Putnam
Tax-Free
Health Care
Fund
ANNUAL REPORT
May 31, 1995
[Balance Scale]
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Performance highlights
> "The gap is narrowing between Treasury and municipal yields, making munis look
increasingly attractive."
- --The Wall Street Journal, May 19, 1995.
FISCAL 1995 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Market
Total return NAV price
...............................................................................
<S> <C> <C> <C> <C> <C>
(change in value during
period plus reinvested
distributions) 7.55% 1.20%
12 months ended 5/31/95
Share value Market
NAV price
...............................................................................
5/31/94 $ 14.29 $14.375
5/31/95 14.13 13.375
Capital gains(1)
Long- Short-
Distributions No. Income term term Total
...............................................................................
12 $1.0128 $0.1384 -- $ 1.1512
Current return Market
NAV price
...............................................................................
End of period
Current dividend rate(2) 7.17% 7.57%
Taxable equivalent(3) 11.87 12.53
</TABLE>
Performance data represent past results and are no indication of future results.
For performance over longer periods, see pages 9 and 10. (1)Capital gains are
taxable for federal and, in most cases, state tax purposes. For some investors,
investment income may also be subject to the federal alternative minimum tax.
Investment income may be subject to state and local taxes. (2)Income portion of
most recent distribution, annualized and divided by NAV or market price at end
of period. (3)Assumes maximum 39.6% federal tax rate. Results for investors
subject to lower tax rates would not be as advantageous.
<PAGE>
From the Chairman
[photo of George Putnam]
(C)Karsh, Ottawa
Dear Shareholder:
Putnam Tax-Free Health Care Fund's manager, Howard Manning, couldn't be more
pleased with the municipal bond market's impressive comeback from the sustained
decline of 1994. Mindful of the uncertainties still hovering in the background,
however, he has begun taking steps aimed at preserving some of the fund's gains
achieved during the final months of the fiscal year ended May 31, 1995.
At the same time, Howard is optimistic about prospects for fiscal 1996. The
recovery in the tax-exempt bond market, while substantial, has lagged that of
other fixed-income markets, leading him to believe the rally may have some
staying power.
Municipal bond investors already have shaken off the jitters ignited by a
flat-tax proposal recently thrown into the legislative hopper. In its purest
form, a flat tax would eliminate the federal income tax advantage of municipal
bonds. We do not believe Congress would enact any such restrictive provision.
Howard provides more discussion of these and other issues in the report that
follows.
Respectfully yours,
[Signature of George Putnam]
George Putnam
Chairman of the Trustees
July 19, 1995
<PAGE>
Report from the Fund Manager
Howard Manning
At the close of Putnam Tax-Free Health Care Fund's fiscal year on May 31, 1995,
it appeared unlikely that the Federal Reserve Board would lower short-term
interest rates--a signal that effectively ended a five-month bond rally. At the
time, we saw evidence that the municipal bond market was undervalued in relation
to taxable fixed income instruments. In a dramatic turnabout, however, the Fed's
lowering of a key interest rate may have reignited the bond markets. This only
reinforced our optimism about the municipal bond market.
Your fund prospered along with the market in the months leading up to the fiscal
year end. Calendar year to date, returns were 7.92% at net asset value and 8.16%
at market price. And, in a reversal from its negative returns at the end of the
semiannual period, the fund posted a 7.55% return at NAV for the one-year period
ended May 31, 1995, and 1.20% at market price.
> FLAT-TAX CONCERNS CREATE OPPORTUNITY
For the first quarter of calendar 1995, municipal bonds rallied dramatically.
Yields fell more than 90 basis points (nine-tenths of one percentage point) and
prices--which move in the opposite direction from yields--rose proportionately.
In late April, however, municipal bond performance began to diverge sharply from
that of other fixed-income securities.
We believe that investors' fears of the effects of the current flat-tax
proposal now being considered by Congress jarred the municipal bond market out
of its dramatic recovery. A flat tax, which is one of many tax-reform proposals
being considered now by congressional committees, would deprive municipal bonds
of their exclusivity as tax-exempt investments.
In our opinion, the market reacted to the perceived effects of the flat-tax
rhetoric and not to any hard facts. By May, investors were starting to look
beyond the flat tax to the likelihood of a more broad-based income tax revision
in the distant future. In fact, a report in The Wall Street Journal (May 5,
1995) suggested that the
<PAGE>
short-term downturn in the market was not grounded in reality and it had
actually created more possibilities than it quashed. "(Tax-law changes) are
far off in the future--1997 at the earliest--and . . . overhauling the
current tax system is a far more difficult task than many investors now
believe. As a result, . . . there's a buying opportunity in municipals."
