Putnam
Tax-Free
Health Care
Fund
SEMIANNUAL REPORT
November 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Before you go out on a muni-bond buying spree, consider a few tips.
Stick with AAA-rated issues or even safer 'prerefunded'. . . bonds that
are backed by Treasuries to avoid worrying about credit risk."
-- Business Week, December 16, 1996
* "Putnam Tax-Free Health Care Fund is the quintessential credit
research fund. Through upgrades and prerefundings, the portfolio has
reached an unprecedented level of quality. We will continue to invest
only in those companies who can meet our stringent credit standards on
their own merit."
-- Triet M. Nguyen, manager
Putnam Tax-Free Health Care Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
17 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
The first half of Putnam Tax-Free Health Care Fund's fiscal 1997, the
six months ended November 30, 1996, presented a significantly brighter
municipal bond market environment than that which had prevailed in the
preceding months. As the fiscal year's first half unfolded, the
municipal bond market began to develop a degree of serenity, closing the
semiannual period in an almost upbeat mood.
During the period, Triet Nguyen was appointed your fund's manager,
succeeding Howard Manning, who has assumed other duties within Putnam's
Tax-Exempt Bond Group. Triet has been a member of the group since 1985.
He has 16 years of investment experience.
In the report that follows, Triet discusses the events and strategies
that drove your fund's performance during the fiscal year's first half
and takes a look at prospects for the second half.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
January 15, 1996
Report from the Fund Manager
Triet Nguyen
In a world filled with a multitude of investment choices, careful
selection can make or break results, and whether a portfolio merely
reflects the performance of the general market or outperforms the
averages depends on the subjective component of management's value
added. In the case of Putnam Tax-Free Health Care Fund, much of this
added value comes in the form of credit research.
Thanks in large part to Putnam's extensive capability for credit
analysis, which enables us to identify undervalued situations
nationwide, your fund was a locomotive of total return over the six
months ended November 30, 1996. An improving interest rate and political
environment, strong sector fundamentals, and on-target credit judgments
all helped the fund to outperform its competitive index as it continued
to generate an attractive level of income and price appreciation.
Your fund provided a total return of 6.96% at net asset value for the
period, which compares favorably with the 6.50% return of the Lehman
Brothers Municipal Bond Index. The fund's return at market price was
2.42%. You will find longer-term and competitive performance in the
tables that start on page 9.
Stability grew into positive momentum for municipal bonds as investors
approached summer 1996. Mired in concerns about political agendas and
economic uncertainties earlier in the year, the tax-exempt market gained
ground as the possibility of tax reform faded and the campaign season
progressed. Prices improved further when reports confirmed that the
economy was growing at a moderate pace and inflation remained well under
control -- a pattern that appears to be sustainable in the coming
months.
* HEALTH CARE: GROWING DEMAND MEETS LIMITED SUPPLY
Health care was one of the top-performing municipal bond sectors in
1996, with a combination of strong investor demand, scant supply, and
improving industry fundamentals pushing prices higher. Demand stemmed
from a growing number of investors who were drawn to health-care bonds
by their higher yields and by trends of increasing efficiency and
profitability among health-care providers. Health care has not incurred
some of the more conspicuous problems endured by other sectors; as such,
it has attracted yield-seeking investors who have turned away from more
troubled areas.
Although the demand for health-care bonds has increased, the supply
remains limited. Mergers and consolidations have reduced the total
number of independent hospitals in the country. This, in turn, not only
has reduced the need for new bond issuance but often has removed some of
the outstanding supply of bonds. With virtually no new hospital
construction or capital projects scheduled in the foreseeable future,
there appears to be little new supply on the horizon. This relationship
of strong demand and limited supply should continue to bode well for the
prices of health-care bonds.
[GRAPHIC PIE CHART OMITTED]
PORTFOLIO QUALITY OVERVIEW*
Aaa--31.9%
Aa--1.1%
A--4.9%
Baa--26.5%
Ba--29.7%
B--4.6%
D--0.1%
VMIG1--1.2%
Footnote reads:
*As a percentage of market value as of 11/30/96. 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.
