Putnam
Tax-Free
Health Care
Fund
ANNUAL REPORT
May 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Putnam Tax-Free Health Care Fund continues to outperform its benchmark.
For the 12 months ended May 31, 1997, the fund returned 10.14% at net
asset value (11.68% at market price) versus 8.29% for the unmanaged Lehman
Brothers Municipal Bond Index.
* Your fund has been recognized by Morningstar as providing above-average
risk-adjusted performance. For the three-year period ended June 30, 1997,
the fund garnered a five-star rating (the highest) from the independent
rating agency. Only 10% of the 195 municipal bond funds rated achieved this
rating.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
17 Financial statements
24 Investment policy change
* Morningstar rates a fund in relation to other funds with similar
investment objectives based on the fund's 3-, 5-, and 10-year returns,
adjusted for risk factors and sales charges. Ratings are updated monthly.
10% of the funds in an investment category receive 5 stars; 22.5% receive
4 stars; 35% receive 3 stars. Past performance is not indicative of future
results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Tax-Free Health Care Fund began fiscal 1997 on a hopeful, yet cautious
note in June 1996 after a somewhat tumultuous year for the municipal bond
market. The hope was warranted, as the market rallied in the fall. The caution
was justified, for the rally ended abruptly in late winter, cut short by
investor worries that inflation and interest rates would both rise in the wake
of an economy still growing too fast.
From the vantage point of the fiscal year's close on May 31, 1997, we can see
that the volatility, while somewhat nerve-racking for investors, was unusually
low in comparison with previous years. By spring, even the Federal Reserve
Board's increase in the federal funds rate in late March, the source of
considerable earlier anxiety, caused little stir.
It is in these contexts that Fund Manager Triet Nguyen discusses your fund's
performance for the year just past and his view of its prospects for the year
ahead. His report begins on the following page.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 16, 1997
Report from the Fund Manager
Triet Nguyen
A superficial examination of bond market returns over the 12 months ended May
31, 1997, reveals two distinct investment climates. In the first half of
Putnam Tax-Free Health Care Fund's fiscal year, bonds were buoyed by low
inflation, positive investor sentiment, and evidence that economic growth
would remain moderate. In the most recent six-month period, investor sentiment
turned decidedly negative as a host of economic data suggested an increase in
inflation was just around the corner. In late March, the Federal Reserve Board
echoed investors' concerns with a quarter of a percentage point increase in
the federal funds rate.
Upon closer inspection, one sees that not all segments of the bond market
performed in equal measure. Municipal bonds generally outperformed U.S.
Treasuries, which tend to be more sensitive to changes in interest rates.
Fortunately for your fund, health-care-related municipal bonds did
particularly well -- thanks to strong investor demand, a limited supply of new
and existing issues, and improving industry fundamentals. Over the fiscal
year, your fund provided a total return of 10.14% at net asset value, compared
with 8.29% for the Lehman Brothers Municipal Bond Index, its benchmark. The
fund's return at market price was 11.68%. For more complete performance
information, please see the tables that start on page 9.
* STRONG DEMAND CONFRONTS A SHRINKING SUPPLY OF BONDS
Over the course of the year, much of the health-care sector's price
appreciation was driven by growing demand from new buyers in the municipal
market. Where demand from mutual funds appears to have leveled off, for
example, insurance companies have stepped in and are picking up the slack,
drawn to the relatively high yields of municipal bonds in general. The
relative scarcity of lower-grade municipals has made these high-yielding bonds
among the most sought after. Contributing to the health-care sector's
desirability is the fact that health-care-related municipals are not subject
to the alternative minimum tax.
While demand for health-care bonds has increased, supply remains limited.
Mergers and consolidations, although slowing, have reduced the total number of
independent hospitals in the country and thus the need for new bond issuance.
At the same time, a growing number of issuers have chosen to prerefund
existing issues, effectively taking them out of the market. In a prerefunding,
new bonds are issued to replace older debt. The proceeds from the sale of
these new bonds are usually invested in top-quality securities such as U.S.
