), 7 1/8s, 2/1/21 BB-/P 8,882,794
3,740,000 KY Econ. Dev. Fin. Auth. Rev. Bonds (Norton
Healthcare, Inc.), Ser. A, 6 1/8s, 10/1/10 BBB/P 3,955,050
6,250,000 KY Econ. Dev. Fin. Auth. Hlth. Syst. Rev. Bonds
(Norton Healthcare, Inc.), Ser. A, 6 5/8s, 10/1/28 BBB/P 6,406,250
1,175,000 Lexington-Fayette Cnty., Urban Govt. 1st Mtge.
Rev. Bonds (AHF/Kentucky Iowa, Inc.), 10 1/4s,
1/1/20 (In default) (NON) D/P 528,750
-------------
23,412,844
Louisiana (3.1%)
- -------------------------------------------------------------------------------------------------------------------
7,000,000 LA Hlth. Ed. Auth. Rev. Bonds (Lambert House),
Ser. A, 6.2s, 1/1/28 B+/P 6,098,750
5,335,000 LA Local Govt. Env. Fac. Cmnty. Dev. Auth. Rev.
Bonds (St. James Place), Ser. A, 8s, 11/1/19 B-/P 5,161,613
7,750,000 LA Pub. Fac. Auth. Hosp. Rev. Bonds (Lake Charles
Memorial Hosp. Project), 8 5/8s, 12/1/30 CCC/P 6,393,750
7,000,000 Port of New Orleans, Indl. Dev. Rev. Bonds
(Continental Grain Co.), 7 1/2s, 7/1/13 BB- 7,187,670
3,000,000 St. Charles Parish, Poll. Control Rev. Bonds,
Ser. A, 4.9s, 6/1/30 Baa3 3,108,750
Tangipahoa Parish Hosp. Svcs. Rev. Bonds
(North Oaks Med. Ctr. Project), Ser. A
1,000,000 5s, 2/1/30 A 902,500
1,000,000 5s, 2/1/25 A 903,750
9,000,000 W. Feliciana Parish, Solid Waste Disp. Rev. Bonds
(Kaiser Aluminum), 7.7s, 12/1/14 Ba1 9,225,900
-------------
38,982,683
Maine (0.6%)
- -------------------------------------------------------------------------------------------------------------------
7,500,000 Rumford, Solid Waste Disp. Rev. Bonds
(Boise Cascade Corp.), 6 7/8s, 10/1/26 Baa3 7,556,250
Maryland (0.7%)
- -------------------------------------------------------------------------------------------------------------------
5,000,000 Howard Cnty., Rev. Bonds, Ser. A, 8s, 5/15/29 BB-/P 6,412,500
2,000,000 MD State Hlth. & Higher Edl. Fac. Auth. Rev. Bonds
(Mercy Ridge), Ser. A, 6s, 4/1/35 BB+/P 1,912,500
-------------
8,325,000
Massachusetts (4.4%)
- -------------------------------------------------------------------------------------------------------------------
Atlas Boston Tax Exempt Rev. Bonds
1,165,000 Ser. 99-1, 7 1/4s, 1/1/35 (In default) (NON) D/P 8,738
2,220,000 Ser. 1, 6.65s, 1/1/35 (In default) (NON) D/P 1,465,200
MA G.O. Bonds, Ser. C, MBIA
5,000,000 5 1/4s, 8/1/18 Aaa 5,318,750
6,400,000 5 1/4s, 8/1/17 Aaa 6,856,000
4,055,000 MA State Dev. Fin. Agcy. Rev. Bonds (Alden Place),
6 3/4s, 7/1/30 B/P 3,715,394
5,600,000 MA State Hlth. & Edl. Fac. Auth. IFB (Boston U.),
Ser. L, AMBAC, 10.854s, 7/1/25 Aaa 5,737,984
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
5,750,000 (Civic Investments), Ser. A, 9s, 12/15/15 B+/P 6,440,000
4,000,000 (Jordan Hosp.), Ser. E, 6 3/4s, 10/1/33 BBB- 3,725,000
4,900,000 (Winchester Hosp.), Ser. E, 6 3/4s, 7/1/30 BBB 5,114,375
5,850,000 (UMass Memorial), Ser. C, 6 5/8s, 7/1/32 Baa2 5,959,688
2,200,000 (Berkshire Hlth. Syst.), Ser. E, 6 1/4s, 10/1/31 BBB+ 2,205,500
4,500,000 (Hlth. Care Syst. Covenant Hlth.), Ser. E, 6s,
7/1/31 A- 4,539,375
1,960,000 MA State Indl. Fin. Agcy. R (TNG Marina Bay LLC
Project), 7 1/2s, 12/1/27 B/P 1,955,100
MA State Indl. Fin. Agcy. Rev. Bonds
2,378,153 (Evanswood Bethzatha Corp.), 8s,
1/15/27 (In default) (NON) D/P 2,973
1,664,711 (1st. Mtge. Evanswood Bethzatha-A), 7 7/8s,
1/15/20 (In default) (NON) D/P 2,081
1,850,000 (Sr. Living Fac. Forge Hill), 7s, 4/1/17 B/P 1,646,500
-------------
54,692,658
Michigan (5.5%)
- -------------------------------------------------------------------------------------------------------------------
2,310,000 Ann Arbor, Econ. Dev. Corp. Ltd. Oblig. Rev. Bonds
(Glacier Hills, Inc.), 8 3/8s, 1/15/19 AAA 3,040,538
2,000,000 Delta Cnty., Econ. Dev. Corp. Rev. Bonds, Ser. A,
6 1/4s, 4/15/27 Baa2 2,005,000
3,840,000 Detroit, Local Dev. Fin. Auth. Tax Increment Rev.
Bonds, Ser. A, 5 1/2s, 5/1/21 BB- 3,052,800
10,000,000 Dickinson Cnty., Econ. Dev. Corp. Rev. Bonds,
5 3/4s, 6/1/16 Baa2 10,162,500
1,500,000 Flint, Hosp. Bldg. Auth. Rev. Bonds (Hurley Med. Ctr.),
6s, 7/1/20 Baa3 1,321,875
Garden City, Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp. OB Group), Ser. A
3,000,000 5 3/4s, 9/1/17 B1 2,362,500
3,000,000 5 5/8s, 9/1/10 B1 2,613,750
1,715,000 Jackson Cnty., Econ. Dev. VRDN (Vista Grande Villa),
Ser. A, 0.90s, 11/1/31 A-1 1,715,000
10,650,000 Macomb Cnty., Hosp. Fin. Auth. Rev. Bonds
(Mt. Clemens Gen. Hosp.), Ser. B, 5 7/8s, 11/15/34 BBB- 9,984,375
2,750,000 MI State Hosp. Fin. Auth. Rev. Bonds (Detroit Med.
Ctr.), Ser. A, 5 1/4s, 8/15/28 Ba1 1,629,375
7,500,000 MI State Strategic Fund Resource Recvy. Rev. Bonds
(Central Wayne Energy Rec.), Ser. A, 7s, 7/1/27
(In default) (NON) D/P 1,500,000
9,450,000 MI State Strategic Fund Solid Waste Disp. Rev.