What kind of value have flat-tax fears created? Analysts evaluate municipal
bonds in relation to taxable Treasury bonds with similar maturities. By this
reasoning, municipal bonds are as undervalued as they were when the bond market
began to turn in November 1994, albeit at much lower yields. On November 30,
1994, the average 30-year AAA-general obligation bond was yielding 84.2% of the
average 30-year Treasury bond. Similarly, on May 31, 1995, that ratio stood at
84.9%. In fact, many types of revenue bonds are yielding more than 90% of
comparable Treasuries.
In other words, the municipal bond market's failure to participate in the rally
to the same extent as other fixed-income securities leaves the potential that it
could make up this ground. There can, of course, be no guarantees of this
result.
> SUPPLY/DEMAND DYNAMICS STILL ATTRACTIVE
The supply and demand imbalance we discussed last year has contributed to the
recent strength of municipal bonds. Independent analysts expect issuance of new
municipal bonds to shrink
YIELD RATIO: MUNICIPAL BOND YIELDS AS
A PERCENTAGE OF U.S. TREASURY BONDS
It is usually considered a buying signal when municipal bonds yield
between 78% and 82% of Treasuries
(graphic-line chart)
11/94 84.2
84
12/94 82.5
82.2
1/95 80.7
79.2
2/95 78.9
79.7
3/95 79.9
78.5
4/95 80.5
82.9
5/95 84.9
Chart shows the yield of an average 30-year general obligation bond
versus the yield of an average 30-year U.S. Treasury bond plotted
biweekly. Treasuries are backed by the full faith and credit of the
U.S. government. Source: Bloomberg.
(end graphic-line chart)
<PAGE>
to $125 billion this year from $150 billion last year and $300 billion in
1993. According to The Bond Buyer, an industry periodical, the volume of new
issues year-to-date is at the lowest level since 1990.
The summer months are also a traditional time for bonds to mature or be called
in. This summer, about $96 billion is expected to flood the market as many
municipal bonds come due or are called by issuers. Should falling interest rates
persist, additional refunding could push more cash into the market.
In the market where your fund concentrates most of its assets, hospitals and
health care systems, new-issue statistics are equally compelling. According to
Securities Data Co. figures, issuance of health-care bonds is off by more than
50% from 1994 levels--one of the sharpest drops relative to other municipal
sectors. Therefore, with few bonds out there, we will be managing your fund with
a particular emphasis on credit research of individual issuers.
> CAREFUL CREDIT ANALYSIS PAYS OFF IN
HOSPITAL MARKET
Health care continues to be a fluid and dynamic market. Although the federal
health-care reforms we wrote about last year currently have fallen off
Washington's political radar, it does not mean the brisk pace of mergers,
acquisitions, and consolidation has abated. The challenge in managing a
health-care portfolio is to be on the "right" side of these changes--that is,
avoiding the bonds of a hospital or nursing home whose business may be adversely
affected by mergers and acquisitions while acquiring those of facilities most
likely to benefit from such activity.
The Friendly Hills Health Care Foundation in La Habra, California, is one
example of how in-depth credit research can pay off. When we acquired these
bonds last year they were not rated by any major credit-rating agencies--thus
raising the potential of more risk. Although these bonds were unrated, we
believed the issuer had great potential. Later on, this facility was acquired by
a stronger health-care company, thereby increasing the value of the outstanding
bonds.
Another issuer, Bexar County (Texas) Health Facilities Development Corporation,
an issuer of hospital revenue bonds, benefited
<PAGE>
CONCENTRATION OF HOLDINGS BY STATE
Pennsylvania 15.9%
Massachusetts 12.6%
Michigan 12.0%
Arizona 10.5%
Florida 8.6%
Based on total net assets on 5/31/95. Holdings may vary over time.
in a similar fashion. Late last year, the bonds had the lowest investment-grade
credit rating from Moody's, a major credit rating agency. In essence, they were
one grade above being considered "speculative" and at a higher risk of default.
Early this year, the hospital supporting these bonds was acquired by a stronger
health system from San Antonio--thus improving its value.
> PREREFUNDED ISSUES CONTRIBUTE TO SOLID
PERFORMANCE
Depending on a bond issuer's interest rate outlook, additional bonds may be
issued and sold in order to eliminate older, higher-cost debt. In this
situation, known as a refunding, the proceeds of the new issue are invested in
AAA-rated government securities. This investment is used to establish an account
that will pay interest and principal on the outstanding issue. Should the
outstanding debt be retired prior to maturity, it is known in bond parlance as
being "prerefunded to the first call date." Owning prerefunded debt is
beneficial to a portfolio because it immediately improves the credit quality of
the bonds, which, in turn, may increase their value.
Your fund's holdings of prerefunded debt increased from roughly 3% of assets at
the fiscal year's midpoint on November 30, 1994, to about 12% at period's end.
The Bexar bonds mentioned above not only appreciated as a result of a merger but
also benefited from a prerefunding--bonds once rated Baa became AAA-rated in
just a few months.