Treasuries, which are then pledged to pay off the older debt. The level of
prerefunding activity in recent months has had a positive impact on the fund's
credit quality and net asset value. A prerefunding immediately improves the
credit quality (and often the market price) of the older bonds, because of the
safety of principal represented by the investment in high-quality securities.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW]
PORTFOLIO QUALITY OVERVIEW*
Aaa 32.8%
Aa 2.0%
A 3.5%
Baa 32.5%
Ba 20.5%
B 7.4%
A-1 1.3%
Footnote reads:
*As a percentage of market value as of 5/31/97. A bond rated Baa or higher is
considered investment grade. All ratings reflect Moody's descriptions, unless
noted otherwise; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
* DEFENSIVE STRATEGY CRITICAL IN SECOND HALF
After a solid year of price gains in 1996, we became concerned that valuations
were high in the health-care sector and that the portfolio was vulnerable to
potential market corrections. Although economic growth had been moderate and
inflationary pressures quiescent for most of 1996, evidence began to mount
late in the year that growth was heating up. Anticipating an increase in
rates, we shifted the portfolio into a more conservative posture. By the
start of 1997, the fund's duration (a measure of sensitivity to changing
interest rates) was less than five years. Also helping to shorten
duration were the prerefundings. The relatively high coupons and shorter
maturities of prerefunded bonds enhanced our strategy of seeking a high level
of income while minimizing interest-rate risk.
As it turned out, economic activity began to surge again in the fourth quarter
of 1996 and escalated to a record pace over the first three months of 1997.
The fund's relatively defensive positioning helped preserve its net asset
value at a time when investor sentiment was turning negative and bond prices
in general were heading lower.
* A RENEWED EMPHASIS ON INCOME
In the past, declining interest rates and industry consolidation provided
attractive total returns for the fund but left little room for generating
higher levels of income. With rates creeping upward this year, merger activity
slowing, and portfolio credit quality high, we have begun to pursue strategies
for increasing the amount of income the fund receives from its investments.
One of the ways we have chosen to do this is by looking outside the
health-care sector. By prospectus, your fund can invest as much as 25% of
total assets in securities outside its primary sector. While we do not
anticipate taking full advantage of this allocation, we have begun to seek
investment opportunities in areas such as long-term care (retirement
communities, etc.) and airports. The long-term care sector, in particular,
offers bonds with solid track records and above-average yields. At the end of
May, your fund had roughly 9% of its holdings invested outside the health-care
sector.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Cochise County (Arizona) Industrial Development
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 Airport
Inverse floating bond
Dickinson County (Michigan)
Hospital revenue bonds
Largo Sun Coast (Florida) Health System
Revenue bonds
Michigan State Hospital Finance Authority
Hospital revenue bonds
Montgomery County (Pennsylvania) Higher Educational
and Health Authority
Hospital revenue bonds
Corona County (California)
Certificate of participation
Footnote reads:
These holdings represent 25.6% of the fund's assets as of 5/31/97.
Portfolio holdings will vary over time.
* LOOKING AHEAD
Relative to other segments of the bond market, health-care-related municipals
have performed exceptionally well over the past year. In the coming months, we
expect the sector's positive fundamentals -- including strong investor demand
and a limited supply of issues -- to continue. On the economic front, we
believe moderate growth and negligible inflation will provide a benign
backdrop for fixed-income investing in general. Where opportunities arise, we
expect to soften the fund's current conservative stance and gradually increase
its sensitivity to interest-rate changes through investment in longer-maturity
bonds. This would enhance the portfolio's ability to benefit from any decline
in rates.