Bonds (Genesee Pwr. Station), 7 1/2s, 1/1/21 BB+/P 8,788,500
7,500,000 MI State Strategic Fund, Ltd. IFB (Rites-PA 334),
MBIA, 11.419s, 9/1/25 (acquired 3/9/98,
cost $9,018,750) (RES) AAA/P 9,018,750
5,000,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds,
6 3/4s, 7/23/09 Ba3 5,006,250
5,595,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth.), 6s, 1/1/39 B-/P 3,839,569
4,000,000 Wayne Charter Cnty., Special Arpt. Fac. Rev. Bonds
(Northwest Airlines, Inc.), 6s, 12/1/29 B+/P 2,830,000
-------------
68,870,782
Minnesota (0.8%)
- -------------------------------------------------------------------------------------------------------------------
2,660,000 Chaska, Indl. Dev. Rev. Bonds (Lifecore
Biomedical, Inc. Project), 10 1/4s, 9/1/20 BB/P 2,749,615
3,000,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise
Cascade Corp.), 7.2s, 10/1/24 Baa3 3,078,750
3,700,000 Minneapolis & St. Paul, Metro. Arpt. Comm. Special
Fac. Rev. Bonds (Northwest Airlines, Inc.),
Ser. A, 7s, 4/1/25 B+/P 3,066,375
2,075,000 Minneapolis, Rev. Bonds (Walker Methodist Sr.
Svcs.), Ser. A, 6s, 11/15/28 BB-/P 1,667,781
-------------
10,562,521
Missouri (0.3%)
- -------------------------------------------------------------------------------------------------------------------
3,250,000 Cape Girardeau Cnty., Indl. Dev. Auth. Hlth. Care
Fac. Rev. Bonds (St. Francis Med. Ctr.), Ser. A,
5 1/2s, 6/1/27 A 3,189,063
Montana (0.3%)
- -------------------------------------------------------------------------------------------------------------------
4,000,000 MT State Board Inv. Exempt Fac. Rev. Bonds
(Still Water Mining Project), 8s, 7/1/20 Ba2 3,725,000
Nebraska (0.2%)
- -------------------------------------------------------------------------------------------------------------------
4,819,785 Kearney, Indl. Dev. Rev. Bonds (Great Platte River Road),
6 3/4s, 1/1/28 (In default) (NON) D/P 24,099
2,000,000 NE Investment Fin. Auth. Hosp. IFB (Bishop
Clarkson Memorial Hosp.), MBIA, 12.225s, 12/8/16 Aaa 2,036,360
-------------
2,060,459
Nevada (1.2%)
- -------------------------------------------------------------------------------------------------------------------
5,350,000 Clark Cnty., Indl. Dev. Rev. Bonds (Southwest
Gas Corp. Project), Ser. C, 5.45s, 3/1/38 Baa2 5,263,063
11,000,000 Director of The State of Nevada Dept. of Bus. &
Ind. Rev. Bonds (Las Vegas Monorail), AMBAC,
zero %, 1/1/25 Aaa 3,258,750
Henderson, Local Impt. Dist. Special Assmt. Bonds
(No. T-14)
3,000,000 5.8s, 3/1/23 BB-/P 2,865,000
2,650,000 5.55s, 3/1/17 BB-/P 2,550,625
810,000 Las Vegas, Special Impt. Dist. No. 809 Rev. Bonds
(Summerlin Area), 5.65s, 6/1/23 BB+/P 719,888
-------------
14,657,326
New Hampshire (2.6%)
- -------------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
8,500,000 (1st. Mtge.-Rivermead Peterborough), 8 1/2s, 7/1/24 AAA 9,233,380
5,900,000 (Havenwood-Heritage Heights), 7.35s, 1/1/18 BB/P 6,128,625
3,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 BB/P 2,610,000
2,500,000 (Lakes Region Hosp. Assn.), 5 3/4s, 1/1/08 BB/P 2,487,500
2,200,000 NH Hlth. & Ed. Fac. Auth. Rev. Bonds
(Huntington at Nashua), Ser. A, 6 7/8s, 5/1/33 B/P 2,065,250
NH State Bus. Fin. Auth. Rev. Bonds
2,500,000 (Alice Peck Day Hlth. Syst.), Ser. A, 7s, 10/1/29 BB+/P 2,521,875
4,000,000 (Franklin Regl. Hosp. Assn.), Ser. A, 6.05s, 9/1/29 BB/P 3,310,000
3,550,000 (Proctor Academy), Ser. A, 5.6s, 6/1/28 Baa2 3,563,313
8,551,027 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 10,689
-------------
31,930,632
New Jersey (3.3%)
- -------------------------------------------------------------------------------------------------------------------
5,000,000 Camden Cnty., Impt. Auth. Rev. Bonds, 8.4s,
4/1/24 (In default) (NON) D/P 4,250,000
NJ Econ. Dev. Auth. Rev. Bonds
7,000,000 (Winchester Gardens), Ser. A, 8 5/8s, 11/1/25 BB-/P 7,402,500
900,000 (Cedar Crest Village, Inc.), Ser. A, 7s, 11/15/16 BB-/P 911,250
12,000,000 (Newark Arpt. Marriot Hotel), 7s, 10/1/14 Ba3 11,925,000
500,000 (First Mtge. Presbyterian), Ser. A, 6 1/4s, 11/1/20 BB/P 501,250
5,220,000 NJ Econ. Dev. Auth. Assisted Living Rev. Bonds
(Meridian Assisted Living), 6 3/4s, 8/1/30 B/P 4,182,525
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
4,000,000 (Trinitas Hosp. Oblig. Group), 7 1/2s, 7/1/30 Baa3 4,365,000
5,000,000 (South Jersey Hosp.), 6s, 7/1/12 Baa1 5,500,000
1,750,000 NJ State Ed. Fac. Auth. Rev. Bonds (Stevens Inst.
of Tech.), Ser. C, 5 1/4s, 7/1/32 A- 1,658,125
-------------
40,695,650
New Mexico (0.4%)
- -------------------------------------------------------------------------------------------------------------------
5,500,000 Farmington, Poll. Control Rev. Bonds (Tucson Elec.
Pwr. Co. San Juan), Ser. A, 6.95s, 10/1/20 Ba3 5,561,875
New York (8.2%)
- -------------------------------------------------------------------------------------------------------------------
3,250,000 Colonie, Indl. Dev. Agcy. Rev. Bonds (Cap. Compost
& Waste), Ser. A, 3 3/8s, 6/1/21 D/P 747,500
6,820,000 Metro. Trans. Auth. Fac. FRB, 11.223s, 4/1/12
(acquired 4/27/00, cost $7,955,530) (RES) AAA 9,189,950
2,000,000 Nassau Cnty, Interim Fin. Auth. Rev. Bonds,
Ser. B, MBIA, 5s, 11/15/11 AAA+ 2,155,000
1,575,000 Nassau Cnty., Indl. Dev. Agcy. Rev. Bonds
(North Shore Hlth. Syst. Project D), 5 1/4s, 11/1/07 BB+/P 1,628,156
8,000,000 NY City, G.O. Bonds, Ser. C, 5 1/2s, 8/1/13 A2 8,460,000
6,280,000 NY City, FRB, FGIC, 10.654s, 8/1/06
(acquired 9/12/97, cost $7,384,526) (RES) AAA/P 7,630,200
NY City, Indl. Dev. Agcy. Rev. Bonds
9,000,000 (Paper Inc.), 7.8s, 1/1/16 B+/P 9,315,000
6,400,000 (British Airways), 7 5/8s, 12/1/32 BBB- 5,592,000
2,500,000 (Brooklyn Navy Yard Cogen. Partners), 5.65s, 10/1/28 BBB- 2,221,875
500,000 NY City, Indl. Dev. Agcy. Civic Fac. Rev. Bonds
(Brooklyn Polytech. U. Project J), 6 1/8s, 11/1/30 Ba1 410,000
5,500,000 NY City, Transitional Fin. Auth. Rev. Bonds
(Future Tax), Ser. C, 5 1/4s, 8/1/10 AAA 6,043,125
1,785,000 NY State Dorm. Auth. Rev. Bonds (Lenox Hill
Hosp.), 5 3/4s, 7/1/12 A3 1,956,806
8,000,000 NY State Energy Resource & Dev. Auth. Poll.