* PORTFOLIO SELECTIONS DRIVE PERFORMANCE
While the overall investment climate provided a favorable backdrop for
health-care investors, the real story of your fund's success over this
period lies in our securities selection. Our portfolio strategy was
threefold:
(bullet) Invest only in those issuers that meet Putnam's stringent
credit standards on their own merit
(bullet) Select bonds that generate an attractive stream of income
(bullet) Target the best investment values
Credit analysis is paramount in the health-care sector. With all of the
consolidation that has taken place among health-care providers, many
investors have focused on issuers whose attributes made them good
candidates for an eventual takeover. As stand-alone credits, however,
those issuers may or may not exhibit what we consider to be solid
financial credentials. In contrast, Putnam's philosophy is to invest
only in those issuers that we believe have the financial strength to
prosper independently.
Of course, issuers that are attractive investments on their own merit
may also be attractive candidates for acquisition. This was the case
with the former Merrit Perralta, a California health-care provider. We
invested in the company's bonds at the fund's inception. Our investment
occurred at a point when a series of negative events had caused the
securities to be downgraded from Baa to Ba and we were able to take
advantage of distressed price levels. We believed the bonds were
undervalued and had the potential for considerable improvement, in both
their creditworthiness and their prices. Our point of investment was
actually the bottom of the issuer's credit cycle. Merrit Perralta merged
to become Summit Medical Center and the bonds were later upgraded to
investment-grade status. To culminate this chain of events, the bonds
were recently prerefunded, which raised their credit rating to BBB.
* PREREFUNDINGS UPGRADE PORTFOLIO QUALITY
Other fund positions, such as the bonds for Inter-Church Residences in
Connecticut and United Hospital in Pennsylvania, also were prerefunded.
The United Hospital bonds accounted for approximately 2% of the fund's
net assets. 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. Treasury bonds which are then
pledged to pay off the older debt. A prerefunding immediately improves
the credit quality of the older bonds because of the safety of principal
represented by these high-quality securities. Often the safety implied
by a prerefunding helps boost the bonds' prices.
TOP 10 HOLDINGS*
Sierra Vista, Arizona, Industrial Development Authority
Hospital revenue bonds (Sierra Vista Community Hospital) 81/2s, 12/1/21
Bexar County (Texas) Health Facilities Development Corp.
Revenue bonds (St. Luke's Lutheran Hospital) 7.9s, 5/1/11
New Jersey Health Care Facilities Financing Authority
Revenue bonds (Kimball Medical Center) Series C, 8s, 7/1/13
Kansas City, Missouri, Industrial Development Authority
Health facilities revenue bonds (Park Lane Medical Center) 83/4s, 1/1/15
San Francisco City and County Airports
Inverse floating bond, Financial Guaranty Insurance Co. 7.964s, 5/1/25
Dickinson County (Michigan)
Hospital revenue bonds (Memorial Hospital System) 81/8s, 11/1/24
Largo Sun Coast (Florida) Health System
Revenue bonds 6.3s, 3/1/20
Montgomery County (Pennsylvania)
Higher Education and Health Authority
Hospital revenue bonds (United Hospital) Series B, 83/8s, 11/1/11
Michigan State Hospital Financing Authority
Revenue bonds (Garden City Hospital) 81/2s (BB), 9/1/17
Connecticut State Development Authority
First mortgage revenue bonds (Inter-Church Residences, Inc.) 95/8s,
4/1/21
Footnote reads:
* These holdings represent 25.7% of the fund's net assets as of
11/30/96. Holdings will vary over time.
Prerefundings had other positive influences on the portfolio during the
period. The relatively high coupons and shorter maturities of the
prerefunded bonds enhanced our strategy of seeking a high level of
income and minimizing interest-rate risk. Furthermore, we are continuing
to select holdings with an eye toward managing the fund's call exposure
in order to provide a more stable dividend stream.
* OUTLOOK: OPTIMISTIC -- WITH A WATCHFUL EYE
We approach 1997 with cautious optimism for both the health-care sector
and the municipal bond market overall. On the positive side, we expect a
continuation of many of the trends these areas have experienced so far,
including strong demand and limited supply. Furthermore, we expect that
moderate economic growth and low inflation will set the stage for a
relatively stable interest-rate environment in the year ahead.
On a more watchful note, certain trends bear monitoring. As a sector,
health care is starved for capital. The well-established liquid
providers have fairly easy access to capital, but those that are less
creditworthy do not. In addition, while the health-care industry as a
whole has increased in profitability, many providers have not built up
sufficient cash reserves to see them through emergencies.
