Putnam
Tax-Free
Health Care
Fund
ANNUAL REPORT
May 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The fund offers more than just a sector play. [Its] average weighted
coupon is 17% higher than the objective average, even though the fund
came to market in mid-1992, when interest rates were approaching
historic lows."
-- Morningstar Mutual Funds, March 22, 1996
* "Putnam Tax-Free Health Care Fund's market niche has all the
ingredients for generating solid returns: relatively high yields, scant
supply, and increasing demand. . . . We believe this is an excellent
time to be invested in these securities."
-- Howard Manning, Portfolio Manager
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
17 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
One of the fascinating things about market watching is that you can
never tell what's going to trigger a defining event. Often what seems
like a defining event one moment is history the next. Who would have
guessed, for example, that a flat-tax proposal would swirl out of the
presidential primary election campaign to douse the municipal bond
market, only to blow away just as the rest of the bond market was
stumbling on statistics suggesting that inflation might flare up?
These were some of the challenges facing Fund Manager Howard Manning
during Putnam Tax-Free Health Care Fund's fiscal year, which closed on
May 31, 1996. Howard handled them with aplomb as the results on the
following pages reveal.
Besides having the luxury of leaving the day-to-day details to Howard,
shareholders with a long-term investment perspective have the added
advantage of being able to let such events run their course without
undue concern.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Manager
Howard K. Manning
A glance at interest rates at the beginning and end of Putnam Tax-Free
Health Care Fund's fiscal year, the 12 months ended May 31, 1996, might
suggest that little had changed in the financial markets over the course
of the year. Nothing could be further from the truth. The first nine
months of your fund's fiscal year were characterized by falling interest
rates, with the most pronounced decline taking place in the last three
months of 1995. With interest rates approaching 6% in the closing days
of December -- the result of two short-term cuts by the Federal Reserve
Board -- your fund finished calendar 1995 with a total return of 14.79%
at net asset value (6.42% at market price).
By early March, however, evidence of rapid employment growth fueled
inflation fears and a possible end to the Federal Reserve's program of
lowering short-term interest rates. These developments brought the 10-
month bond market rally to a halt. The performance of the fund, like
that of most other fixed-income investments, suffered in the wake of
ongoing signs of a stronger economy. However, thanks to the significant
headway made early in the period, your fund returned 7.00% at net asset
value for the 12 months ended May 31, 1996 (8.74% at market price).
During the final weeks of the fiscal year, bond prices had recovered
somewhat, as further economic news suggested a more moderate pace of
growth. The rally proved short-lived, however. Comments from several
Federal Reserve officials, hinting at the prospect of higher short-term
interest rates over the next few months, unnerved the market shortly
after Memorial Day.
While this environment has been difficult for most fixed-income securities,
prices of tax-exempt bonds have fared better than those of taxable bonds
since the beginning of 1996. Since December 1995, municipal yields have
fallen from approximately 89% of comparable Treasury bonds to 83% as
of late May. The main reason for this outperformance is the apparent
reduced likelihood of a flat tax, which could jeopardize the tax advantages
enjoyed by municipals.
* HOSPITAL CONSOLIDATION LEADS TO A POSITIVE INVESTMENT ENVIRONMENT
Over the past several years, in an effort to control health-care costs,
hospital administrations have adopted a more businesslike approach to
managing their facilities. This "corporate" attitude has contributed to
an increasing number of mergers and acquisitions that, in turn, have
created a positive investment environment for tax-exempt hospital bonds
and your fund.
The takeover of not-for-profit hospitals by for-profit institutions and
the acquisition of stand-alone hospitals by larger hospital systems have
led to fewer tax-exempt hospitals and a reduced number of new tax-exempt
bonds. As bond supplies have dwindled, demand for existing hospital
bonds has risen, pushing prices higher and boosting your fund's
performance. The prerefundings that often accompany hospital
consolidations have also been beneficial to your fund.