Control IFB, FGIC, 12.948s, 7/1/29 (acquired
12/19/94, cost $8,353,120) (RES) Aaa 9,073,440
4,500,000 NY State Env. Fac. Corp. Rev. Bonds, MBIA, 6s, 6/15/12 Aaa 5,169,375
11,185,000 NY State Env. Fac. Corp. Poll. Control FRB (PA
198), MBIA, 10.677s, 6/15/10 (acquired 10/22/97,
cost $13,449,963) (RES) AAA 14,442,631
5,000,000 Onondaga Cnty., Indl. Dev. Agcy. Rev. Bonds
(Solvay Paperboard, LLC), 7s, 11/1/30 BB-/P 5,225,000
5,000,000 Suffolk Cnty., Indl. Dev. Agcy. Rev. Bonds
(Peconic Landings), Ser. A, 8s, 10/1/20 B+/P 4,987,500
8,000,000 Suffolk Cnty., Indl. Dev. Agcy. Civic Fac. Rev.
Bonds (Southampton Hosp. Assn.), Ser. B,
7 5/8s, 1/1/30 B-/P 7,410,000
-------------
101,657,558
North Carolina (2.5%)
- -------------------------------------------------------------------------------------------------------------------
NC Eastern Muni. Pwr. Agcy. Syst. Rev. Bonds, Ser. C
7,500,000 5 3/8s, 1/1/17 BBB 7,509,375
3,400,000 5 3/8s, 1/1/16 BBB 3,429,750
2,000,000 5.3s, 1/1/15 BBB 2,022,500
3,000,000 NC Med. Care Cmnty. Healthcare Fac. Rev. Bonds
(1st Mtge. - Presbyterian Homes), 7s, 10/1/31 BB/P 3,240,000
4,500,000 NC Med. Care Comm. Retirement Fac. Rev. Bonds
(1st Mtge. - Givens Estates Project), Ser. A,
6 1/2s, 7/1/32 BB-/P 4,410,000
NC State Muni. Pwr. Agcy. Rev. Bonds
4,000,000 (No. 1, Catawba Elec.), Ser. B, 6 1/2s, 1/1/20 Baa1 4,305,000
6,000,000 Ser. A, 5 1/2s, 1/1/13 Baa1 6,322,500
-------------
31,239,125
Ohio (2.1%)
- -------------------------------------------------------------------------------------------------------------------
18,000,000 Hamilton Cnty., Rev. Bonds, Ser. B, AMBAC,
zero %, 12/1/26 Aaa 4,995,000
750,000 Marion Cnty., Hlth. Care Fac. Rev. Bonds (United
Church Homes), 6.3s, 11/15/15 BBB- 755,625
OH State Higher Edl. Fac. FRB (Kenyon College Project)
2,500,000 4.95s, 7/1/37 A2 2,487,500
5,000,000 4.85s, 7/1/37 A2 4,981,250
6,500,000 OH State Solid Waste Mandatory Put Bonds, 4.85s,
11/1/22 BBB 6,621,875
6,000,000 OH State Wtr. Dev. Auth. Poll. Control Fac. Rev.
Bonds, 6.1s, 8/1/20 Baa2 6,187,500
800,000 OH State Wtr. Dev. Auth. Solid Waste Disp. Rev.
Bonds (Bay Shore Power Co.), Ser. A, 5 7/8s,
9/1/20 BB+/P 752,000
-------------
26,780,750
Oklahoma (1.2%)
- -------------------------------------------------------------------------------------------------------------------
OK Dev. Fin. Auth. Rev. Bonds
1,600,000 (Continuing Care Retirement), Ser. A, 8s, 2/1/32 B/P 1,548,000
3,000,000 (Doane Products Co.), 6 1/4s, 7/15/23 B-/P 2,478,750
8,850,000 (Hillcrest Hlth. Care), Ser. A, 5 5/8s, 8/15/29 B1 5,774,625
5,800,000 Ottawa Cnty., Fin. Auth. Indl. Rev. Bonds (Doane
Products Co.), 7 1/4s, 6/1/17 B-/P 4,821,250
-------------
14,622,625
Oregon (0.9%)
- -------------------------------------------------------------------------------------------------------------------
11,900,000 Multnomah Cnty., Hosp. Fac. Auth. Rev. Bonds
(Terwilliger Plaza Project), 6 1/2s, 12/1/29 BB-/P 11,126,500
Pennsylvania (5.1%)
- -------------------------------------------------------------------------------------------------------------------
6,500,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Hlth. Syst.), Ser. B, 9 1/4s, 11/15/15 B1 6,272,500
8,605,000 Carbon Cnty., Indl. Dev. Auth. Rev. Bonds
(Panther Creek Partners), 6.65s, 5/1/10 BBB- 9,024,494
1,700,000 Chester Cnty., Hlth. & Ed. Fac. Auth. Rev. Bonds
(Jenners Pond, Inc.), 7 5/8s, 7/1/34 BB-/P 1,695,750
12,500,000 Dauphin Cnty., Gen. Auth. Rev. Bonds
(Office & Pkg.), Ser. A, 6s, 1/15/25 CCC/P 6,250,000
Lehigh Cnty., Gen. Purpose Auth. Rev. Bonds
2,250,000 (St. Luke's Hosp. - Bethlehem), 5 3/8s, 8/15/33 Baa2 2,070,000
2,860,000 (Lehigh Valley Hosp. Hlth. Network), Ser. A,
5 1/4s, 7/1/32 A2 2,670,525
1,750,000 New Morgan, Indl. Dev. Auth. Solid Waste Disp.
Rev. Bonds (New Morgan Landfill Co., Inc.),
6 1/2s, 4/1/19 BB- 1,590,313
2,000,000 PA Econ. Dev. Fin. Auth. Rev. Bonds
(Amtrak Project), Ser. A, 6 3/8s, 11/1/41 A3 1,855,000
PA State Econ. Dev. Fin. Auth. Resource Recvy.
Rev. Bonds
13,000,000 (Colver), Ser. E, 8.05s, 12/1/15 BBB- 13,568,750
1,000,000 (Northampton Generating), Ser. A, 6 1/2s, 1/1/13 BBB- 1,010,000
1,345,000 PA State Higher Edl. Fac. Auth. Rev. Bonds
(Philadelphia College of Osteopathic Med.), 5s,
12/1/13 A 1,390,394
Philadelphia, Hosp. & Higher Ed. Fac. Auth. Rev. Bonds
4,875,853 (Graduate Hlth. Syst. Oblig. Group), 7 1/4s,
7/1/18 (In default) (NON) D/P 6,095
5,450,000 (Jeanses Hosp. Project), 5 7/8s, 7/1/17 Baa2 5,245,625
1,500,000 Philadelphia, Indl. Dev. Auth. Rev. Bonds (Gallery
II Garage), 6.4s, 2/15/13 BBB-/P 1,515,000
3,686,212 Philadelphia, Indl. Dev. Auth. Special Fac. Rev.