<PAGE>
The same may be true for another issuer, Sierra Vista (Arizona) Industrial
Development Authority. Based on credit quality and the current interest-rate
environment, these hospital revenue bonds, have the potential, in our opinion,
to be the subject of a prerefunding within the next 6-12 months. Even if this
does not come to pass, we still believe these bonds add value to the fund's
portfolio.
> POSITIONING TO GIVE INVESTORS THE BEST OF BOTH WORLDS--INCOME AND TOTAL
RETURN
While health-care bonds generally provide a good deal of income, at times they
have lagged other types of municipal bonds in terms of total return. One way we
attempt to make up for this is by targeting undervalued bonds. An example was a
group of hospital bonds issued by the state of Michigan. In our opinion, these
bonds underperformed because of an overreaction to last year's negative general
market conditions rather than a shift in fundamental credit outlook. Therefore,
we hope to continue to reap substantial yield and total return benefits from
this position.
Although the direction of the broader bond market for the remainder of calendar
1995 is anybody's guess, we believe the municipal bond market will continue to
hold promise for investors seeking tax-free income. However, as we observe many
signs that our optimism about the municipal bond market as a whole is not
unfounded, we will stand ready to deal with any unexpected changes affecting the
fund's portfolio.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 5/31/95, there is no guarantee the fund will continue to hold
these securities in the future.
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's
performance. 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 back into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might have grown each
year over varying periods.
Performance should always be considered in light of a fund's investment
strategy. Putnam Tax-Free Health Care Fund is designed for investors seeking
high current income free from federal income tax and consistent with
preservation of capital through a portfolio of securities in the health care
sector.
TOTAL RETURN FOR PERIODS ENDED 5/31/95
<TABLE>
<CAPTION>
Lehman
Bros.
Market Municipal
NAV Price Bond Index CPI
<S> <C> <C> <C> <C>
1 year 7.55% 1.20% 9.11% 3.19%
Life-of-fund
(since 6/29/92) 27.53 11.78 23.12 8.56
Annual average 8.68 3.89 7.38 2.85
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 6/30/95 (most recent calendar quarter)
<TABLE>
<CAPTION>
Lehman
Bros.
Market Municipal
NAV price Bond Index CPI
<S> <C> <C> <C> <C>
1 year 6.24% 0.68% 8.82% 2.84%
Life-of-fund
(since 6/29/92) 26.26 12.83 22.04 8.56
Annual average 8.08 4.11 6.87 2.78
</TABLE>
Performance data represent past results and is not indicative of future
performance. Investment returns, net asset value, and market value will
fluctuate so an investor's shares, when sold, may be worth more or less than
their original cost. Fund performance data do not take into account any
adjustment for taxes payable on reinvested distributions.
<PAGE>
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding common shares.
Market price is the current trading price of one share of the fund. Market
prices are set by transactions between buyers and sellers on the New York Stock
Exchange.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index does not take into account brokerage commissions or other
costs, may include bonds different from those in the fund, and may pose
different risks than the fund.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
<PAGE>
Report of Independent Accountants
For the Year Ended May 31, 1995
To the Trustees and Shareholders of
Putnam Tax-Free Health Care Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments owned (except for bond ratings), and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Putnam Tax-Free Health Care Fund (the "fund") at May 31, 1995, and the results
of its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments owned at May 31, 1995, by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Boston, Massachusetts
July 18, 1995
<PAGE>
Portfolio of investments owned
May 31, 1995
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (103.7%)*
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Arizona (10.5%)
$2,935,000 AZ Hlth. Fac. Auth. Hosp. Syst. Prerefunded
Rev. Bonds (St. Luke's Hlth. Syst.), 7-1/4s,
11/1/14 AAA/P $ 3,356,906
4,000,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds
(Payson Regl. Med. Ctr. Inc. Project), 7.7s,
10/1/23 B/P 3,800,000
Pinal Cnty., Indl. Dev. Auth. Rev. Bonds (Casa
Grande Regl. Med. Ctr.),
4,200,000 9s, 12/1/13 BB/P 4,357,500
1,875,000 Ser. A, 8-1/8s, 12/1/22 BB/P 1,992,188
6,470,000 Sierra Vista, Indl. Dev. Auth. Hosp. Rev.