On a more cautious note, we believe much of the industry's consolidation --
and thus the rapid price gains associated with merger activity -- is behind
us. Careful credit analysis and security selection should play an important
role in the fund's performance going forward. At the federal level, Medicare
and Medicaid have again come under scrutiny as Congress searches for ways to
balance its tax revenues with its yearly expenditures. If cuts are made in
these programs, we expect they will come at the expense of health-care
providers rather than the general public. As always, we will continue to seek
health-care credits we believe are financially sound as independent entities
and that have the potential for capital appreciation. At the same time, we
will look outside the sector for undervalued credits we think offer attractive
income and the potential for solid gains.
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 5/31/97, 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.
TOTAL RETURN FOR PERIODS ENDED 5/31/97
NAV Market price
- ------------------------------------------------------------------------------
1 year 10.14% 11.68%
- ------------------------------------------------------------------------------
3 years 26.74 22.18
Annual average 8.22 6.91
- ------------------------------------------------------------------------------
Life of fund
(since 6/29/92) 50.27 36.40
Annual average 8.63 6.51
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 8.29% 2.23%
- ------------------------------------------------------------------------------
3 years 23.59 8.54
Annual average 7.31 2.77
- ------------------------------------------------------------------------------
Life of fund
(since 6/29/92) 39.46 14.19
Annual average 7.00 2.74
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
NAV Market price
- ------------------------------------------------------------------------------
1 year 10.63% 13.75%
- ------------------------------------------------------------------------------
3 years 27.99 21.11
Annual average 8.57 6.59
- ------------------------------------------------------------------------------
Life of fund
(since 6/29/92) 52.10 35.72
Annual average 8.75 6.30
- ------------------------------------------------------------------------------
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 5/31/97
NAV
- ------------------------------------------------------------------------------
Distributions (number) 12
- ------------------------------------------------------------------------------
Income $0.900
- ------------------------------------------------------------------------------
Capital gains1 --
- ------------------------------------------------------------------------------
Share value NAV Market price
- ------------------------------------------------------------------------------
5/31/96 $14.11 $13.50
- ------------------------------------------------------------------------------
5/31/97 $14.56 $14.125
- ------------------------------------------------------------------------------
Current return: (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 6.18% 6.37%
- ------------------------------------------------------------------------------
Taxable equivalent2 10.23 10.55
- ------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases, state
purposes.
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.
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. 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, 1997, 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, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 15, 1997
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1997
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 Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Note
MUNICIPAL BONDS AND NOTES (98.7%) *
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C>
Arizona (6.6%)
- --------------------------------------------------------------------------------------------
$ 6,440,000 Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.),
Ser. B, 8 1/2s, 12/1/21 BBB/P $ 7,285,250
3,965,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds
(Payson Regl. Med. Ctr. Inc.), 7.7s, 10/1/23 B/P 3,979,867
1,875,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.),
Ser. A, 8 1/8s, 12/1/22 B/P 1,980,467
--------------
13,245,584
California (10.6%)
- --------------------------------------------------------------------------------------------
1,940,000 CA Hlth. Fac. Fin. Auth. Rev. Bonds
(Summit Med. Ctr.), Ser. A, 7 1/2s, 5/1/09 Baa 2,095,200
4,000,000 Corona, COP (Hosp. Syst. Inc.),
Ser. C, 8 3/8s, 7/1/11 B/P 4,430,000
2,000,000 Metropolitan Wtr. Dist. Rev. Bonds,
Ser. C, 5s, 7/1/27 AA 1,817,500
3,000,000 San Bernardino Cnty. IF COP
(PA-100-Med. Ctr. Fin.), MBIA, 8.266s, 8/1/28
(acquired 6/27/95, cost $3,237,720) [DBL. DAGGER] AAA/P 3,798,750
4,750,000 San Francisco, City & Cnty. Cmnty. Intl. Arpts.
IFB, FGIC, 7.449s, 5/1/25 (acquired 1/3/96,
cost $5,354,105) [DBL. DAGGER] AAA 4,975,625
4,145,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BBB 4,284,894
--------------
21,401,969
Connecticut (3.9%)
- --------------------------------------------------------------------------------------------
CT State Dev. Auth. 1st Mtge. Rev. Bonds
(Inter-Church Residences Inc.)