Prerefundings work this way: When hospitals merge, the new, consolidated
facility often issues new bonds to replace older debt. Proceeds from the
sales of these new bonds are usually invested in top-quality securities
such as U.S. Treasury bonds. The Treasury bonds are pledged to pay off
the older debt. Because of the safety of principal represented by the
high-quality securities, a prerefunding immediately improves the credit
quality of the older bonds that, in turn, may help boost bond prices.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW*]
A 4.0%
Aa 2.3%
Aaa 23.9%
B 2.4%
Ba 21.8%
Baa 44.6%
Caa 0.2%
VMIG1 0.8%
Footnote reads:
*As a percentage of market value as of 5/31/96. A bond rated BBB/Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions, unless noted otherwise; the fund also holds unrated
securities determined by Putnam Management to be of comparable quality.
Holdings will vary over time.
Two examples of how prerefunding has benefited your fund are Montgomery
County United Hospital bonds in Pennsylvania and Inter-Church Home bonds
of Connecticut. When initially purchased for the portfolio, both of
these bond issues were rated BB. After these institutions were acquired
by stronger companies and their bonds prerefunded, their credit ratings
were upgraded. In each case, the bonds have relatively high coupon
rates, which are characteristic of the prerefunded lower-quality bonds.
The coupon rate for the Montgomery County hospital bonds is 83/8%.
Inter-Church Home bonds have coupon rates of 91/2% and 95/8%.
Your fund should continue to reap substantial benefit from these
positions.
* SEARCHING THE COUNTRY FOR TRIPLE Bs
We continued our strategy of seeking undervalued securities with
attractive yields and strong potential for appreciation. We invested
approximately 95% of the fund's assets in the health-care industry, most
of which are in hospital bonds. Our research indicated that because of
their liquidity and attractive yields, bonds with BBB or BB ratings
offered the best performance potential, in terms of both earnings and
possible price appreciation.
In selecting bonds for the portfolio, we search the country for the most
attractive investments. We consider each state as a separate health-care
market and we target those states that have the most potential for
improvement. Over the past 12 months, Pennsylvania and Massachusetts
were areas of focus for us. In both states, there is an oversupply of
hospitals, and the consolidation process of larger, profitable hospitals
taking over smaller hospitals has just begun.
Through in-depth analysis in each state, we uncovered a number of
attractively priced BBB-rated bonds that we believe were undervalued and
that have the potential to benefit from possible merger and prerefunding
activity.
While tax-exempt hospital bonds account for the largest percentage of
the fund's investments, we have also increased its exposure to nursing
homes and elderly congregate care facilities. The latter combine living
units with access to nursing home care. Approximately 7% of the fund's
assets were invested in bonds issued to support such facilities. Going
forward, we would like to increase the fund's investments in this area.
We believe the combination of compelling demographics -- the aging of
America -- and the current shortage of nursing homes provides a
favorable environment for investing in this sector.
[GRAPHIC OMITTED: TOP 10 HOLDINGS*]
Sierra Vista (Arizona) Industrial Development Authority
Hospital revenue bonds
Dickinson County (Michigan)
Hospital revenue bonds
Bexar County (Texas) Health Facilities Development Corp.
Revenue bonds
New Jersey Health Care Facilities Financing Authority
Revenue bonds
Kansas City, Missouri, Industrial Development Authority
Health facilities revenue bonds
San Francisco City and County Community International Airpor
Inverse floating bond
Montgomery County (Pennsylvania) Higher Educational and Health Authority
Hospital revenue bonds
Michigan State Hospital Financing Authority (Garden City Hospital)
Revenue bonds
Connecticut State Development Authority
1st mortgage revenue bonds (Inter-Church Residences, Inc., project)
4/1/21
Largo Sun Coast (Florida) Health System
Revenue bonds
Footnote reads:
*These holdings represent 26.5% of the fund's net assets. Holdings will
vary over time.
* LOOKING AHEAD
Our outlook for the health-care industry is positive. We expect the
consolidation to continue, and we view this as favorable for the
industry and your fund. While we believe the prospects for broad-based
health-care reform in the immediate future have faded, the issues
surrounding tax reform and Medicare and Medicaid funding are of concern
to us. In the coming months, we will continue to monitor developments in
these areas carefully.