Bonds (Sierra Vista Cmnty. Hosp. Project),
8-1/2s, 12/1/21 BBB/P 7,028,031
20,534,625
California (7.1%)
4,000,000 Berkeley, Hlth. Fac. Rev. Bonds (Alta Bates
Med. Ctr.), Ser. A, 6.55s, 12/1/22 Baa 3,915,000
CA Hlth. Fac. Auth. Rev. Bonds
1,105,000 (Summit Med. Ctr.), Ser. 85A, 9s, 5/1/15 Ba 1,125,719
1,065,000 (Valley Presbyterian Hosp. Project),
Ser. A, 9s, 5/1/12 BB/P 1,065,000
2,130,000 CA Hlth. Fac. Fin. Auth. Rev. Bonds
(Summit Med. Ctr.), Ser. A, 7-1/2s, 5/1/09 Ba 2,076,750
1,600,000 CA Hlth. Fac. Fin. Auth. VRDN
(St. Joseph Hlth. Syst.), Ser. A, 4s, 7/1/13 VMIGI 1,600,000
2,700,000 CA Hlth. Fac. Fin. Auth. VRDN (St. Francis
Memorial Hospital), Ser. B, 4.65s, 11/1/19 VMIGI 2,700,000
1,660,000 San Bernardino Cnty. COP (Medical Center
Financing Project), 5-1/2s, 8/1/22 A 1,413,075
13,895,544
District of Columbia (0.2%)
375,000 District of Columbia Hosp. Rev. Bonds
(Medlantic Health Care Group), Ser. B, 7s,
8/15/15 BBB 366,094
Florida (8.6%)
Largo, Sun Coast Hlth. Syst. Rev. Bonds
6,865,000 6.3s, 3/1/20 BBB 6,075,525
2,485,000 6.2s, 3/1/13 BBB 2,236,500
2,000,000 Miami, Hlth. Fac. Auth. Prerefunded, Rev.
Bonds (Cedars Med. Ctr.), Ser. A, 8-3/8s,
10/1/17 AAA/P 2,212,500
2,000,000 Orange Cnty., Hlth. Fac. Auth. 1st. Mtge.
Rev. Bonds (RHA/Princeton Hosp.), 9s, 7/1/21 B/P 1,627,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Florida (Continued)
$2,600,000 Orange Cnty., Hlth. Fac. Auth. IFB Ser. 91-C,
MBIA, 8.259s, 10/29/21 AAA $ 2,804,750
Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc. Project),
1,430,000 8-7/8s, 12/1/18 BBB 1,573,000
140,000 Prerefunded 8-7/8s, 12/1/18 AAA/P 162,050
16,691,825
Illinois (3.5%)
3,785,000 IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.), 8-3/4s, 7/1/11 BBB/P 4,073,606
2,720,000 IL Hlth. Fac. Auth. Prerefunded Rev. Bonds
(St. Elizabeth's Hosp.), 10-1/8s, 7/1/16 AAA 2,815,010
6,888,616
Kentucky (2.0%)
2,000,000 Jefferson Cnty., Hosp. Rev. IFB (Alliant Hlth.
Syst. Project), MBIA, 8.228s, 10/1/14 AAA 2,192,500
1,520,000 Muhlenberg Cnty., Hosp. Rev. Bonds (Muhlenberg
Cmnty. Hosp. Project), 9-1/2s, 8/1/10 BBB/P 1,654,900
3,847,400
Maryland (3.3%)
2,910,000 Berlin, Hosp. Rev. Bonds (Atlantic Gen. Hosp.
Fac.), 8-3/8s, 6/1/22 BB/P 3,084,600
3,765,000 Prince George's Cnty., Hosp. Rev. Bonds
(Greater Southeast Healthcare Syst.), 6-3/8s,
1/1/23 Baa 3,346,144
6,430,744
Massachusetts (12.6%)
MA State Hlth. & Edl. Fac. Auth.
Rev. Bonds
2,225,000 Prerefunded (St. Joseph's Hosp.), Ser. C,
9-1/2s, 10/1/20 AAA 2,619,938
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8-3/8s, 7/1/15 Baa 3,510,375
3,830,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 BB 3,739,038
115,000 (Norwood Hosp.), Ser. E, 8s, 7/1/05 Ba 112,988
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7-7/8s,
8/15/24 BB/P 4,055,000
3,100,000 (MA Eye & Ear Infirmary), Ser. A, 7-3/8s, 7/1/11 BB 3,053,500
2,930,000 (Cooley Dickinson Hosp. Issue-A), 7-1/8s,
11/15/18 BB/P 2,798,150
1,070,000 (Norwood Hosp.), Ser. C, 7s, 7/1/14 Ba 897,463
MA State Indl. Fin. Agcy. Rev. Bonds
1,000,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB/P 1,083,750
2,385,000 Prerefunded (Morton Hosp. & Med. Ctr. A),
8-3/4s, 7/1/11 AAA 2,760,638
24,630,840
<PAGE>
Michigan (12.0%)
$1,970,000 Detroit, Hosp. Fac. Fin. Auth. Rev. Bonds (MI
Hlth. Care Corp.), 10s, 12/1/20 (Chapter 11)+ Caa $ 788,000
5,500,000 Dickinson Cnty., Hosp. Rev Bonds (Memorial
Hosp. Syst.), 8-1/8s, 11/1/24 BBB 5,754,375
55,000 Highland Park, Fin. Auth. Hosp. Fac. Rev. Bonds
(MI Hlth. Care Corp. Project), Ser. A, 9-3/4s,
12/1/06 (Chapter 11)+ Caa 22,000
MI Hosp. Fin. Auth. Rev. Bonds
6,500,000 (Garden City Hosp.), 8-1/2s, 9/1/17 BBB 6,898,125
4,500,000 (Genesys Hlth. Syst.) Ser. A, 7-1/2s, 10/1/27 Baa 4,601,250
Pontiac Hosp. Fin. Auth. Rev. Bonds
2,500,000 6s, 8/1/23 Baa 2,062,500
2,000,000 6s, 8/1/13 Baa 1,732,500
1,430,000 Tawas City, Hosp. Fin. Auth. Rev. Bonds
(St. Joseph's Hosp. Project), Ser. A, 8-1/2s,
3/15/12 BBB/P 1,505,075
23,363,825
Minnesota (1.2%)
2,300,000 Rochester, Hlth. Care Fac. Rev. Bonds (Olmsted
Med. Group), 7-1/2s, 7/1/19 BB/P 2,351,750
Missouri (2.8%)
5,000,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev.