Bonds (U.S. Airways, Inc.), 8 1/8s,
5/1/30 (In default) (NON) D/P 110,586
Scranton, G.O. Bonds, Ser. C
3,060,000 7.1s, 9/1/31 BB/P 3,740,850
1,000,000 7s, 9/1/22 BB/P 1,216,250
2,600,000 West Shore, Area Hosp. Auth. Rev. Bonds
(Holy Spirit Hosp.), 6 1/4s, 1/1/32 BBB+ 2,603,250
2,000,000 York Cnty., Indl. Dev. Auth. Rev. Bonds, Ser. A,
5 1/2s, 9/1/20 Baa1 1,900,000
-------------
63,735,382
Puerto Rico (1.3%)
- -------------------------------------------------------------------------------------------------------------------
8,000,000 Cmnwlth. of PR, Pub. Bldg. Auth. Rev. Bonds,
Ser. H, FGIC, 5 1/4s, 7/1/15 Aaa 8,750,000
7,500,000 PR Indl. Tourist Edl. Med. & Env. Control Fac.
Rev. Bonds (Cogen. Fac.-AES Project), 6 5/8s, 6/1/26 Baa2 7,584,375
-------------
16,334,375
South Carolina (3.0%)
- -------------------------------------------------------------------------------------------------------------------
5,215,000 Connector 2000 Assn., Inc. SC Toll Road Rev. Bonds
(SR-Southern Connector), Ser. A, 5 3/8s, 1/1/38 B- 2,170,744
Connector 2000 Assn., Inc. Toll Road Rev. Bonds
(Cap. Appn. Sub.), Ser. C
4,465,000 zero %, 1/1/21 BB-/P 351,619
5,500,000 zero %, 1/1/20 BB-/P 501,875
4,200,000 zero %, 1/1/14 BB-/P 918,750
4,100,000 zero %, 1/1/13 BB-/P 1,040,375
1,000,000 zero %, 1/1/12 BB-/P 293,750
3,175,000 Florence Cnty., Indl. Dev. Auth. Rev. Bonds
(Stone Container Corp.), 7 3/8s, 2/1/07 B/P 3,238,214
2,275,000 Lexington Cnty. Rev. Bonds, 5 1/2s, 11/1/32 A2 2,232,344
4,000,000 SC Hosp. Auth. Rev. Bonds (Med. U.), Ser. A,
6 1/2s, 8/15/32 BBB+ 4,070,000
10,355,000 SC Jobs Econ. Dev. Auth. Rev. Bonds (St. Francis
Hosp.-Franciscan Sisters), 7s, 7/1/15 AAA 10,908,682
3,800,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. Rev. Bonds
(Palmetto Hlth. Alliance), Ser. A, 7 3/8s, 12/15/21 Baa2 4,180,000
9,000,000 SC Tobacco Settlement Rev. Mgt. Rev. Bonds,
Ser. B, 6 3/8s, 5/15/30 A- 7,526,250
-------------
37,432,603
Tennessee (1.9%)
- -------------------------------------------------------------------------------------------------------------------
1,000,000 Elizabethton, Hlth. & Edl. Fac. Board Rev. Bonds
(Hosp. Ref. & Impt.), Ser. B, 8s, 7/1/33 Baa2 1,116,250
14,000,000 Johnson City, Hlth. & Edl. Fac. Board Hosp. Rev.
Bonds (Mountain States Hlth.), Ser. A, 7 1/2s, 7/1/33 Baa2 15,277,489
Memphis-Shelby Cnty., Arpt. Auth. Rev. Bonds
(Federal Express Corp.)
4,000,000 5.05s, 9/1/12 Baa2 4,215,000
3,000,000 4 1/2s, 7/1/14 Baa2 2,932,500
-------------
23,541,239
Texas (4.9%)
- -------------------------------------------------------------------------------------------------------------------
6,850,000 Abilene, Hlth. Fac. Dev. Corp. Rev. Bonds
(Sears Methodist Retirement), Ser. A, 5.9s, 11/15/25 BB+/P 6,079,375
5,000,000 Amarillo, Hlth. Fac. Corp. Rev. Bonds (Sears
Panhandle Retirement), Ser. B, 7 3/4s, 8/15/26 AAA 5,906,250
3,985,000 Crawford Ed. Fac. Rev. Bonds (U. St. Thomas),
5 3/8s, 10/1/27 BBB+ 3,706,050
2,500,000 Dallas-Fort Worth, Intl. Arpt. Fac. Impt. Rev.
Bonds (American Airlines, Inc.), 8 1/4s, 11/1/36 Caa2 1,200,000
10,000,000 Houston, Arpt. Syst. Rev. Bonds (Special Fac. -
Continental Airlines, Inc.), Ser. E, 6 3/4s, 7/1/21 B 7,787,500
12,560,000 Houston, Hotel Occupancy Rev. Bonds (Cap. Appn.
Convention), Ser. B, AMBAC, zero %, 9/1/32 Aaa 2,370,700
15,500,000 Houston, Wtr. & Swr. Rev. Bonds, Ser. A, FSA,
zero %, 12/1/19 Aaa 6,451,875
5,500,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds (Memorial
Hlth. Syst. of East TX), 5.7s, 2/15/28 BBB- 4,434,375
5,265,000 Round Rock, Hotel Occupancy Tax Rev. Bonds
(Convention Ctr. Complex), 5.85s, 12/1/24 BBB/P 5,212,350
4,500,000 Sam Rayburn Muni. Pwr. Agcy. Rev. Bonds,
6s, 10/1/21 Baa2 4,522,500
Tomball, Hosp. Auth. Rev. Bonds (Tomball Regl. Hosp.)
6,250,000 6 1/8s, 7/1/23 Baa2 6,265,625
2,095,000 6s, 7/1/25 Baa2 2,021,675
4,650,000 TX State Dept. of Hsg. & Cmnty. Affairs Home Mtge.
IFB, Ser. C, GNMA Coll, FNMA Coll, 12.623s, 7/2/24 AAA 5,231,250
-------------
61,189,525
Utah (0.8%)
- -------------------------------------------------------------------------------------------------------------------
5,500,000 Tooele Cnty., Harbor & Term. Dist. Port Fac. Rev.
Bonds (Union Pacific), Ser. A, 5.7s, 11/1/26 BBB 5,355,625
4,480,000 UT Cnty., Env. Impt. Rev. Bonds (Marathon Oil
Project), 5.05s, 11/1/17 Baa1 4,659,200
-------------
10,014,825
Virginia (2.0%)
- -------------------------------------------------------------------------------------------------------------------
6,250,000 Henrico Cnty. Econ. Dev. Auth. Rev. Bonds
(United Methodist), Ser. A, 6.7s, 6/1/27 BB+/P 6,273,438
2,000,000 Henrico Cnty., Indl. Dev. Auth. IFB (Bon Secours
Hlth. Syst.), FSA, 10.61s, 8/23/27 Aaa 2,465,000
4,000,000 Peninsula Ports Auth. Rev. Bonds (VA Baptist
Homes), Ser. A, 7 3/8s, 12/1/32 B+/P 4,080,000
6,500,000 Pocahontas Parkway Assn. Toll Rd. Rev. Bonds,
Ser. A, 5 1/2s, 8/15/28 BB 4,533,750
9,010,000 Suffolk, Redev. & Hsg. Auth. Rev. Bonds
(Beach-Oxford Apts.), 6 1/4s, 10/1/33 BB-/P 7,827,438
-------------
25,179,626
Washington (0.8%)
- -------------------------------------------------------------------------------------------------------------------
4,850,000 Port of Seattle, Special Fac. Rev. Bonds
(Northwest Airlines, Inc.), 7 1/4s, 4/1/30 B+/P 4,086,125
3,500,000 Spokane Cnty., Indl. Corp. Solid Waste Disp. Rev.