While the steadily growing economy can be a challenging environment for
fixed-income investments, the types of bonds in which your fund invests
tend to be less sensitive to interest-rate moves and less volatile than
some other fixed-income securities. On balance, we believe the tax-
exempt health-care bonds in your portfolio have all of the ingredients
for generating solid returns: relatively high yields, scant supply, and
increasing demand. Against a backdrop of industry consolidation, we
believe this is an excellent time to be invested in these securities.
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 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
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.
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 in the fund.
TOTAL RETURN FOR PERIODS ENDED 5/31/96
NAV Market price
- ------------------------------------------------------------------------
1 year 7.00% 8.74%
- ------------------------------------------------------------------------
3 years 20.92 17.16
Annual average 6.54 5.42
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Life of fund
(since 6/29/92) 36.44 21.56
Annual average 8.25 5.11
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
1 year 4.57% 2.89%
- ------------------------------------------------------------------------
3 years 14.72 8.60
Annual average 4.68 2.79
- ------------------------------------------------------------------------
Life of fund
(since 6/29/92) 26.33 11.70
Annual average 6.15 2.86
- ------------------------------------------------------------------------
Performance data represent past results, and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset
value, and market price will fluctuate so that an investor's shares,
when sold, may be worth more or less than their original cost.
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
NAV Market price
- -----------------------------------------------------------------------
1 year 7.64% 5.10%
- ------------------------------------------------------------------------
3 years 19.44 12.43
Annual average 6.10 3.98
- ------------------------------------------------------------------------
Life of fund
(since 6/29/92) 36.74 19.31
Annual average 8.12 4.50
- ------------------------------------------------------------------------
Performance data represent past results, and do not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns, net asset
value, and market price will fluctuate so that an investor's shares,
when sold, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/96
NAV
- ------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------
Income $0.9282
- ------------------------------------------------------------------------
Share value: NAV Market price
- ------------------------------------------------------------------------
5/31/95 $14.13 $13.375
- ------------------------------------------------------------------------
5/31/96 14.11 13.500
- ------------------------------------------------------------------------
Current return: (end of period)
- ------------------------------------------------------------------------
Current dividend rate1 6.38% 6.67%
- ------------------------------------------------------------------------
Taxable equivalent2 10.56 11.04
- ------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
2 Assumes maximum 39.6% federal tax rate. Results for investors subject
to lower rates would not be as advantageous.
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 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. It is not possible
to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
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, 1996, 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, 1996 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 15, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1996
Key to Abbreviations
AMBAC - AMBAC Indemnity Corporation
COP - Certificate of Participation
FGIC - Financial Guaranty Insurance Company
FHA Insd. - Federal Housing Administration Insured
FSA - Financial Security Assurance
IF COP - Inverse Floating Rate Certificate of Participation
IFB - Inverse Floating Rate Bond