We expect credit analysis and security selection, therefore, to play an
even more critical role in investment performance than it has in the
past. No longer do we expect investors to be able to ride the wave of
opportunity associated with merger-and-acquisition activity. We will
continue to seek credits that we believe are financially sound as
independent entities and have considerable potential for capital
appreciation.
While we expect to find undervalued situations in health care, the
possibility exists that the sector as a whole could come under some
temporary price pressure. In that case, the fund also may employ its
flexibility to invest a certain portion of its assets in other
investment sectors. By discovering and evaluating undervalued
situations, we believe that, over the long term, your fund will continue
to reward shareholders with attractive income and solid capital
appreciation.
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 11/30/96, 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 11/30/96
NAV Market value
- ------------------------------------------------------------------------
6 months 6.96% 2.42%
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1 year 8.53 11.05
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3 years 21.54 13.48
Annual average 6.72 4.31
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Life of fund
(since 6/29/92) 45.94 23.82
Annual average 8.93 4.95
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
6 months 6.50% 1.28%
- ------------------------------------------------------------------------
1 year 5.89 3.26
- ------------------------------------------------------------------------
3 years 19.32 8.78
Annual average 6.06 2.84
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Life of fund
(since 6/29/92) 37.15 13.12
Annual average 7.41 2.83
- ------------------------------------------------------------------------
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 12/31/96
(most recent calendar quarter)
NAV Market value
- ------------------------------------------------------------------------
6 months 6.14% 5.32%
- ------------------------------------------------------------------------
1 year 7.60 14.26
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3 years 19.74 15.09
Annual average 6.19 4.80
- ------------------------------------------------------------------------
Life of fund (since 6/29/92) 45.94 25.66
Annual average 8.74 5.20
- ------------------------------------------------------------------------
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
6 months ended 11/30/96
NAV
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Distributions (number) 6
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Income1 $0.45
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Total $0.45
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Share value: NAV Market price
- ------------------------------------------------------------------------
5/31/96 $14.11 $13.500
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11/30/96 14.60 13.375
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Current return:
- ------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------
Current dividend rate2 6.17% 6.73%
- ------------------------------------------------------------------------
Taxable equivalent3 10.22 11.14
- ------------------------------------------------------------------------
1For some investors, investment income may also be subject to the
federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
3Assumes 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.
<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1996 (Unaudited)
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
G.O. Bonds --General Obligation Bonds
IFB --Inverse Floating Rate Bonds
IF COP --Inverse Floating Rate Certificate of Participation
MBIA --Municipal Bond Investors Assurance Corporation
VRDN --Variable Rate Demand Notes
<S> <C> <C> <C> <C>
MUNICIPAL BONDS AND NOTES (97.0%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Arizona (6.5%)
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$3,965,000 Payson, Indl. Dev. Auth. Hosp. Rev. Bonds (Payson Regl. Med. Ctr. Inc.),
7.7s, 10/1/23 B/P $ 3,637,884
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 2,109,375
6,440,000 Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds (Sierra Vista Cmnty. Hosp.),
8 1/2s, 12/1/21 BBB/P 7,317,450
-----------
13,064,709
California (9.8%)
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2,035,000 CA Hlth. Fac. Fin. Auth. Rev. Bonds (Summit Med. Ctr.), Ser. A, 7 1/2s, 5/1/09 BBB 2,233,413
4,000,000 Corona, COP (Hosp. Syst. Inc.), Ser. C, 8 3/8s, 7/1/11 B/P 4,250,000
3,000,000 San Bernardino Cnty., IF COP (PA-100-Med. Ctr. Fin.), MBIA, 8.918s, 8/1/28
(acquired 6/27/95, cost $3,237,720)(double dagger) AAA/P 3,933,750
4,750,000 San Francisco, City & Cnty. Arpts. IFB, FGIC, 7.964s, 5/1/25 (acquired 1/3/96,
cost $5,354,105)(double dagger) Aaa 5,135,938
4,145,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BBB/P 4,279,713
-----------
19,832,814
Connecticut (3.9%)
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CT State Dev. Auth. 1st Mtge. Rev. Bonds (Inter-Church Residences Inc.)