Bonds (Park Lane Med. Ctr. Project), 8-3/4s,
1/1/15 BBB/P 5,431,250
New Hampshire (1.1%)
1,945,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
(Alice Peck Day Memorial Hosp. Project),
9-3/8s, 11/1/20 BB/P 2,117,619
New Jersey (3.3%)
3,000,000 NJ Econ. Dev. Auth. Hlth. Care Fac. Rev. Bonds
(Ocean Nursing Pavilion), Ser. A, 7-3/8s,
12/1/25 BB/P 2,973,750
3,200,000 NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds (St.
Elizabeth Hosp.), Ser. B, 8-1/4s, 7/1/20 Baa 3,436,000
6,409,750
New Mexico (0.7%)
1,350,000 Grant Cnty., Hosp. Fac. Rev. Bonds (Gila Regl.
Med. Ctr. Project), 10s, 2/1/12 BBB/P 1,437,750
New York (1.2%)
2,015,000 NY State Med. Care Facs. Fin. Agcy. Rev. Bonds
(Mental Hlth. Svcs. Fac.), Ser. B, 7-7/8s,
8/15/20 Baa 2,269,394
<PAGE>
Ohio (3.8%)
$2,111,982 Holland, Indl. Dev. Mtge. Rev. Bonds (Spring
Meadow Extended Care Project), FHA, 11s,
4/15/13 BBB/P $ 2,333,740
5,000,000 Mount Vernon, Hosp. Rev. Bonds (Knox Cmnty.
Hosp.), 7-7/8s, 6/1/12 BBB/P 5,156,250
7,489,990
Oklahoma (2.8%)
Tulsa, Indl. Auth. Hosp. Rev. Bonds (Tulsa
Regl. Med. Ctr.),
2,395,000 Ser. A, 7-5/8s, 6/1/17 BBB 2,460,863
3,000,000 7.2s, 6/1/17 BBB 3,000,000
5,460,863
Pennsylvania (15.9%)
Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
3,000,000 (Divine Providence Hosp.), Ser. B, 8-3/4s,
1/1/14 BBB 3,236,250
1,000,000 Prerefunded (Divine Providence Hosp.), Ser.
A, 8-3/4s, 1/1/14 AAA/P 1,138,750
1,000,000 (Southside Hosp. Pittsburgh), Ser. A, 8-3/4s,
6/1/10 BBB 1,048,750
2,500,000 Allentown Hosp. Auth. Rev. Bonds (Sacred Heart
Hosp.), Ser. A, 6-3/4s, 11/15/14 BBB 2,362,500
1,700,000 Chartiers Valley, Indl. & Coml. Dev. Auth.
Rev. Bonds (Beverly Enterprises Project),
6-1/2s, 2/1/07 BB/P 1,593,750
3,525,000 College Township, Indl. Dev. Auth. 1st Mtge.
Hlth. Fac. Rev. Bonds (Nittany Valley Rehab.
Hosp. Project), 7-5/8s, 11/1/07 BBB/P 3,666,000
2,500,000 Langhorne Manor Boro Higher Ed. Hlth. Auth.
Rev. Bonds (Lower-Bucks Hosp. Project), 7.35s,
7/1/22 Ba 2,375,000
1,800,000 Lebanon Cnty., Good Samaritan Hosp. Auth.
Prerefunded Rev. Bonds, Ser. B, 8-1/4s, 11/1/18 AAA/P 2,085,750
5,000,000 Montgomery Cnty., Higher Edl. & Hlth. Auth.
Hosp. Rev. Bonds (UTD Hosp. Project), Ser.
B, 8-3/8s, 11/1/11 Ba 5,206,250
2,950,000 Philadelphia Hosp. & Higher Edl. Fac. Auth.
Hosp. IFB, FGIC, 5.79s, 3/6/12 AAA 2,684,500
1,000,000 Scranton-Lackawanna, Hlth. & Welfare Auth.
Rev. Bonds (Moses Taylor Hosp. Project), Ser.