3,500,000 9 5/8s, 4/1/21 AAA 4,226,250
1,200,000 9 1/2s, 5/1/13 AAA 1,444,500
2,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care Inc.), Ser. A, 8.7s, 7/1/22 BB/P 2,170,000
--------------
7,840,750
Florida (4.6%)
- --------------------------------------------------------------------------------------------
4,865,000 Largo, Sun Coast Hlth. Syst. Rev. Bonds, 6.3s, 3/1/20 BBB/P 4,682,563
2,600,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C,
MBIA, 8.593s, 10/29/21 AAA 3,064,750
1,325,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc.), 8 7/8s, 12/1/18 AAA/P 1,439,281
--------------
9,186,594
Georgia (1.1%)
- --------------------------------------------------------------------------------------------
2,000,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds
(Crossover Ser. Project One),
AMBAC, 6.4s, 1/1/13 AAA 2,220,000
Illinois (1.8%)
- --------------------------------------------------------------------------------------------
3,435,000 IL Dev. Fin. Auth. Retirement Hsg. Rev. Bonds
(Cmnty. Rehab. Providers Fac.), 8 3/4s, 7/1/11 BB/P 3,658,275
Kentucky (1.9%)
- --------------------------------------------------------------------------------------------
2,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst.),
MBIA, 8.36s, 10/1/14 AAA 2,195,000
1,425,000 Muhlenberg Cnty., Hosp. Rev. Bonds
(Muhlenberg Cmnty. Hosp.), 9 1/2s, 8/1/10 AAA/P 1,537,219
--------------
3,732,219
Maryland (2.0%)
- --------------------------------------------------------------------------------------------
2,815,000 Berlin, Hosp. Rev. Bonds (Atlantic Gen. Hosp. Fac.),
8 3/8s, 6/1/22 BB/P 2,924,081
1,000,000 Prince Georges Cnty. Hosp. Rev. Bonds
(Greater Southeast Healthcare Syst.),
6 3/8s, 1/1/23 Baa 1,001,250
--------------
3,925,331
Massachusetts (16.7%)
- --------------------------------------------------------------------------------------------
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
1,000,000 (Beth Israel Hosp.), Ser. D, 7 3/4s, 7/1/08 A 1,056,770
2,000,000 (Charlton Memorial Hosp.),
Ser. B, 7 1/4s, 7/1/07 A/P 2,162,500
2,830,000 (Cooley Dickinson Hosp.),
Ser. A, 7 1/8s, 11/15/18 AAA/P 3,219,125
4,075,000 (Ctr. for New England Hlth. Syst.),
Ser. A, 6 1/8s, 8/1/13 BBB/P 3,866,156
3,250,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 BBB 3,302,813
2,500,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 2,601,225
4,000,000 (Rehab. Hosp. Cape & Islands),
Ser. A, 7 7/8s, 8/15/24 BB/P 4,235,000
3,500,000 (Sisters Providence Hlth. Syst),
Ser. A, 6 5/8s, 11/15/22 Baa 3,526,250
2,225,000 (St. Joseph's Hosp.), Ser. C, 9 1/2s, 10/1/20 AAA/P 2,489,219
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.),
8 3/8s, 7/1/15 Baa 3,580,500
MA State Indl. Fin. Agcy. Rev. Bonds
2,250,000 (Morton Hosp. & Med. Ctr.),
Ser. A, 8 3/4s, 7/1/11 AAA 2,466,563
950,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB/P 1,011,750
--------------
33,517,871
Michigan (12.3%)
- --------------------------------------------------------------------------------------------
4,500,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB 4,955,625
MI State Hosp. Fin. Auth. Rev. Bonds
4,130,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba 4,450,075
2,370,000 Prerefunded (Garden City Hosp.),
8 1/2s, 9/1/17 AAA/P 2,766,975
1,500,000 (Detroit-Macomb Hosp. Corp.),
Ser. A, 7.4s, 6/1/13 BB 1,511,250
1,750,000 (Sinai Hospital), 6.7s, 1/1/26 Baa 1,813,438
3,000,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Mercy Svcs. for Aging), 9.4s, 5/15/20 BBB/P 3,393,750
1,500,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa 1,413,750
1,350,000 Tawas City Hosp. Fin. Auth. Rev. Bonds
(St. Joseph's Hosp.), Ser. A, 8 1/2s, 3/15/12 BB/P 1,393,497
3,000,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care), 8 3/8s, 7/1/23 B/P 3,123,750
--------------
24,822,110
Minnesota (0.7%)
- --------------------------------------------------------------------------------------------
1,300,000 Rochester Hlth. Care Fac. Rev. Bonds
(Olmsted Med. Group), 7 1/2s, 7/1/19 BB/P 1,363,375
Missouri (3.4%)
- --------------------------------------------------------------------------------------------
4,800,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds
(Park Lane Med. Ctr.), 8 3/4s, 1/1/15 BB/P 5,100,000
1,700,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac.