3,500,000 9 5/8s, 4/1/21 AAA/P 4,313,750
1,200,000 9 1/2s, 5/1/13 AAA/P 1,473,000
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
-----------
7,956,750
Florida (4.6%)
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4,865,000 Largo, Sun Coast Hlth. Syst. Rev. Bonds, 6.3s, 3/1/20 BBB 4,712,969
2,600,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA, 9.101s, 10/29/21 Aaa 2,990,000
1,325,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds (JFK Med. Ctr. Inc.),
8 7/8s, 12/1/18 Aaa 1,472,406
-----------
9,175,375
Georgia (1.1%)
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2,000,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds (Fifth Crossover),
Ser. Project One, AMBAC, 6.4s, 1/1/13 Aaa 2,250,000
Illinois (1.9%)
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3,545,000 IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab. Providers Fac.), 8 3/4s, 7/1/11 BB/P 3,797,581
Kentucky (1.9%)
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2,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst.), MBIA, 9.009s, 10/1/14 Aaa 2,247,500
1,425,000 Muhlenberg Cnty., Hosp. Rev. Bonds (Muhlenberg Cmnty. Hosp.), 9 1/2s, 8/1/10 AAA 1,576,406
-----------
3,823,906
Maryland (2.0%)
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2,850,000 Berlin, Hosp. Rev. Bonds (Atlantic Gen. Hosp. Fac.), 8 3/8s, 6/1/22 BB/P 3,042,375
1,000,000 Prince Georges Cnty., Hosp. Rev. Bonds (Greater Southeast Healthcare
Syst.), 6 3/8s, 1/1/23 Baa 985,000
-----------
4,027,375
Massachusetts (16.6%)
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MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,225,000 (St. Joseph's Hosp.), Ser. C, 9 1/2s, 10/1/20 Aaa 2,539,281
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B, 8 3/8s, 7/1/15 Baa 3,564,000
2,500,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 BB 2,578,125
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 BB/P 4,250,000
1,000,000 (Beth Israel Hosp.), Ser. D, 7 3/4s, 7/1/08 A 1,077,500
3,250,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 BBB 3,315,000
2,000,000 (Charlton Memorial Hosp.), Ser. B, 7 1/4s, 7/1/07 A 2,185,000
2,830,000 (Cooley Dickinson Hosp.), Issue A, 7 1/8s, 11/15/18 AAA/P 3,275,725
3,500,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s, 11/15/22 BBB 3,548,125
4,075,000 (Ctr. for New England Hlth. Syst.), Ser. A, 6 1/8s, 8/1/13 BBB 3,626,750
MA State Indl. Fin. Agcy. Rev. Bonds
975,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB 1,043,250
2,250,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s, 7/1/11 Aaa 2,489,063
-----------
33,491,819
Michigan (12.3%)
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4,500,000 Dickinson Cnty., Hosp. Rev. Bonds (Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB 4,966,875
MI State Hosp. Fin. Auth. Rev. Bonds
2,370,000 (Garden City Hosp.), prerefunded 8 1/2s, 9/1/17 Aaa 2,820,300
4,130,000 (Garden City Hosp.), 8 1/2s, 9/1/17 BB 4,388,125
1,500,000 (Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB 1,507,500
1,750,000 (Sinai Hospital), 6.7s, 1/1/26 Baa 1,800,313
3,000,000 MI State Strategic Fund Rev. Bonds (Mercy Svcs. for Aging), 9.4s, 5/15/20 BBB 3,390,000
1,500,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa 1,423,125
1,390,000 Tawas City Hosp. Fin. Auth. Rev. Bonds (St. Joseph's Hosp.),
Ser. A, 8 1/2s, 3/15/12 BB 1,435,022
3,000,000 Waterford, Econ. Dev. Corp. Rev. Bonds (Canterbury Hlth. Care), 8 3/8s, 7/1/23 BB/P 3,168,750
-----------
24,900,010
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 1,369,875
Missouri (2.6%)
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4,800,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds (Park Lane Med. Ctr.),
8 3/4s, 1/1/15 BB 5,142,000
New Hampshire (1.0%)
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1,910,000 NH Higher Edl. & Hlth. Fac. Auth. Rev. Bonds (Alice Peck Day Memorial Hosp.),