B, 8-1/2s, 7/1/20 BB 1,043,750
1,500,000 Washington Cnty., Hosp. Auth. Rev. Bonds
(Canonsburg Gen. Hosp. Project), 7.35s, 6/1/13 BB/P 1,475,625
2,900,000 York Cnty., Indl. Dev. Auth. 1st Mtge. Hlth.
Fac. Rev. Bonds (Rehabilitation Hosp. of York
Project), 7-1/2s, 9/1/07 BB/P 3,034,125
30,951,000
Tennessee (0.7%)
1,302,308 Meigs Cnty., Hlth. Edl. & Hsg. Fac. Board Rev.
Bonds (Meigs Cnty., Hlth. Ctr.), FHA, 12s,
7/15/25 A 1,465,097
<PAGE>
Texas (8.5%)
$3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High
Plains Baptist Hosp.), FSA, 8.582s, 1/3/22 AAA $ 3,964,813
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Prerefunded
Rev. Bonds (St. Luke's Lutheran Hospital
Project), 7.9s, 5/1/11 AAA/P 5,975,000
1,060,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev.
Bonds (Nan Travis Memorial Hosp. Project),
10s, 5/15/13 B/P 1,140,825
1,655,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev.
Bonds (Woodlands Med. Ctr. Project), 8.85s,
8/15/14 BBB/P 1,797,744
2,000,000 North Central TX Hlth. Fac. Dev. Corp. IFB
(Baylor Hlth. Care Syst.), Ser. B, 6.8s, 5/15/08 AA 2,210,000
1,415,000 Tarrant Cnty., Hlth. Facs. Dev. Corp. Hosp.
Rev. Bonds (Cmnty. Hlth. Care Foundation. Inc.
Project), 10-1/8s, 4/1/21 B/P 1,496,363
16,584,745
Virginia (0.6%)
1,000,000 Fairfax Cnty., Indl. Dev. Auth. Prerefunded
IFB (Fairfax Hosp. Syst.), Ser. C, 9.077s,
8/29/23 Aaa 1,257,500
Washington (1.3%)
2,250,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9-1/4s, 9/1/10 BBB/P 2,505,938
Total Investments (cost $198,231,568)*** $202,382,159
</TABLE>
* Percentages indicated are based on net assets of $195,078,721, which
correspond to a net asset value per share of $14.13.
** The Moody's or Standard & Poor's ratings indicated are believed to be
the most recent ratings available at May 31, 1995 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 May 31,
1995. Securities rated by Putnam are indicated by "/P" and are not publicly
rated. Ratings are not covered by the Report of Independent Accountants.
+ Non-income producing security
*** The aggregate identified cost for federal income tax purposes is
$198,231,568, resulting in gross unrealized appreciation and
depreciation of $7,405,966 and $3,255,375, respectively, or net
unrealized appreciation of $4,150,591.
<TABLE>
<CAPTION>
<S> <C>
Key to Abbrevations
COP -- Certificate of Participation
IFB -- Inverse Floating Rate Bonds
VRDN -- Variable Rate Demand Notes
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
MBIA -- Municipal Bond Investors Assurance Corporation
</TABLE>
The rates shown on IFBs, which are securities paying variable interest rates
that vary inversely to changes in the market interest rates and VRDNs, are the
current interest rates at May 31,1995, which are subject to change based on the
terms of the security.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of assets and liabilities
May 31, 1995
<TABLE>
<CAPTION>
Assets
<S> <C>
Investments in securities, at value (identified cost
$198,231,568) (Note 1) $ 202,382,159
Cash 169,600
Interest receivable and other 4,215,317
Unamortized organization expenses (Note 1) 17,011
Total assets 206,784,087
Liabilities
Distributions payable to shareholders 1,165,263
Payable for securities purchased 10,145,703
Payable for compensation of Manager (Note 2) 340,949
Payable for compensation of Trustees (Note 2) 32
Payable for investor servicing and custodian fees (Note 2) 26,182
Payable for administrative services (Note 2) 1,562
Other accrued expenses 25,675
Total liabilities 11,705,366
Net assets $ 195,078,721
Represented by
Paid-in capital (Note 1) $ 191,840,225
Undistributed net investment income (Note 1) 229,447
Accumulated net realized loss on investments (Note 1) (1,141,542)
Net unrealized appreciation of investments 4,150,591
Total--Representing net assets applicable to capital shares
outstanding $ 195,078,721
Computation of net asset value and offering price
Net asset value, offering price, and redemption price per share
($195,078,721 divided by 13,807,168 shares) $14.13
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of operations
Year ended May 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Tax exempt interest income $14,939,373
Expenses:
Compensation of Manager (Note 2) $ 1,352,078
Investor servicing and custodian fees (Note 2) 186,545
Compensation of Trustees (Note 2) 11,277
Reports to shareholders 48,869
Postage 37,803
Auditing 20,397
Legal 9,897
Administrative services (Note 2) 8,679
Amortization of organization expenses (Note 1) 8,326
Registration fees 905
Exchange listing fees 26,281
Other expenses 23,108
Total expenses 1,734,165
Net investment income 13,205,208
Net realized loss on investments (Notes 1 and 3) (739,516)
Net realized loss on futures contracts (Note 1) (390,872)
Net unrealized appreciation of investments and futures
contracts during the year 1,574,883
Net gain on investments 444,495
Net increase in net assets resulting from operations $13,649,703
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended May 31
1995 1994
<S> <C> <C>
Decrease in net assets
Operations:
Net investment income $ 13,205,208 $ 13,543,620
Net realized gain (loss) on investments and futures
contracts (1,130,388) 3,171,219
Net unrealized appreciation (depreciation) of investments 1,574,883 (6,258,248)