Rev. Bonds (Jefferson Memorial Hosp.),
6.8s, 5/15/25 Baa 1,748,875
--------------
6,848,875
New Hampshire (1.0%)
- --------------------------------------------------------------------------------------------
1,910,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds
(Alice Peck Day Memorial Hosp.),
9 3/8s, 11/1/20 BB/P 2,084,288
New Jersey (4.7%)
- --------------------------------------------------------------------------------------------
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
5,000,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 Baa 5,331,250
3,600,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 AAA 4,054,500
--------------
9,385,750
New York (0.7%)
- --------------------------------------------------------------------------------------------
1,500,000 NY City, Hlth. & Hosp. Corp. VRDN
(Hlth. Syst.), Ser. D, 3.6s, 2/15/26 VMIGI 1,500,000
Ohio (1.1%)
- --------------------------------------------------------------------------------------------
2,016,878 Holland, Indl. Dev. Mtge. Rev. Bonds
(Spring Meadow Extended Care),
FHA Insd., 11s, 4/15/13 A/P 2,130,711
Pennsylvania (11.9%)
- --------------------------------------------------------------------------------------------
3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(Divine Providence Hosp.),
Ser. B, 8 3/4s, 1/1/14 BBB 3,199,860
3,175,000 College Township, Indl. Dev. Auth. 1st Mtge.
Hlth. Fac. Rev. Bonds (Nittany Valley
Rehab. Hosp.), 7 5/8s, 11/1/07 BB/P 3,436,938
2,000,000 Langhorne Manor Boro Higher Ed. Hlth. Auth.
Rev. Bonds (Lower-Bucks Hosp.), 7.35s, 7/1/22 Ba 2,045,000
1,800,000 Lebanon Cnty., Good Samaritan Hosp. Auth.
Rev. Bonds, Ser. B, 8 1/4s, 11/1/18 AAA/P 1,989,000
4,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (UTD Hosp.), Ser. B, 8 3/8s, 11/1/11 AAA 4,435,000
1,000,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Rev. Bonds (Graduate Hlth. Syst.),
Ser. B, 6 1/4s, 7/1/13 BBB 982,500
1,285,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp.
Rev. Bonds (Graduate Hlth. Syst.) , 7 1/4s, 7/1/18 BBB 1,349,250
2,950,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp.
IFB, FGIC, 6.195s, 3/6/12 AAA 2,780,375
1,000,000 Sayre, Hlth. Care Fac. Auth. VRDN
(VHR PA Cap. Fin.), Ser. F, AMBAC,
3.85s, 12/1/20 A-1 1,000,000
2,610,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac.