Bonds (Kaiser Aluminum & Chemical Corp.), 7.6s,
3/1/27 (In default) (NON) D/P 1,225,000
5,500,000 Washington Cnty., Hsg. & Redev. Auth. Rev. Bonds
(Healtheast), 5 1/2s, 11/15/27 Ba2 4,565,000
-------------
9,876,125
West Virginia (0.6%)
- -------------------------------------------------------------------------------------------------------------------
3,475,000 Mason Cnty., Poll. Control FRB (Appalachian
Pwr. Co. Project), Ser. L, 5 1/2s, 10/1/22 Baa1 3,366,406
5,045,000 Princeton, Hosp. Rev. Bonds (Cmnty. Hosp.
Assn., Inc.), 6.1s, 5/1/29 Ba3 3,581,950
3,000,000 Weirton, Poll. Control Rev. Bonds (Weirton
Steel Corp.), 1/2s, 4/1/12 Caa3 300,000
-------------
7,248,356
Wisconsin (0.4%)
- -------------------------------------------------------------------------------------------------------------------
5,500,000 Badger Tobacco Settlement Asset Securitization
Corp. Rev. Bonds, 6 3/8s, 6/1/32 A- 4,551,250
Wyoming (0.4%)
- -------------------------------------------------------------------------------------------------------------------
5,350,000 Sweetwater Cnty., Poll. Control Rev. Bonds
(Idaho Power Co. Project), Ser. A, 6.05s, 7/15/26 A3 5,443,625
--------------
Total Municipal bonds and notes (cost $1,296,061,101) $1,213,616,397
Preferred stocks (0.9%) (a)
Number of shares Value
- -------------------------------------------------------------------------------------------------------------------
2,000,000 Charter Mac. Equity Trust 144A Ser. A, 6.625% cum. pfd. $2,147,500
8,000,000 MuniMae Tax Exempt Bond Subsidiary, LLC 144A
Ser. B, 7 3/4s cum. pfd. 8,810,000
-------------
Total Preferred stocks (cost $10,000,000) $10,957,500
Common stocks (0.1%) (a) (cost $9,057,285)
Number of shares Value
- -------------------------------------------------------------------------------------------------------------------
184,103 Tembec, Inc. (Canada) (NON) $953,204
- -------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,315,118,386) $1,225,527,101
- -------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $1,246,195,961.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at July 31, 2003 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, 2003. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the
Independent Auditors' Report.
(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 2003 was
$82,208,071 or 6.6% of net assets.
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 VRDN and Floating Rate Bonds (FRB) are the
current interest rates shown at July 31, 2003.
The rates shown on IFB and IF COP, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, are the current interest rates at July 31, 2003.
The fund had the following industry group concentrations greater
than 10% at July 31, 2003 (as a percentage of net assets):
Health care 32.0%
Utilities 15.3
The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities
July 31, 2003
Assets
- -------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$1,315,118,386) (Note 1) $1,225,527,101
- -------------------------------------------------------------------------------------------
Interest and other receivables 19,111,722
- -------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 549,187
- -------------------------------------------------------------------------------------------
Receivable for securities sold 14,120,576
- -------------------------------------------------------------------------------------------
Total assets 1,259,308,586
Liabilities
- -------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 1,928,900
- -------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,616,527
- -------------------------------------------------------------------------------------------
Payable for securities purchased 4,436,938
- -------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 2,729,178
- -------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 629,192
- -------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 188,321
- -------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 109,274
- -------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,514
- -------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 354,772
- -------------------------------------------------------------------------------------------
Other accrued expenses 118,009
- -------------------------------------------------------------------------------------------
Total liabilities 13,112,625
- -------------------------------------------------------------------------------------------
Net assets $1,246,195,961
Represented by
- -------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,463,537,235
- -------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,083,364
- -------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (130,833,353)
- -------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (89,591,285)
- -------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares
outstanding $1,246,195,961
Computation of net asset value and offering price
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,000,769,292 divided by 81,299,331 shares) $12.31
- -------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $12.31)* $12.92
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($222,969,815 divided by 18,084,387 shares)** $12.33
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($12,027,543 divided by 976,731 shares)** $12.31
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($10,429,311 divided by 847,198 shares) $12.31
- -------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $12.31)*** $12.72
- -------------------------------------------------------------------------------------------
* 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.
Statement of operations
Year ended July 31, 2003
Interest income: $90,261,049
- -------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 7,696,907
- -------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 1,172,176
- -------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 42,839
- -------------------------------------------------------------------------------------------
Administrative services (Note 2) 23,195
- -------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,144,950
- -------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,766,215
- -------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 120,926
- -------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 54,071
- -------------------------------------------------------------------------------------------
Other 533,768
- -------------------------------------------------------------------------------------------
Total expenses 13,555,047
- -------------------------------------------------------------------------------------------
Expense reduction (Note 2) (46,232)
- -------------------------------------------------------------------------------------------
Net expenses 13,508,815
- -------------------------------------------------------------------------------------------
Net investment income 76,752,234
- -------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (46,265,504)
- -------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 259,242
- -------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the year (14,729,467)
- -------------------------------------------------------------------------------------------
Net loss on investments (60,735,729)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $16,016,505
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Year ended July 31
Decrease in net assets 2003 2002
- -----------------------------------------------------------------------------------------------
Operations:
- -----------------------------------------------------------------------------------------------
Net investment income $76,752,234 $91,037,887
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (46,006,262) (5,347,201)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (14,729,467) (52,892,964)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 16,016,505 32,797,722
- -----------------------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -----------------------------------------------------------------------------------------------
From ordinary income
Class A (17,230) (205,363)
- -----------------------------------------------------------------------------------------------
Class B (3,945) (61,777)
- -----------------------------------------------------------------------------------------------
Class C (187) (1,467)
- -----------------------------------------------------------------------------------------------
Class M (171) (1,925)
- -----------------------------------------------------------------------------------------------
From tax-exempt income
Class A (62,725,610) (69,919,380)
- -----------------------------------------------------------------------------------------------
Class B (13,041,582) (18,601,460)
- -----------------------------------------------------------------------------------------------
Class C (610,914) (486,721)
- -----------------------------------------------------------------------------------------------
Class M (601,649) (668,982)
- -----------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (113,047,446) (43,091,311)
- -----------------------------------------------------------------------------------------------
Total decrease in net assets (174,032,229) (100,240,664)
Net assets
- -----------------------------------------------------------------------------------------------
Beginning of year 1,420,228,190 1,520,468,854
- -----------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $3,083,364 and $1,858,486, respectively) $1,246,195,961 $1,420,228,190
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.88 $13.39 $13.27 $14.13 $14.61
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .74 .83 .80 .80 .81
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.57) (.52) .11 (.85) (.48)
- ------------------------------------------------------------------------------------------------
Total from
investment operations: .17 .31 .91 (.05) .33
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.74) (.82) (.79) (.81) (.81)