Net increase in net assets resulting from operations 13,649,703 10,456,591
Distributions to shareholders:
From net investment income (13,986,810) (13,984,155)
From net realized gain on investments (1,910,060) (2,554,233)
Total decrease in net assets (2,247,167) (6,081,797)
Net assets:
Beginning of year 197,325,888 203,407,685
End of year (including undistributed net investment income
of $229,447 and $1,007,645, respectively) $195,078,721 $197,325,888
Number of fund shares
Shares outstanding at beginning and end of year 13,807,168 13,807,168
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Financial Highlights
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
For the period
June 29, 1992
(commencement of
operations) to
Year ended May 31 May 31
1995 1994 1993
<S> <C> <C> <C>
Net asset value, beginning of period $14.29 $14.73 $ 13.89*
Investment operations
Net investment income .96 .98 .95(a)
Net realized and unrealized gain (loss) on
investments .03 (.22) .80
Total from investment operations .99 .76 1.75
Less distributions from:
Net investment income (1.01) (1.01) (.84)
Net realized gain on investments (note 1) (.14) (.19) (.07)
Total distributions (1.15) (1.20) (.91)
Net asset value, end of period $14.13 $14.29 $ 14.73
Market value, end of period $13.375 $14.375 $ 14.625
Total investment return at market value
(%)(b) 1.20 6.46 3.75(c)
Net assets, end of period (in thousands) $195,079 $197,326 $203,408
Ratio of expenses to average net assets (%) .90 .91 .49(a)(c)
Ratio of net investment income to average net
assets (%) 6.85 6.58 6.71(a)(c)
Portfolio turnover (%) 39.44 36.92 69.11(c)
</TABLE>
* Represents initial net asset of $13.95 less offering expenses of approximately
$0.06.
(a) Reflects an absorption of expenses incurred by the Fund. As a result of this
limitation, expenses for the period ended May 31, 1993 reflects a reduction
of $0.05 per share.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Not annualized.
<PAGE>
Notes to financial statements
May 31, 1995
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, closed-end management investment company. The fund seeks as high
a level of current income exempt from federal income tax as Putnam Investment
Management, Inc., (Putnam Management), the Fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc., believes is consistent with preservation
of capital by investing primarily in a portfolio of tax-exempt securities in the
health care sector of the tax-exempt securities market.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. The fair value of restricted securities is
determined by the Manager following procedures approved by the Trustees and such
valuations and procedures as reviewed periodically by the Trustees.
B) Futures The fund may purchase and sell financial futures contracts to hedge
against changes in the values of tax-exempt municipal securities the fund owns
or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of a
particular index or a certain amount of a U.S. Government security at a set
price on a future date.
Upon entering into such a contract the fund is required to pledge to the broker
an amount of cash or securities equal to the minimum "initial margin"
requirements of the futures. Pursuant to the contract, the fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the fund as unrealized gains or losses.
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.
The potential risk to the fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in value of the hedged instruments. In addition, there
is a risk that the fund may not be able to close out its futures positions due
to an illiquid secondary market.
C) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
D) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid imposition
of any excise tax under Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for
<PAGE>
federal taxes on income, capital gains or unrealized appreciation of
securities held and excise tax on income and capital gains.
At May 31, 1995, the fund had capital loss carryovers of approximately
$198,000 available to offset future realized capital gains, if any. This
amount will expire May 31, 2003.
E) Distributions to shareholders Distributions to shareholders are recorded
by the fund on the ex-dividend date.
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 treatment of dividends payable,
loss deferrals, capital loss carryover and post-October 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 May 31, 1995, the fund reclassified
$3,404 to increase undistributed net investment income, $11,155 to increase
accumulated net realized loss on investments and $7,751 to increase paid-in
capital.
F) Amortization of bond premium and discount Any premium resulting from the
purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis. Discount on zero-coupon bonds is accreted according to
the effective yield method.
G) Unamortized organization expenses Expenses incurred by the fund in connection
with its organization, its registration with the Securities and Exchange
Commission and with various states, and the initial public offering of its
shares aggregated $41,646. These expenses are being amortized over a five-year
period based on a straight line basis.