MBIA - Municipal Bond Investors Assurance Corporation
VRDN - Variable Rate Demand Note
MUNICIPAL BONDS AND NOTES (98.7%) *
PRINCIPAL AMOUNT RATINGS** VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arizona (6.5%)
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$ 4,000,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds
(Payson Regl. Med. Ctr. Inc. Project), 7.7s, 10/1/23 B/P $3,535,000
1,875,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.), Ser. A, 8 1/8s, 12/1/22 BB/P 1,975,781
6,455,000 Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp. Project), 8 1/2s, 12/1/21 BBB/P 7,084,359
------------
12,595,140
California (9.5%)
- ---------------------------------------------------------------------------------------------------------------------------
2,035,000 CA Hlth. Fac. Fin. Auth. Rev. Bonds (Summit Med. Ctr.),
Ser. A, 7 1/2s, 5/1/09 Ba 2,050,263
4,000,000 Corona COP (Hosp. Syst. Inc.), Ser. C, 8 3/8s, 7/1/11 BB/P 3,945,000
3,000,000 San Bernardino Cnty., IF COP (PA-100-Med. Ctr. Fing. Project),
MBIA, 8.238s, 8/1/28 (acquired 6/27/95 cost $3,237,720)(double dagger) Aaa 3,690,000
4,750,000 San Francisco City & Cnty. Cmnty. Intl. Arpt. IFB
FGIC, 7.748s, 5/1/25 (acquired 1/3/96 cost $5,354,105)(double dagger) Aaa 4,720,313
4,145,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BBB 4,041,375
------------
18,446,951
Connecticut (4.1%)
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CT State Dev. Auth. 1st Mtge. Rev. Bonds
(Inter-Church Residences Inc. Project)
3,500,000 9 5/8s, 4/1/21 AAA/P 4,305,000
1,200,000 9 1/2s, 5/1/13 AAA/P 1,470,000
2,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Hlth. Care Inc. Project), Ser. A, 8.7s, 7/1/22 BB/P 2,147,500
------------
7,922,500
Delaware (0.8%)
- ---------------------------------------------------------------------------------------------------------------------------
1,500,000 Wilmington Hosp. VRDN (Franciscan Hlth. Syst.),
Ser. A, 3.65s, 7/1/11(Societe Generale LOC) VMIG1 1,500,000
Florida (4.4%)
- ---------------------------------------------------------------------------------------------------------------------------
4,865,000 Largo Sun Coast Hlth. Syst. Rev. Bonds, 6.3s, 3/1/20 BBB/P 4,287,281
2,600,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA,
8.779s, 10/29/21 Aaa 2,752,750
1,380,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc. Project), 8 7/8s, 12/1/18 AAA/P 1,554,225
------------
8,594,256
Illinois (2.0%)
- ---------------------------------------------------------------------------------------------------------------------------
3,665,000 IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab. Providers Fac.),
8 3/4s, 7/1/11 BBB/P 3,884,900
Kentucky (1.9%)
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2,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst. Project),
MBIA, 8.837s, 10/1/14 AAA 2,132,500
1,470,000 Muhlenberg Cnty., Hosp. Rev. Bonds (Muhlenberg Cmnty. Hosp. Project),
9 1/2s, 8/1/10 BBB/P 1,576,575
------------
3,709,075
Maryland (2.0%)
- ---------------------------------------------------------------------------------------------------------------------------
2,850,000 Berlin Hosp. Rev. Bonds (Atlantic Gen. Hosp. Fac.), 8 3/8s, 6/1/22 BB/P 2,996,063
1,000,000 Prince George's Cnty., Hosp. Rev. Bonds
(Greater Southeast Hlth. Care Syst.), 6 3/8s, 1/1/23 Baa 906,250
------------
3,902,313
Massachusetts (17.5%)
- ---------------------------------------------------------------------------------------------------------------------------
MA State Hlth & Edl. Fac. Auth. Rev. Bonds
1,000,000 (Beth Israel Hosp.), Ser. D, 7 3/4s, 7/1/08 Aa 1,086,250
4,075,000 (Ctr. for New England Hlth. Syst.), Ser. A, 6 1/8s, 8/1/13 Ba 3,570,719
2,000,000 (Charlton Memorial Hosp.), Ser. B, 7 1/4s, 7/1/07 A 2,150,000
2,880,000 (Cooley Dickinson Hosp. Issue-A), 7 1/8s, 11/15/18 AAA/P 3,276,000
3,250,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba 3,258,125
2,500,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 2,528,125
1,070,000 (Norwood Hosp.), Ser. C, 7s, 7/1/14 Ba 1,001,788
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 BB/P 4,095,000
2,225,000 (St. Joseph's Hosp.), Ser. C, 9 1/2s, 10/1/20 AAA/P 2,600,469