- ------------------------------------------------------------------------------------------------
Total distributions (.74) (.82) (.79) (.81) (.81)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.31 $12.88 $13.39 $13.27 $14.13
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 1.34 2.38 7.10 (.24) 2.25
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,000,769 $1,115,695 $1,145,710 $1,114,842 $1,157,920
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .91 .90 .88 .86 .87
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.83 6.31 6.01 5.95 5.56
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 28.90 19.87 17.95 12.05 12.16
- ------------------------------------------------------------------------------------------------
(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).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.90 $13.41 $13.29 $14.15 $14.62
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .67 .76 .73 .73 .74
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.57) (.52) .12 (.86) (.47)
- ------------------------------------------------------------------------------------------------
Total from
investment operations: .10 .24 .85 (.13) .27
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.67) (.75) (.73) (.73) (.74)
- ------------------------------------------------------------------------------------------------
Total distributions (.67) (.75) (.73) (.73) (.74)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.33 $12.90 $13.41 $13.29 $14.15
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 0.82 1.88 6.55 (.82) 1.81
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $222,970 $281,825 $356,506 $441,174 $743,456
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.43 1.40 1.39 1.44 1.37
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.32 5.83 5.49 5.36 5.03
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 28.90 19.87 17.95 12.05 12.16
- ------------------------------------------------------------------------------------------------
(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).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ------------------------------------------------------------------------------------------------
For the
period
Feb 1, 1999+
Per-share Year ended July 31 to July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.89 $13.39 $13.27 $14.13 $14.73
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .64 .72 .69 .69 .36
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.58) (.51) .12 (.85) (.60)
- ------------------------------------------------------------------------------------------------
Total from
investment operations: .06 .21 .81 (.16) (.24)
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.64) (.71) (.69) (.70) (.36)
- ------------------------------------------------------------------------------------------------
Total distributions (.64) (.71) (.69) (.70) (.36)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.31 $12.89 $13.39 $13.27 $14.13
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 0.46 1.64 6.25 (1.05) 1.58*
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $12,028 $11,002 $6,779 $3,945 $2,738
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.71 1.70 1.68 1.66 .83*
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.02 5.46 5.20 5.16 2.47*
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 28.90 19.87 17.95 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).
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------
Per-share Year ended July 31
operating performance 2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $12.89 $13.39 $13.27 $14.14 $14.61
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income .70 .79 .76 .77 .77
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.58) (.51) .12 (.87) (.47)
- ------------------------------------------------------------------------------------------------
Total from
investment operations: .12 .28 .88 (.10) .30
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.70) (.78) (.76) (.77) (.77)
- ------------------------------------------------------------------------------------------------
Total distributions (.70) (.78) (.76) (.77) (.77)
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $12.31 $12.89 $13.39 $13.27 $14.14
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 0.96 2.16 6.79 (.62) 2.01
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $10,429 $11,706 $11,474 $13,745 $23,693
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.21 1.20 1.18 1.16 1.17
- ------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.54 6.00 5.70 5.65 5.27
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 28.90 19.87 17.95 12.05 12.16
- ------------------------------------------------------------------------------------------------
(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).
The accompanying notes are an integral part of these financial statements.
Notes to financial statements
July 31, 2003
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.
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 fund invests in higher yielding, lower rated bonds that
have a higher rate of default due to the nature of the investments. The
preparation of financial statements is in conformity with accounting
principles generally accepted in the United States of America and
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities in 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 valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees. Such services use information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Investments for which market quotations are readily
available are valued at the last reported sales price on their principal
exchange, or official closing price for certain markets. If no sales are
reported- as in the case of some securities traded over-the-counter- a
security is valued at its last reported bid price. Restricted securities
are valued 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 valued at amortized cost, which approximates fair value.
B) Security transactions and related investment income Security
transactions are recorded 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.
Non-cash dividends, if any, are recorded at the fair market value of the
securities received. All premiums/discounts are amortized/accreted on a
yield-to-maturity basis. The premium in excess of the call price, if
any, is amortized to the call date; thereafter, any remaining premium is
amortized to maturity.
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. The fund and the broker
agree to exchange an amount of cash equal to the daily fluctuation in
the value of the futures contract. Such receipts or payments are known
as "variation margin." 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.
Futures and written option contracts outstanding at period end are
listed after The fund's portfolio.
D) Line of credit During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund maintain an asset coverage
ratio of at least 300% and borrowings must not exceed prospectus
limitations. For the period ended July 31,2003, the fund had no
borrowings against the line of credit. Effective August 6, 2003, the
fund will no longer participate in a committed 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, 2003, the fund had a capital loss carryover of $72,899,436
available to the extent allowed by tax law to offset future capital
gains, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------
$12,477,080 July 31, 2004
21,345,454 July 31, 2006
23,390,767 July 31, 2007
7,813,842 July 31, 2008
1,682,906 July 31, 2009
1,466,587 July 31, 2010
4,722,800 July 31, 2011
Pursuant to federal income tax regulations applicable to regulated
investment companies, the fund has elected to defer to its fiscal year
ending July 31, 2004 $51,751,776 of losses recognized during the period
November 1, 2002 to
July 31, 2003.
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, 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, the expiration of a capital loss carryover,
dividends payable, defaulted bond interest, realized gains and losses on
certain futures contracts, market discount, straddle loss deferrals and
partnership income. 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, 2003, the fund reclassified $1,473,932 to increase
undistributed net investment income and $22,070,393 to decrease
paid-in-capital, with a decrease to accumulated net realized loss of
$20,596,461.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $46,698,155
Unrealized depreciation (136,193,747)
----------------
Net unrealized depreciation (89,495,592)
Undistributed tax-exempt
income 9,290,598
Undistributed ordinary income 159,286
Capital loss carryforward (72,899,436)
Post October loss (51,751,776)
Cost for federal income
tax purposes $1,315,022,693
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.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Investment Management, LLC ("Putnam Management"),
for management and investment advisory services is paid quarterly based
on the average net assets of the fund. Such fee is based on the
following annual rates: 0.65% of the first $500 million of average net
assets, 0.55% of the next $500 million, 0.50% of the next $500 million,
0.45% of the next $5 billion, 0.425% of the next $5 billion, 0.405% of
the next $5 billion, and 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, LLC. 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, 2003, the payable to the subcustodian
bank represents the amount due for cash advanced for the settlement of a
security purchased.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the year ended July 31, 2003, the
fund's expenses were reduced by $46,232 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,904 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, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, 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 at an
annual rate of 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 the
annual rates of 0.20%, 0.85%, 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 June 1, 2003, the class B rate was 0.70% of
average net assets.