Rev. Bonds (Rehabilitation Hosp. of York),
7 1/2s, 9/1/07 BB/P 2,740,500
--------------
23,958,423
South Carolina (1.6%)
- --------------------------------------------------------------------------------------------
3,000,000 SC Jobs Econ. Dev. Auth. Econ. Dev. Rev. Bonds
(St. Francis Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa 3,180,000
Tennessee (0.9%)
- --------------------------------------------------------------------------------------------
1,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.124s, 1/1/22 AAA 1,765,875
Texas (7.4%)
- --------------------------------------------------------------------------------------------
3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB
(High Plains Baptist Hosp.), FSA,
8.814s, 1/3/22 AAA 4,083,438
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 5,793,750
1,015,000 Cherokee Cnty., Hlth. Fac. Dev. Corp.
Rev. Bonds (Nancy Travis Memorial Hosp.),
10s, 5/15/13 B/P 1,106,350
1,595,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Woodlands Med. Ctr.), 8.85s, 8/15/14 A/P 1,756,494
2,000,000 North Central TX ,Hlth. Fac. Dev. Corp. IFB
(Baylor Hlth. Care Syst.), Ser. B, 7.54s, 5/15/08 AA 2,142,500
--------------
14,882,532
Vermont (0.9%)
- --------------------------------------------------------------------------------------------
1,870,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds
(Northwestern Med. Ctr.) 6 1/4s, 9/1/18 BBB 1,846,625
Virginia (0.6%)
- --------------------------------------------------------------------------------------------
1,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB
(Fairfax Hosp. Syst.), Ser. C, 9.337s, 8/29/23 AAA 1,201,250
Washington (1.2%)
- --------------------------------------------------------------------------------------------
2,250,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9 1/4s, 9/1/10 BBB/P 2,491,875
West Virginia (1.1%)
- --------------------------------------------------------------------------------------------
2,000,000 Randolph Cnty. Rev. Bonds (Davis Memorial Hosp.),
Ser. A, 7.65s, 11/1/21 Baa 2,150,000
- --------------------------------------------------------------------------------------------
Total Investments (cost $188,561,846) *** $ 198,340,282
- --------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $200,986,867.
** The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available at May 31, 1997 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, 1997. Securities
rated by Putnam are indicated by "/P" and are not publicly
rated. Ratings are not covered by the Report of independent
accountants.
*** The aggregate identified cost on a tax basis is $188,561,846
resulting in gross unrealized appreciation and depreciation of
$10,807,372 and $1,028,936, respectively, or net unrealized
appreciation of $9,778,436.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at May 31, 1997
was $8,774,375 or 4.4% of net assets.
The rates shown on IFB and IF COP, which are securities paying
interest rates that vary inversely to changes in the market
interest rates, and VRDN's are the current interest rates at
May 31, 1997.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $188,561,846) (Note 1) $198,340,282
- ---------------------------------------------------------------------------------------------------
Cash 220,632
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 3,751,349
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 145,000
- ---------------------------------------------------------------------------------------------------
Total assets 202,457,263
Liabilities
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,035,450
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 348,313
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 30,292
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,616
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,211
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 48,514
- ---------------------------------------------------------------------------------------------------
Total liabilities 1,470,396
- ---------------------------------------------------------------------------------------------------
Net assets $200,986,867
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $191,840,293
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 855,732
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
(Note 1) (1,487,594)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,778,436
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $200,986,867
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($200,986,867 divided by
13,807,168 shares) $14.56
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1997
<S> <C>
Tax exempt interest income $14,578,002
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,391,287
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 202,882
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 18,458
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,267
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 8,663
- --------------------------------------------------------------------------------------------------
Reports to shareholders 38,031
- --------------------------------------------------------------------------------------------------
Auditing 26,479
- --------------------------------------------------------------------------------------------------
Legal 6,158
- --------------------------------------------------------------------------------------------------
Postage 47,494
- --------------------------------------------------------------------------------------------------
Exchange listing fees 24,260
- --------------------------------------------------------------------------------------------------
Other 27,718
- --------------------------------------------------------------------------------------------------
Total expenses 1,798,697
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (54,982)
- --------------------------------------------------------------------------------------------------
Net expenses 1,743,715
- --------------------------------------------------------------------------------------------------
Net investment income 12,834,287
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (748,542)
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 685,409