3,500,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s, 11/15/22 Baa 3,395,000
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B, 8 3/8s, 7/1/15 Baa 3,526,875
MA State Indl. Fin. Agcy. Rev. Bonds
2,320,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s, 7/1/11 Aaa 2,598,400
975,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB/P 1,038,375
------------
34,125,126
Michigan (12.2% )
- ---------------------------------------------------------------------------------------------------------------------------
5,500,000 Dickinson Cnty., Hosp. Rev. Bonds (Memorial Hosp. Syst.),
8 1/8s, 11/1/24 BBB 5,974,375
MI State Hosp. Fin. Auth. Rev. Bonds
1,500,000 (Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB 1,488,750
2,370,000 Prerefunded (Garden City Hosp.), 8 1/2s, 9/1/17 AAA 2,802,525
4,130,000 (Garden City Hosp.), 8 1/2s, 9/1/17 BBB 4,326,175
3,000,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Mercy Svcs. for Aging Project), 9.4s, 5/15/20 BBB/P 3,397,500
1,500,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa 1,338,750
1,390,000 Tawas City Hosp. Fin. Auth. Rev. Bonds (St. Joseph's Hosp. Project),
Ser. A, 8 1/2s, 3/15/12 BBB/P 1,433,438
3,000,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care), 8 3/8s, 7/1/23 BB/P 3,112,500
------------
23,874,013
Minnesota (0.7%)
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1,300,000 Rochester Hlth. Care Fac. Rev. Bonds (Olmsted Med. Group),
7 1/2s, 7/1/19 BB/P 1,339,000
Missouri (2.7%)
- ---------------------------------------------------------------------------------------------------------------------------
4,900,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds
(Park Lane Med. Ctr. Project), 8 3/4s, 1/1/15 BBB/P 5,175,625
New Hampshire (1.1%)
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1,930,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
(Alice Peck Day Memorial Hosp. Project), 9 3/8s, 11/1/20 BBB/P 2,110,938
New Jersey (6.2%)
- ---------------------------------------------------------------------------------------------------------------------------
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 2,943,750
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
5,000,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 BBB 5,300,000
3,600,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Baa 3,906,000
------------
12,149,750
New Mexico (0.7%)
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1,320,000 Grant Cnty., Hosp. Fac. Rev. Bonds (Gila Regl. Med. Ctr. Project),
10s, 2/1/12 BBB/P 1,366,160
Ohio (1.1%)
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2,064,741 Holland, Indl. Dev. Mtge. Rev. Bonds
(Spring Meadow Extended Care Project), FHA Insd., 11s, 4/15/13 A/P 2,224,759
Pennsylvania (12.1%)
- ---------------------------------------------------------------------------------------------------------------------------
3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Divine Providence Hosp.), Ser. B, 8 3/4s, 1/1/14 BBB 3,198,750
3,355,000 College Township, Indl. Dev. Auth. 1st Mtge. Hlth. Fac.
Rev. Bonds (Nittany Valley Rehab. Hosp. Project), 7 5/8s, 11/1/07 BBB/P 3,568,881
2,000,000 Langhorne Manor Boro Higher Edl. Hlth. Auth. Rev. Bonds
(Lower -Bucks Hosp. Project), 7.35s, 7/1/22 Ba 1,710,000
1,800,000 Lebanon Cnty., Good Samaritan Hosp. Auth. Rev. Bonds,
Ser. B, 8 1/4s, 11/1/18 BBB 2,029,500
4,000,000 Montgomery Cnty., Higher Edl. & Hlth. Auth. Hosp. Rev. Bonds
(UTD Hosp. Project), Ser. B, 8 3/8s, 11/1/11 Baa 4,525,000
2,950,000 Philadelphia, Hosp. & Higher Edl. Fac. Auth. Hosp. IFB, FGIC,
6.398s, 3/4/12 Aaa 2,610,750
3,000,000 Philadelphia, Hosp. & Higher Edl. Fac. Auth. Hosp. Rev. Bonds
(Graduate Hlth. Syst.), Ser. A & B, 7 1/4s, 7/1/18 Baa 3,018,750
2,760,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac. Rev. Bonds
(Rehabilitation Hosp. of York Project), 7 1/2s, 9/1/07 BB/P 2,839,350
------------
23,500,981
Tennessee (1.6%)
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1,288,640 Meigs Cnty. Hlth. Edl. & Hsg. Fac. Board Rev. Bonds
(Meigs Cnty., Hlth. Ctr.), FHA Insd., 12s, 7/15/25 A/P 1,475,493
1,700,000 Metro. Govt. Nashville & Davidson Cnty. Tenn.