Note 2
Management fee, administrative services, and other transactions
Compensation of Putnam Management for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such fee
is based on the annual rate of 0.70% of average weekly net assets.
The fund also reimburses the Manager 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.
Trustees of the fund receive an annual Trustee's fee of $780 and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of the Manager and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary Trust Company
(PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor servicing
agent functions are provided by Putnam Investor Services, a division of PFTC.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended May 31, 1995 have been reduced by credits allowed by PFTC.
Note 3
Purchases and sales of securities
During the year ended May 31, 1995, purchases and sales of investment securities
other than short-term municipal obligations aggregated $82,580,108 and
$74,840,186, respectively. Purchases and sales of short-term municipal
obligations aggregated $30,165,000 and $28,455,000, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
<PAGE>
Selected Quarterly Data
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
May 31 February 28 November 30 August 31
1995 1995 1994 1994
<S> <C> <C> <C> <C>
Investment income
Total $ 3,698,558 $ 3,706,008 $ 3,763,452 $ 3,771,355
Per Share $ .27 $ .27 $ .27 $ .27
Net investment income
Total $ 3,228,485 $ 3,293,266 $ 3,365,265 $ 3,318,192
Per Share $ .24 $ .24 $ .24 $ .24
Net realized and unrealized gain (loss) on investments
Total $ 2,636,867 $ 9,342,288 $(11,789,485) $ 254,825
Per Share $ .18 $ .68 $ (.85) $ .02
Net increase (decrease) in net assets from operations
Total $ 5,865,352 $ 12,635,554 $ (8,424,220) $ 3,573,017
Per Share $ .42 $ .92 $ (.61) $ .26
Net assets at end of
period
Total $195,078,721 $192,709,139 $185,480,993 $197,401,016
Per Share $ 14.13 $ 13.96 $ 13.43 $ 14.30
</TABLE>
<TABLE>
<CAPTION>
Three months ended
May 31 February 28 November 30 August 31
1994 1994 1993 1993
<S> <C> <C> <C> <C>
Investment income
Total $ 3,775,827 $ 3,833,864 $ 3,883,176 $ 3,906,776
Per Share $ .27 $ .28 $ .27 $ .29
Net investment income
Total $ 3,339,676 $ 3,373,354 $ 3,414,063 $ 3,416,527
Per Share $ .24 $ .25 $ .24 $ .25
Net realized and unrealized gain (loss) on investments
Total $ (8,917,744) $ (264,663) $ 1,804,283 $ 4,293,095
Per Share $ (.65) $ (.02) $ .14 $ .31
Net increase (decrease) in net assets from operations
Total $ (5,578,068) $ 3,108,691 $ 5,216,346 $ 7,709,622
Per Share $ (.41) $ .23 $ .38 $ .56
Net assets at end of
period
Total $197,325,888 $206,407,850 $209,341,170 $207,629,192
Per Share $ 14.29 $ 14.95 $ 15.16 $ 15.04
</TABLE>
<PAGE>
Federal Tax Information
The fund has designated all distributions paid from net investment income during
the fiscal year as exempt-interest dividends. Thus, 100% of these distributions
are exempt from federal income tax. The fund designates $0.14 per share as a
capital gain dividend. The Form 1099 you will receive in January 1996 will tell
you the tax status of any distributions paid to your account in calendar 1995.
The income earned from each state will also be reported to you at this time.
<PAGE>
Results of February 2, 1995
shareholder meeting
(Unaudited)
An annual meeting of the shareholders of the fund was held on
February 2, 1995. At the meeting, each of the nominees for Trustees was
elected, as follows:
<TABLE>
<CAPTION>
Votes for Votes withheld
<S> <C> <C>
Jameson Adkins
Baxter 11,751,805 152,353
Hans H. Estin 11,757,152 147,006
John A. Hill 11,760,716 143,442
Elizabeth T. Kennan 11,758,963 145,195
Lawrence J. Lasser 11,759,731 144,195
Robert E. Patterson 11,760,346 144,427
Donald S. Perkins 11,757,007 147,151
William F. Pounds 11,757,658 146,500
George Putnam 11,756,782 147,376
George Putnam, III 11,753,243 150,914
A.J.C. Smith 11,760,889 143,275
W. Nicholas
Thorndike 11,761,132 143,026
</TABLE>
A proposal to ratify the selection of Price Waterhouse LLP as auditors for
the fund was approved as follows: 11,729,453 votes for, and 47,742 votes
against, with 126,963 abstentions and broker non-votes. All tabulations have
been rounded to the nearest whole number.
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary Coburn
Vice President
James E. Erickson
Vice President
Howard Manning
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
<PAGE>
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-to-date
information about the fund's NAV or to request Putnam's quarterly Closed-End
Fund Commentary.
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
18990-168
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM)