For the year ended July 31, 2003, Putnam Retail Management, acting as
underwriter, received net commissions of $68,145 and $941 from the sale
of class A and class M shares, respectively, and received $353,665 and
$3,090 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, 2003, Putnam Retail Management,
acting as underwriter, received $13,384 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended July 31, 2003, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $376,854,291 and $495,146,265, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At July 31, 2003, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 7,302,265 $92,127,348
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,953,632 37,186,069
- ---------------------------------------------------------------------------
10,255,897 129,313,417
Shares repurchased (15,560,514) (195,724,936)
- ---------------------------------------------------------------------------
Net decrease (5,304,617) $(66,411,519)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 10,410,340 $135,719,544
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,970,439 38,823,709
- ---------------------------------------------------------------------------
13,380,779 174,543,253
Shares repurchased (12,357,676) (161,196,733)
- ---------------------------------------------------------------------------
Net increase 1,023,103 $13,346,520
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 1,854,677 $23,435,847
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 512,488 6,465,446
- ---------------------------------------------------------------------------
2,367,165 29,901,293
Shares repurchased (6,122,644) (77,328,504)
- ---------------------------------------------------------------------------
Net decrease (3,755,479) $(47,427,211)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 3,285,083 $43,162,206
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 643,095 8,419,815
- ---------------------------------------------------------------------------
3,928,178 51,582,021
Shares repurchased (8,674,524) (113,214,884)
- ---------------------------------------------------------------------------
Net decrease (4,746,346) $(61,632,863)
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 345,325 $4,381,427
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 25,053 308,458
- ---------------------------------------------------------------------------
370,378 4,689,885
Shares repurchased (247,328) (3,113,145)
- ---------------------------------------------------------------------------
Net increase 123,050 $1,576,740
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class C Shares Amount
- ---------------------------------------------------------------------------
Shares sold 589,374 $7,697,613
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 15,825 206,321
- ---------------------------------------------------------------------------
605,199 7,903,934
Shares repurchased (257,890) (3,358,454)
- ---------------------------------------------------------------------------
Net increase 347,309 $4,545,480
- ---------------------------------------------------------------------------
Year ended July 31, 2003
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 47,097 $565,889
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 31,500 421,804
- ---------------------------------------------------------------------------
78,597 987,693
Shares repurchased (139,917) (1,773,149)
- ---------------------------------------------------------------------------
Net decrease (61,320) $(785,456)
- ---------------------------------------------------------------------------
Year ended July 31, 2002
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 194,047 $2,520,036
- ---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 32,669 427,839
- ---------------------------------------------------------------------------
226,716 2,947,875
Shares repurchased (174,987) (2,298,323)
- ---------------------------------------------------------------------------
Net increase 51,729 $649,552
- ---------------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.97% 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 2004 will show the tax status of
all distributions paid to your account in calendar 2003.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
President, Baxter Associates, Inc. (a consulting and private investments firm)
Director of ASHTA Chemicals, Inc., Banta Corporation (a printing and
digital imaging firm), Ryerson Tull, Inc. (a steel service corporation),
Advocate Health Care, and the National Center for Nonprofit Boards.
Chairman Emeritus of the Board of Trustees, Mount Holyoke College. Until
2002, Mrs. Baxter was a director of Intermatic Corporation, a
manufacturer of energy control products. Also held various positions in
investment banking and corporate finance, including Vice President and
principal of the Regency Group and Vice President and consultant to
First Boston Corp.
Charles B. Curtis (4/27/40), Trustee since 2001
President and Chief Operating Officer, Nuclear Threat Initiative (a
private foundation dealing with national security issues), also serves
as Senior Advisor to the United Nations Foundation
Member of the Council on Foreign Relations and the Trustee Advisory
Council of the Applied Physics Laboratory at Johns Hopkins University.
Until 2003, Mr. Curtis was a member of the Electric Power Research
Institute Advisory Council, and the University of Chicago Board of
Governors for Argonne National Laboratory. Prior to 2002, Mr. Curtis was
a member of the Board of Directors of the Gas Technology Institute and
the Board of Directors of the Environment and Natural Resources Program
Steering Committee, John F. Kennedy School of Government, Harvard
University. Until 2001, Mr. Curtis was a Member of the Department of
Defense's Policy Board and Director of EG&G Technical Services, Inc.
(fossil energy research and development support). Prior to May 1997, Mr.
Curtis was Deputy Secretary of Energy. He served as Chairman of the
Federal Energy Regulatory Commission from 1977 to 1987 and has held
positions on the staff of the U.S. House of Representatives, the U.S.
Treasury Department, and the Securities and Exchange Commission. Mr.
Curtis is also a lawyer with over 15 years of experience.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Vice-Chairman and Managing Director, First Reserve Corporation (a
registered investment advisor investing in companies in the world-wide
energy industry on behalf of institutional investors)
Director of Devon Energy Corporation (formerly known as Snyder Oil
Corporation), TransMontaigne Oil Company, Continuum Health Partners of
New York, Sarah Lawrence College, and various private compa nies owned
by First Reserve Corporation. Trustee of TH Lee, Putnam Investment Trust
(a closed-end investment company). Prior to acquiring First Reserve in
1983, Mr. Hill held executive positions with several advisory firms and
various positions with the federal government, including Associate
Director of the Office of Manage ment and Budget and Deputy Director of
the Federal Energy Administration.
Ronald J. Jackson (12/17/43), Trustee since 1996
Private investor
Former Chairman, President, and Chief Executive Officer of Fisher-Price,
Inc. (a toy manufacturer). Previously served as President and Chief
Executive Officer of Stride-Rite, Inc. and Kenner Parker Toys. Also held
financial and marketing positions with General Mills, Parker Brothers,
and Talbots. President of the Kathleen and Ronald J. Jackson Foundation
(charitable trust). Member of the Board of Overseers of WGBH (public
television and radio). Member of the Board of Overseers of the Peabody
Essex Museum.
Paul L. Joskow (6/30/47), Trustee since 1997
Elizabeth and James Killian Professor of Economics and Management and
Director of the Center for Energy and Environmental Policy Research,
Massachusetts Institute of Technology
Director, National Grid Transco (formerly National Grid Group, a
UK-based holding company with interests in electric and gas transmission
and distribution and telecommunications infrastructure), and the
Whitehead Institute for Biomedical Research (a non-profit research
institution). President of the Yale University Council. Prior to
February 2002, March 2000, and September 1998, Dr. Joskow was a Director
of State Farm Indemnity Company (an automobile insurance company),
Director of New England Electric System (a public utility holding
company) and a consultant to National Economic Research Associates,
respectively.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Chairman, Cambus-Kenneth Bloodstock (a limited liability company
involved in thoroughbred horse breeding and farming), President Emeritus
of Mount Holyoke College
Director, Northeast Utilities, and Talbots (a distributor of women's
apparel). Trustee of Centre College. Prior to 2001, Dr. Kennan was a
member of the Oversight Committee of Folger Shakespeare Library. Prior
to September 2000, June 2000, and November 1999, Dr. Kennan was a
Director of Chastain Real Estate, Bell Atlantic, and Kentucky Home Life
Insurance, respectively. Prior to 1995, Dr. Kennan was a Trustee of
Notre Dame University. For 12 years, she was on the faculty of Catholic
University.
John H. Mullin, III (6/15/41), Trustee since 1997
Chairman and CEO of Ridgeway Farm (a limited liability company engaged
in timber and farming)
Director Alex. Brown Realty, Inc., Sonoco Products, Inc. (a packaging
company), The Liberty Corporation (a company engaged in the broadcasting
industry), and Progress Energy, Inc. (a utility company, formerly known
as Carolina Power & Light). Trustee Emeritus of Washington & Lee
University. Prior to October 1997, January 1998, and May 2001, Mr.