Wtr. & Swr. IFB, AMBAC, 8.216s, 1/1/22 Aaa 1,710,625
------------
3,186,118
Texas (7.7%)
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3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains Baptist Hosp.),
FSA, 8.937s, 1/3/22 Aaa 3,910,063
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp. Project), 7.9s, 5/1/11 AAA/P 5,818,750
1,040,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp. Project), 10s, 5/15/13 B/P 1,128,400
1,625,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Woodlands Med. Ctr. Project), 8.85s, 8/15/14 A/P 1,740,781
2,000,000 North Central TX Hlth. Fac. Dev. Corp. IFB
(Baylor Hlth. Care Syst.), Ser. B, 7.94s, 5/15/08 Aa 2,127,500
1,415,000 Tarrant Cnty., Hlth. Fac. Dev. Corp. Hosp. Rev. Bonds
(Cmnty. Hlth. Care Foundation. Inc. Project), 10 1/8s, 4/1/21 CCC/P 353,750
------------
15,079,244
Vermont (0.9%)
- ---------------------------------------------------------------------------------------------------------------------------
1,870,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds
(Northwestern Med. Ctr. Project), 6 1/4s, 9/1/18 BBB 1,725,075
Virginia (0.6%)
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1,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB (Fairfax Hosp. Syst.),
Ser. C, 9.607s, 8/29/23 Aa 1,218,750
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 2,517,188
West Virginia (1.1%)
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2,000,000 Randolph Cnty., Hosp. Rev. Bonds (Davis Memorial Hosp. Project),
Ser. A, 7.65s, 11/1/21 Baa 2,127,500
- ---------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $188,382,770) *** $192,275,362
- ---------------------------------------------------------------------------------------------------------------------------
* Percentages are based on net assets of $194,755,056.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at May 31,1996 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, 1996. Securities rated by Putnam are indicated by "/P" and are not
publicly rated. Ratings are not covered by the Report of independent accountants.
(double dagger) Restricted, excluding 144A securities, as to public resale. The total market value
of restricted securities held at May 31, 1996 was $8,410,313 or 4.3% of net assets.
*** The aggregate identified cost on a tax basis is $188,382,770, resulting in gross
unrealized appreciation and depreciation of $7,323,850, and $3,431,258, respectively, or net
unrealized appreciation of $3,892,592.
The rates shown on Inverse Floating Rate Bonds (IFB), Inverse Floating Rate Certificate of
Participation (IF COP), which are securities paying interest rates that vary inversely to changes
in the market interest rates, and Variable Rate Demand Notes (VRDN'S) are the current interest rates
at May 31, 1996.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------
Investments in securities, at value(identified cost $188,382,770) (Note 1) $192,275,362
- -----------------------------------------------------------------------------------------------------
Cash 50,074
- -----------------------------------------------------------------------------------------------------
Interest and other receivables 3,868,219
- -----------------------------------------------------------------------------------------------------
Receivable for securities sold 30,000
- -----------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 8,663
- -----------------------------------------------------------------------------------------------------
Total assets 196,232,318
Liabilities
- -----------------------------------------------------------------------------------------------------
Distributions payable to shareholders $1,035,549
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 344,056
- -----------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 212
- -----------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,330
- -----------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 51,136
- -----------------------------------------------------------------------------------------------------
Other accrued expenses 44,979
- -----------------------------------------------------------------------------------------------------
Total liabilities 1,477,262
- -----------------------------------------------------------------------------------------------------
Net assets $194,755,056
Represented by
- -----------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) 191,840,206
- -----------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 446,719
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (1,424,461)
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,892,592
- -----------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $194,755,056
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------------
Net asset value per share ($194,755,056 divided by 13,807,168 shares) $14.11
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1996
<S> <C>
Tax exempt interest income: $14,696,652
- -------------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,372,355
- -------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 220,863
- -------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,199
- -------------------------------------------------------------------------------------------------
Administrative services (Note 2) 8,191
- -------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 8,348
- -------------------------------------------------------------------------------------------------
Reports to shareholders 51,921
- -------------------------------------------------------------------------------------------------
Auditing 32,853
- -------------------------------------------------------------------------------------------------
Legal 10,740
- -------------------------------------------------------------------------------------------------
Postage 49,950
- -------------------------------------------------------------------------------------------------
Registration fees 158
- -------------------------------------------------------------------------------------------------
Exchange listing fees 24,260
- -------------------------------------------------------------------------------------------------
Other 9,315
- -------------------------------------------------------------------------------------------------