9 3/8s, 11/1/20 BB 2,103,388
New Jersey (4.6%)
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NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
3,600,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 BBB 3,973,500
5,000,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 BBB 5,375,000
-----------
9,348,500
New York (1.2%)
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2,500,000 NY City VRDN, 3.55s, 2/1/22 VMIG1 2,500,000
Ohio (1.1%)
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2,039,675 Holland, Indl. Dev. Mtge. Rev. Bonds (Spring Meadow Extended Care),
FHA Insd., 11s, 4/15/13 A/P 2,187,551
Pennsylvania (11.5%)
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3,000,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds (Divine Providence Hosp.),
Ser. B, 8 3/4s, 1/1/14 AAA/P 3,270,000
3,175,000 College Township, Indl. Dev. Auth. 1st Mtge. Hlth. Facs. Rev. Bonds
(Nittany Valley Rehab. Hosp.), 7 5/8s, 11/1/07 BB/P 3,460,750
2,000,000 Langhorne Manor Boro Higher Ed. Hlth. Auth. Rev. Bonds (Lower -Bucks Hosp.),
7.35s, 7/1/22 Ba 1,950,000
1,800,000 Lebanon Cnty., Good Samaritan Hosp. Auth. Rev. Bonds, Ser. B, 8 1/4s, 11/1/18 AAA 2,027,250
4,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp. Rev. Bonds (Utd Hosp.),
Ser. B, 8 3/8s, 11/1/11 AAA 4,515,000
1,000,000 Philadelphia, Hosp. & Higher Ed. Fac. Rev. Bonds (Graduate Hlth. Syst.),
Ser. B, 6 1/4s, 7/1/13 Ba 968,750
2,950,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp. IFB, FGIC, 6.712s, 3/4/12 Aaa 2,850,438
1,285,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Rev. Bonds, 7 1/4s, 7/1/18 Ba 1,339,613
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 2,753,550
-----------
23,135,351
Puerto Rico (0.5%)
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1,000,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Hwy. Rev. Bonds, Ser. X, 5s, 7/1/22 A 910,000
Tennessee (1.6%)
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1,279,840 Meigs Cnty., Hlth. Edl. & Hsg. Fac. Board Rev. Bonds (Meigs Cnty., Hlth. Ctr.),
FHA Insd., 12s, 7/15/25 A/P 1,475,016
1,700,000 Metropolitan Govt. Nashville & Davidson Cnty., Tenn. Wtr. & Swr. IFB,
AMBAC, 8.317s, 1/1/22 Aaa 1,793,500
-----------
3,268,516
Texas (7.7%)
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3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains Baptist Hosp.),
FSA, 9.149s, 1/3/22 Aaa 4,206,625
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (St. Luke's Lutheran Hosp.),
7.9s, 5/1/11 AAA 5,906,250
1,040,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (Nancy Travis Memorial
Hosp.), 10s, 5/15/13 B/P 1,141,400
1,595,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds (Woodlands Med.
Ctr.), 8.85s, 8/15/14 A/P 1,718,612
2,000,000 North Central TX Hlth. Fac. Dev. Corp. IFB (Baylor Hlth. Care Syst.),
Ser. B, 7.93s, 5/15/08 Aa 2,180,000
1,415,000 Tarrant Cnty., Hlth. Facs. Dev. Corp. Hosp. Rev. Bonds (Cmnty. Hlth.
Care Foundation. Inc.), 10 1/8s, 4/1/21 (In default)+ D 283,000
-----------
15,435,887
Vermont (0.9%)
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1,870,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds, 6 1/4s, 9/1/18 BBB 1,858,313
Virginia (0.6%)
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1,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB (Fairfax Hosp. Syst.),
Ser. C, 9.827s, 8/29/23 AAA 1,246,250
Washington (1.3%)
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2,250,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds (Samaritan Hosp.),
9 1/4s, 9/1/10 BBB 2,522,813
West Virginia (1.1%)
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2,000,000 Randolph Cnty., Rev. Bonds (Davis Memorial Hosp.),
Ser. A, 7.65s, 11/1/21 Baa 2,167,500
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Total Investments (cost $186,023,128)*** 195,516,283
- -----------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $201,517,974.