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 5,885,844
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,822,711
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $18,656,998
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $12,834,287 $12,973,551
- ----------------------------------------------------------------------------------------------------------------------
Net realized loss on investments (63,133) (224,233)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 5,885,844 (257,999)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 18,656,998 12,491,319
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income (12,425,187) (12,814,984)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) net assets 6,231,811 (323,665)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 194,755,056 195,078,721
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $855,732 and $446,719, respectively) $200,986,867 $194,755,056
- ----------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
June 29, 1992+
Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.11 $14.13 $14.29 $14.73 $13.89(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .93 .94 .96 .98 .95(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .42 (.03) .03 (.22) .80
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.35 .91 .99 .76 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.90) (.93) (1.01) (1.01) (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.14) (.19) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.90) (.93) (1.15) (1.20) (.91)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.56 $14.11 $14.13 $14.29 $14.73
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $14.125 $13.500 $13.375 $14.375 $14.625
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 11.68 8.74 1.20 6.46 3.75*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $200,987 $194,755 $195,079 $197,326 $203,408
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .90 .92 .90 .91 .49(d)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.45 6.62 6.85 6.58 6.71(d)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 7.92 44.68 39.44 36.92 69.11*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(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.
Notes to financial statements
May 31, 1997
Note 1
Significant accounting policies
Putnam Tax-Free Health Care Fund (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 income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At May 31, 1997, the fund had a capital loss carryover of approximately
$536,000 available to offset future net capital gain, if any, which will
expire on 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 post-October loss deferrals, capital loss carryover, and realized gains and
losses on certain futures contracts. 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, 1997, the fund reclassified $87 to decrease undistributed net
investment income and $87 to increase paid-in-capital. The calculation of net
investment income per share in the financial highlights table excludes these
adjustments.
E) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on original issue discount
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. The expenses have been fully amortized over a five
year period as of May 31, 1997.
G) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
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 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.
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, 1997, fund expenses were reduced by $54,982 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.
Trustees of the fund receive an annual Trustees fee of $550 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 in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
Note 3
Purchase and sales of securities
During the year ended May 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $15,375,363 and
$15,359,211, 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.
Investment Policy Change
At the meeting of Putnam Tax-Free Health Care Fund's Trustees on July 11,
Putnam Investment Management proposed -- and the Trustees approved -- a change
in the fund's investment policy concerning credit quality.
The fund's policy on credit quality has two prongs. The primary test, which
remains unchanged, requires the fund normally to invest at least 70% of its
total assets in securities rated investment-grade by a nationally recognized
rating service and in nonrated securities determined by Putnam to be of
comparable quality. A secondary test, which was modified, required the fund
normally to invest at least 65% of its total assets in securities rated
investment-grade by a rating service.
The change allows nonrated securities for which the issuer has deposited
collateral sufficient to meet all remaining payments of principal and interest
to count toward satisfaction of the 65% test, if Putnam determines that these
nonrated securities are equivalent to investment-grade. Thus, these
securities, known as prerefunded securities, will no longer be included in the
35% basket for unrated securities. Removing these securities from the 35%
basket will allow the fund to better use the 35% basket for true higher-yield
opportunities, up to the 30% limit on non-investment-grade securities imposed
by the primary test.
The revised policy on credit quality, including the unchanged primary test and
the modified secondary test, states that the fund will normally invest at
least 70% of its assets in securities rated investment-grade by a rating
agency and in nonrated securities determined by Putnam to be of comparable
quality, provided that at least 65% of the fund's assets will normally be
invested in securities rated investment-grade by a rating service and in
nonrated prerefunded securities that are secured by payments from escrowed
securities and determined by Putnam to be of comparable quality.
Federal tax information
(Unaudited)
The fund has designated 99.58% 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 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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
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
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Triet Nguyen
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
34415-168 7/97
</TABLE>