Total expenses 1,801,153
- -------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (78,052)
- -------------------------------------------------------------------------------------------------
Net expenses 1,723,101
- -------------------------------------------------------------------------------------------------
Net investment income 12,973,551
- -------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (224,233)
- -------------------------------------------------------------------------------------------------
Net unrealized depreciation during the year (257,999)
- -------------------------------------------------------------------------------------------------
Net loss on investments (482,232)
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $12,491,319
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended Year ended
May 31 May 31
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ------------------------------------------------------------------------------------------------------------
Operations:
- ------------------------------------------------------------------------------------------------------------
Net investment income $12,973,551 $13,205,208
- ------------------------------------------------------------------------------------------------------------
Net realized loss on investments (224,233) (1,130,388)
- ------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (257,999) 1,574,883
- ------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 12,491,319 13,649,703
- ------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ------------------------------------------------------------------------------------------------------------
From net investment income (12,814,984) (13,986,810)
- ------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (1,910,060)
- ------------------------------------------------------------------------------------------------------------
Total decrease in net assets (323,665) (2,247,167)
- ------------------------------------------------------------------------------------------------------------
Net Assets
- ------------------------------------------------------------------------------------------------------------
Beginning of year 195,078,721 197,325,888
- ------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $446,719 and $229,447, respectively) $194,755,056 $195,078,721
- ------------------------------------------------------------------------------------------------------------
Number of fund shares
- ------------------------------------------------------------------------------------------------------------
Shares outstanding at beginning and end of year 13,807,168 13,807,168
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
(For a share outstanding throughout the period)
Year ended May 31
- --------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.13 $14.29 $14.73
- --------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------
Net investment income .94 .96 .98
- --------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.03) .03 (.22)
- --------------------------------------------------------------------------------------------------------------------
Total from investment operations .91 .99 .76
- --------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------------------------
From net investment income (.93) (1.01) (1.01)
- --------------------------------------------------------------------------------------------------------------------
From net realized gains on investments -- (.14) (.19)
- --------------------------------------------------------------------------------------------------------------------
Total distributions (.93) (1.15) (1.20)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.11 $14.13 $14.29
- --------------------------------------------------------------------------------------------------------------------
Market value, end of period $13.500 $13.375 $14.375
- --------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 8.74 1.20 6.46
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $194,755 $195,079 $197,326
- --------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .92 .90 .91
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.62 6.85 6.58
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 44.68 39.44 36.92
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
For the Period
June 29, 1992
(commencement
of operations)
to May 31
- -------------------------------------------------------------------------------
1993
- -------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $13.89 (c)
- -------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------
Net investment income .95 (d)
- -------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .80
- -------------------------------------------------------------------------------
Total from investment operations 1.75
- -------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------
From net investment income (.84)
- -------------------------------------------------------------------------------
From net realized gains on investments (.07)
- -------------------------------------------------------------------------------
Total distributions (.91)
- -------------------------------------------------------------------------------
Net asset value, end of period $14.73
- -------------------------------------------------------------------------------
Market value, end of period $14.625
- -------------------------------------------------------------------------------
Total investment return at market value (%)(a) 3.75 (e)
- -------------------------------------------------------------------------------
Net assets, end of period (in thousands) $203,408
- -------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .49 (d)(e)
- -------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.71 (d)(e)
- -------------------------------------------------------------------------------
Portfolio turnover (%) 69.11 (e)
- -------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended
May 31, 1996 includes amounts paid through expense offset
arrangements. Prior period ratios exclude these amounts (Note2).
(c) Represents initial net asset value of $13.95 less offering expenses of
approximately $0.06.