Mullin was a Director of Dillon, Read & Co. Inc., The Ryland Group,
Inc., and Graphic Packaging International Corp., respectively.
Robert E. Patterson (3/15/45), Trustee since 1984
Senior Partner of Cabot Properties, L.P. and Chairman of Cabot
Properties, Inc.
Chairman of the Joslin Diabetes Center, Trustee of SEA Education
Association, and Director of Brandywine Trust Company (a trust company).
Prior to February 1998, Mr. Patterson was Executive Vice President and
Director of Acquisitions of Cabot Partners Limited Partnership. Prior to
December 2001, Mr. Patterson was President and Trustee of Cabot
Industrial Trust (publicly traded real estate investment trust). Prior
to 1990, Mr. Patterson was Executive Vice President of Cabot, Cabot &
Forbes Realty Advisors, the predecessor of Cabot Partners, and prior to
that was Senior Vice President of the Beal Companies.
W. Thomas Stephens (9/2/42), Trustee since 1997
Corporate Director
Director of Xcel Energy Incorporated (public utility company),
TransCanada Pipelines, Norske Canada, Inc. (paper manufacturer), and
Qwest Communications (communications company). Until 2003, Mr. Stephens
was a Director of Mail-Well, a printing and envelope company. Prior to
July 2001 and October 1999, Mr. Stephens was Chairman of Mail-Well and
MacMillan-Bloedel (forest products company). Prior to 1996, Mr. Stephens
was Chairman and Chief Executive Officer of Johns Manville.
W. Nicholas Thorndike (3/28/33), Trustee since 1992
Director of various corporations and charitable organizations, including
Courier Corporation (a book manufacturer and publisher) and Providence
Journal Co. (a newspaper publisher)
Trustee of Northeastern University and Honorary Trustee of Massachusetts
General Hospital. Prior to September 2000, April 2000, and December
2001, Mr. Thorndike was a Director of Bradley Real Estate, Inc., a
Trustee of Eastern Utilities Associates, and a Trustee of Cabot
Industrial Trust, respec tively. Previously served as Chairman of the
Board and managing partner of Wellington Management/Thorndike Doran
Paine & Lewis, and Chairman and Director of Ivest Fund.
Lawrence J. Lasser* (11/1/42), Trustee since 1992 and Vice President since 1981
President and Chief Executive Officer of Putnam Investments and Putnam
Management
Director of Marsh & McLennan Companies, Inc. and the United Way of
Massachusetts Bay. Member of the Board of Governors of the Investment
Company Institute, Trustee of the Museum of Fine Arts, Boston, a Trustee
and Member of the Finance and Executive Committees of Beth Israel
Deaconess Medical Center, Boston, and a Member of the CareGroup Board of
Managers Investment Committee, the Council on Foreign Relations, and the
Commercial Club of Boston.
George Putnam, III* (8/10/51), Trustee since 1984 and President since 2000
President, New Generation Research, Inc. (a publisher of financial
advisory and other research services relating to bankrupt and distressed
companies) and New Generation Advisers, Inc. (a registered investment
adviser)
Director of The Boston Family Office, L.L.C. (registered investment
advisor), Trustee of St. Mark's School, and Trustee of Shore Country Day
School. Until 2002, Mr. Putnam was a Trustee of the SEA Education
Association. Previously, Mr. Putnam was an attorney with the firm of
Dechert Price & Rhoads.
A.J.C. Smith* (4/13/34), Trustee since 1986
Director of Marsh & McLennan Companies, Inc.
Director of Trident Corp. (a limited partnership with over 30
institutional investors). Trustee of the Carnegie Hall Society, the
Educational Broadcasting Corporation and the National Museums of
Scotland. Chairman of the Central Park Conservancy. Member of the Board
of Overseers of the Joan and Sanford I. Weill Graduate School of Medical
Sciences of Cornell University. Fellow of the Faculty of Actuaries in
Edinburgh, the Canadian Institute of Actuaries, and the Conference of
Actuaries. Associate of the Society of Actuaries. Member of the American
Actuaries, the International Actuarial Association and the International
Association of Consulting Actuaries. Prior to May 2000 and November
1999, Mr. Smith was Chairman and CEO, respectively, of Marsh & McLennan
Companies, Inc.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of July 31, 2003, there were 104 Putnam Funds.
Each Trustee serves for an indefinite term, until his or her resignation,
death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as defined in
the Investment Company Act of 1940) of the fund, Putnam Management, Putnam
Retail Management or Marsh & McLennan Companies, Inc., the parent company
of Putnam, LLC and its affiliated companies. Messrs. Putnam, III, Lasser
and Smith are deemed "interested persons" by virtue of their positions as
officers or shareholders of the fund or Putnam Management, Putnam Retail
Management or Marsh & McLennan Companies, Inc. George Putnam, III is the
President of your fund and each of the other Putnam funds. Lawrence J. Lasser
is the President and Chief Executive Officer of Putnam Investments and Putnam
Management. Mr. Lasser and Mr. Smith serve as Directors of Marsh & McLennan
Companies, Inc.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Treasurer and
Principal Financial Officer
Since 1989
Managing Director, Putnam Investments
and Putnam Management
Patricia C. Flaherty (12/1/46)
Senior Vice President
Since 1993
Senior Vice President, Putnam Investments and
Putnam Management
Karnig H. Durgarian (1/13/56)
Vice President and Principal Executive Officer
Since 2002
Senior Managing Director, Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Managing Director, Putnam Investments. Prior to
July 2001, Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Gordon H. Silver (7/3/47)
Vice President
Since 1990
Senior Managing Director, Putnam Investments,
Putnam Management and Putnam Retail
Management
Mark C. Trenchard (6/5/62)
Vice President
Since 2002
Senior Vice President, Putnam Investments
William H. Woolverton (1/17/51)
Vice President and Chief Legal Officer
Since 2003
Managing Director, Putnam Investments,
Putnam Management and Putnam Retail
Management
Judith Cohen (6/7/45)
Clerk and Assistant Treasurer
Since 1993
Clerk and Assistant Treasurer, The Putnam Funds
The address of each Officer is One Post Office Square,
Boston, MA 02109.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Auditors
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
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, Treasurer and
Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Karnig H. Durgarian
Vice President and Principal Executive Officer
Steven D. Krichmar
Vice President and Principal Financial Officer
Michael T. Healy
Assistant Treasurer and Principal Accounting Officer
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President
William H. Woolverton
Vice President and Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Tax-Free
High Yield Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.
AN042-203373 036/679/851 9/03
Not FDIC Insured, May Lose Value, No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson and Mr. Stephens qualify as "audit committee
financial experts" (as such term has been defined by the Regulations)
based on their review of their pertinent experience and education.
Certain other Trustees, although not on the Audit and Pricing Committee,
would also qualify as "audit committee financial experts." The SEC has
stated that the designation or identification of a person as an audit
committee financial expert pursuant to this Item 3 of Form N-CSR does
not impose on such person any duties, obligations or liability that are
greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal financial
officers have concluded, based on their evaluation of the effectiveness
of the design and operation of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this report
on Form N-CSR, that the design and operation of such procedures are
effective to provide reasonable assurance that information required to
be disclosed by the investment company in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
the Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 10. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: September 26, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Karnig H. Durgarian
---------------------------
Karnig H. Durgarian
Principal Executive Officer
Date: September 26, 2003
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Financial Officer
Date: September 26, 2003
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: September 26, 2003