** The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at
November 30, 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 November 30, 1996.
Securities rated by Putnam are indicated by "/P" and
are not publicly rated.
*** The aggregate identified cost on a tax basis is
$186,023,128, resulting in gross unrealized appreciation and
depreciation of $11,812,739 and $2,319,584, respectively,
or net unrealized appreciation of $9,493,155.
(double dagger) Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
November 30, 1996 was $9,069,688 or 4.5% 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 November 30, 1996.
+ Non-income producing security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30,1996 (Unaudited)
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $186,023,128) (Note 1) $195,516,283
- ----------------------------------------------------------------------------------------------
Cash 3,691,992
- ----------------------------------------------------------------------------------------------
Interest receivable 3,652,948
- ----------------------------------------------------------------------------------------------
Receivable for securities sold 170,000
- ----------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 4,489
- ----------------------------------------------------------------------------------------------
Total assets 203,035,712
Liabilities
- ----------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,035,459
- ----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 348,982
- ----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 24,835
- ----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,124
- ----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,235
- ----------------------------------------------------------------------------------------------
Other accrued expenses 101,103
- ----------------------------------------------------------------------------------------------
Total liabilities 1,517,738
- ----------------------------------------------------------------------------------------------
Net assets $201,517,974
Represented by
- ----------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $191,840,206
- ----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 581,421
- ----------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (396,808)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,493,155
- ----------------------------------------------------------------------------------------------
Total - Representing net assets applicable to capital shares outstanding $201,517,974
Computation of net asset value:
- ----------------------------------------------------------------------------------------------
Net asset value per share ($201,517,974 divided by
13,807,168 shares) $14.60
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended November 30, 1996 (Unaudited)
<S> <C>
Tax exempt interest income: $7,281,816
- ---------------------------------------------------------------------------------
Expenses:
- ---------------------------------------------------------------------------------
Compensation of Manager (Note 2) 697,329
- ---------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 98,618
- ---------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,061
- ---------------------------------------------------------------------------------
Administrative services (Note 2) 3,676
- ---------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 4,174
- ---------------------------------------------------------------------------------
Reports to shareholders 26,977
- ---------------------------------------------------------------------------------
Auditing 12,470
- ---------------------------------------------------------------------------------
Legal 4,276
- ---------------------------------------------------------------------------------
Postage 85,732
- ---------------------------------------------------------------------------------
Exchange listing fees 12,130
- ---------------------------------------------------------------------------------
Other 8,444
- ---------------------------------------------------------------------------------
Total expenses 965,887
- ---------------------------------------------------------------------------------
Expense reduction (Note 2) (31,275)
- ---------------------------------------------------------------------------------
Net expenses 934,612
- ---------------------------------------------------------------------------------
Net investment income 6,347,204
- ---------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 342,244
- ---------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 685,409
- ---------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 5,600,563
- ---------------------------------------------------------------------------------
Net gain on investments 6,628,216
- ---------------------------------------------------------------------------------
Net increase in net assets resulting from operations $12,975,420
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
----------------------------------
1996* 1996
- ----------------------------------------------------------------------------------------------------
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $6,347,204 $12,973,551
- ----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 1,027,653 (224,233)
- ----------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 5,600,563 (257,999)
- ----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 12,975,420 12,491,319
- ----------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------
From net investment income (6,212,502) (12,814,984)
- ----------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 6,762,918 (323,665)
- ----------------------------------------------------------------------------------------------------
Net assets
- ----------------------------------------------------------------------------------------------------
Beginning of period 194,755,056 195,078,721
- ----------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $581,421 and $446,719, respectively) $201,517,974 $194,755,056
- ----------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------
Shares outstanding at beginning and end of period 13,807,168 13,807,168
- ----------------------------------------------------------------------------------------------------
*Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
Six months ended
November 30
(Unaudited) Year ended May 31
----------------------------------------------------------------
1996 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $14.11 $14.13 $14.29
- --------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .46 .94 .96
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .48 (.03) .03
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations .94 .91 .99
- --------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------------------------------
From net investment income (.45) (.93) (1.01)
- --------------------------------------------------------------------------------------------------------------------------
From net realized gains on investments -- -- (.14)
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.93) (1.15)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.60 $14.11 $14.13
- --------------------------------------------------------------------------------------------------------------------------
Market value, end of period $13.375 $13.500 $13.375
- --------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 2.42* 8.74 1.20
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $201,518 $194,755 $195,079
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .49* .92 .90
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 3.21* 6.62 6.85
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 4.47* 44.68 39.44
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the Period
June 29, 1992
(commencement
of operations)
Year ended May 31 to May 31
----------------------------------------------------
1994 1993
----------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $14.73 $13.89(c)
- --------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------
Net investment income .98 .95(d)
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.22) .80
- --------------------------------------------------------------------------------------------------------------
Total from investment operations .76 1.75
- --------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------------------
From net investment income (1.01) (.84)
- --------------------------------------------------------------------------------------------------------------
From net realized gains on investments (.19) (.07)
- --------------------------------------------------------------------------------------------------------------
Total distributions (1.20) (.91)
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period $14.29 $14.73
- --------------------------------------------------------------------------------------------------------------
Market value, end of period $14.375 $14.625
- --------------------------------------------------------------------------------------------------------------
Total investment return at market value (%)(a) 6.46 3.75*
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $197,326 $203,408
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) .91 .49(d)*
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 6.58 6.71(d)*
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 36.92 69.11 *
- --------------------------------------------------------------------------------------------------------------
* 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.