(d) Reflects an expense limitation in effect during the period.
As a result of such limitation, expenses for the fund
reflect a reduction of $0.05 per share.
(e) Not annualized.
</TABLE>
Notes to financial statements
May 31, 1996
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 preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The fair
value of restricted securities is determined following procedures
approved by the Trustees and such valuations and procedures as reviewed
periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed).
Interest income is recorded on the accrual basis.
C) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At May 31, 1996, the fund had a capital loss carryover of approximately
$1,269,000 available to offset future net capital gain, if any. The
amount of the carryover and the expiration dates are:
Loss Carryover Expiration
---------------- --------------------
$ 186,000 May 31, 2003
$1,083,000 May 31, 2004
D) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid at least annually. The amount and character of income and gains
to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. These differences include treatment of dividends payable,
realized and unrealized losses on certain future contracts, market
discount, and organizational expenses. 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, 1996, the fund reclassified
$58,705 to increase undistributed net investment income and $19 to
decrease paid-in capital, with an increase to accumulated net realized
loss of $58,686. The calculation of net investment income per share in
the financial highlights table excludes these adjustments.
E) 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. Discounts on original issue bonds are accreted
according to the effective yield method.
F) 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 were $41,646. These expenses are being amortized
on a straight-line basis over a five-year period.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.70% of
average weekly net assets and fees (less expenses) received by
affiliates of Putnam Management on the fund's portfolio transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $770 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain invested in
certain Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets 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.
For the year ended May 31, 1996, fund expenses were reduced by $78,052
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Note 3
Purchase and sales of securities
During the year ended May 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $85,894,387 and
$92,625,222, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
<TABLE>
<CAPTION>
Selected Quarterly Data
(Unaudited)
Net realized and Net increase (decrease)
Investment Net investment unrealized gain in net assets
income income (loss) on investments from operations
- -----------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
8/31/94 $3,771,355 $.27 $3,318,192 $.24 $ 254,825 $ .02 $ 3,573,017 $ .26
11/30/94 3,763,452 .27 3,365,265 .24 (11,789,485) (.85) (8,424,220) (.61)
2/28/95 3,706,008 .27 3,293,266 .24 9,342,288 .68 12,635,554 .92
5/31/95 3,698,558 .27 3,228,485 .24 2,636,867 .18 5,865,352 .42
8/31/95 3,654,588 .26 3,198,370 .23 (810,783) (.06) 2,387,587 .17
11/30/95 3,659,158 .27 3,229,433 .24 4,427,744 .32 7,657,177 .56
2/29/96 3,658,908 .26 3,232,257 .23 (368,535) (.03) 2,863,722 .20
5/31/96 3,723,998 .27 3,313,491 .24 (3,730,658) (.26) (417,167) (.02)
</TABLE>
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Results of March 7, 1996 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on
March 7, 1996. At the meeting, each of the nominees for Trustees was
elected, as follows:
Votes for Votes withheld
- ------------------------------------------------------------------------
Jameson Adkins Baxter 11,343,614 169,086
Hans H. Estin 11,343,103 169,598
John A. Hill 11,346,903 165,798
Ronald J. Jackson* -- --
Elizabeth T. Kennan 11,343,976 168,724
Lawrence J. Lasser 11,345,573 167,128
Robert E. Patterson 11,345,519 167,182
Donald S. Perkins 11,341,653 171,048
William F. Pounds 11,344,620 168,080
George Putnam 11,342,901 169,800
George Putnam, III 11,344,879 167,821
Eli Shapiro 11,331,507 181,194
A.J.C. Smith 11,351,802 160,899
W. Nicholas Thorndike 11,341,244 171,457
A proposal to ratify the selection of Price Waterhouse LLP as auditors
for the fund was approved as follows: 11,317,140 votes for, and 56,491
votes against, with 139,070 abstentions and broker non-votes. All
tabulations have been rounded to the nearest whole number.
*Elected trustee as of 5/3/96.
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
Ronald J. Jackson
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
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. 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
Beverly Marcus
Clerk and Assistant Treasurer
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -------------
25868--168 7/96