</TABLE>
Notes to financial statements
November 30, 1996 (Unaudited)
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 nor 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 capital gains, 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 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.
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.
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 annual rate of 0.70% of average 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 six months ended November 30, 1996, fund expenses were reduced
by $31,275 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 $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 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 six months ended November 30, 1996, purchases and sales of
investment securities other than short-term investments aggregated
$8,660,252 and $12,318,439 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.
Results of December 5, 1996 shareholder meeting
A meeting of shareholders of the fund was held on December 5, 1996. At
the meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
----------- ----------
Jameson Adkins Baxter 8,375,179 190,257
Hans H. Estin 8,366,035 199,401
John A. Hill 8,376,802 188,634
Ronald J. Jackson 8,374,204 191,232
Elizabeth T. Kennan 8,372,539 192,897
Lawrence J. Lasser 8,376,176 189,260
Robert E. Patterson 8,374,476 190,960
Donald S. Perkins 8,368,407 197,029
William F. Pounds 8,372,190 193,246
George Putnam 8,375,153 190,283
George Putnam, III 8,376,937 188,499
Eli Shapiro 8,350,393 215,043
A.J.C. Smith 8,376,330 189,106
W. Nicholas Thorndike 8,374,270 191,166
A proposal to ratify the selection of Price Waterhouse LLP as auditors
for the fund was approved as follows: 8,374,900 votes for, and 58,839
votes against, with 131,697 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to diversification was approved as follows: 6,917,693 votes for,
and 301,899 votes against, with 1,345,844 abstentions and broker non-
votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in the securities of a single issuer was approved
as follows: 6,780,879 votes for, and 397,363 votes against, with
1,387,194 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans was approved as follows: 6,552,941 votes for,
and 625,600 votes against, with 1,386,895 abstentions and broker non-
votes.
A proposal to amend the fund's fundamental investment restriction with
respect to concentration of its assets was approved as follows:
6,764,499 votes for, and 385,731 votes against, with 1,416,206
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in commodities was approved as follows: 6,493,533
votes for, and 699,150 votes against, with 1,372,753 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in securities of issuers in which management
of the fund or Putnam Investment Management, Inc. owns securities was
approved as follows: 6,583,194 votes for, and 602,510 votes against,
with 1,379,732 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to margin transactions was approved as follows: 6,403,058
votes for, and 781,508 votes against, with 1,380,870 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to short sales was approved as follows: 6,405,876 votes
for, and 780,334 votes against, with 1,379,226 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to pledging assets was approved as follows: 6,370,900 votes
for, and 790,372 votes against, with 1,404,164 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in certain oil, gas and mineral interests
was approved as follows: 6,563,545 votes for, and 613,590 votes against,
with 1,388,301 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investing to gain control of a company's management was
approved as follows: 6,602,305 votes for, and 537,183 votes against,
with 1,425,948 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in other investment companies was approved
as follows: 6,633,147 votes for, and 512,613 votes against, with
1,419,676 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
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
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
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ---------------------
29949-168 1/97
