Putnam
Tax-Free
Health Care
Fund
SEMIANNUAL REPORT
November 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, an independent mutual fund rating agency, gave Putnam
Tax-Free Health Care Fund 5 out of 5 stars for overall performance as
of December 31, 1997 (based on the fund's average annual returns for
the 3-and 5-year periods). This rating put the fund among 10% of the
197 closed-end municipal funds rated.*
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
17 Financial statements
22 Results of December 4, 1997 shareholder meeting
* Morningstar ratings reflect risk-adjusted performance through 12/31/97
and are subject to change every month. Morningstar ratings are calculated
from a fund's 3-, 5-, and 10-year returns (with fee adjustments) in
excess of 90-day Treasury bill returns and a risk factor that reflects
performance below 90-day Treasury bill returns. For 3- and 5-year
performance, the fund received 5 stars. There were 197 and 136 municipal
funds rated, respectively, 10% of the funds in an investment category
receive 5 stars; the next 22.5% receive 4 stars; the middle 35% receive 3
stars; the next 22.5% receive 2 stars; and the bottom 10% receive 1 star.
Performance of other share classes will vary. Past performance is not
indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The global flight to the relative safety of bonds in the aftermath of the
Southeast Asian currency crisis in late October provided a dramatic and
positive finale to the first half of Putnam Tax-Free Health Care Fund's
fiscal year. In the five months prior to that flare-up, the U.S. municipal
bond market had demonstrated solid, albeit tenuous, strength as many
investors cautiously set aside their lingering concerns about the economy,
interest rates, and renewed inflation.
Recognizing the fragility of the generally positive environment both prior
to and following the disruption in global markets, Fund Manager Triet Nguyen
had pursued a slightly defensive policy in managing the fund. As the year
unfolded, however, he concluded that a somewhat more dynamic strategy was
in order and began adjusting the portfolio accordingly.
In the report that follows, Triet provides the specifics of his strategic
shift as well as details about the fiscal year's first half. Then he offers
some insights into what he believes is in store for the rest of the period.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 21, 1998
Report from the Fund Manager
Triet M. Nguyen
In managing Putnam Tax-Free Health Care Fund, we believe our most important
goal is to deliver the best risk-adjusted returns possible. We would rather
sacrifice some upside appreciation potential in rising markets in order to
outperform our competition in downtrends. Over the long term, this approach
has enabled us to produce superior long-term results and the six months ended
November 30, 1997, were no exception. The fund outperformed its competitive
index, the Lehman Brothers Municipal Bond Index, delivering a total return of
5.81% at net asset value (6.31% at market price) versus the index's 5.40%. It
also maintained a five-star rating from Morningstar (details on page 2).
* SEEKING CONSISTENT RETURNS IN HIGH-RISK MARKET
We attribute the fund's outperformance and high rating to the fact that it
takes a relatively conservative approach to investing in a high risk/reward
sector of the municipal bond market. Sector funds are rightly regarded as
higher risk because they concentrate on a specific market area. While the
health-care sector of the municipal bond market is regarded as higher risk
than other sectors, it offers the potential for higher returns because for the
past several years, health-care providers have been under pressure from both
the insurance industry and government agencies to cut costs.
Although demand for health-care services is virtually recession- proof, costs
are influenced by inflation; new technologies are expensive and quality
expectations are high. It is a difficult market in which to make a consistent
profit, so municipal health-care securities generally receive lower credit
ratings than those of other tax-exempt sectors. This is a market in which
painstaking research and analysis are essential -- and in which Putnam's
abilities in both areas have been able to add value for shareholders.
* HEALTH-CARE TRENDS AT CROSSROADS
In recent years, the health-care sector has benefited from mergers and
acquisitions, helping to make the sector one of the tax-free market's top
performers. While some investors tried to predict which hospitals would be the
most likely takeover candidates by large, for-profit companies like Columbia
Medical, your fund pursued a more conservative route, continuing to seek out
the facilities we believed to be the best run and most efficient. As it
happened, the best run nonprofits often found themselves high on the list for
takeovers.
One byproduct of the pressure to cut costs, however, has been mounting public
concern about the quality of medical-care services. Organizations like
Columbia have found themselves strongly criticized in the media and are
reversing themselves, divesting hospitals they recently purchased. The
dynamics of the past few years have changed.
Since your fund never relied on acquisitions, the shift toward divestiture
leaves our strategy unaffected. There also seems to continue to be a shortage
in the supply of hospital bonds, so any retrenchment in this sector is
unlikely to be dramatic.
* INVESTMENT FLEXIBILITY CAN BENEFIT LONG-TERM PERFORMANCE
Recently we have added some other types of credits to the fund's portfolio. At
the end of the period, nearly 20% of net assets were invested in non hospital
health-care bonds. Examples include long-term care providers, such as nursing
homes. Right now even higher-quality nursing home issues offer attractive
yields but they have not had an extensive following among investors.
Painstaking research, including on-site visits from our analysts, is
particularly important in helping us identify the best opportunities in this
area.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW*]
PORTFOLIO QUALITY OVERVIEW*
Aaa 40.8%
Aa 2.3%
A 4.9%
Baa 18.3%
Ba 27.8%
B 5.3%
VMIGI 0.6%
Footnote reads:
*As a percentage of market value as of 11/30/97. 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.
Narrowing yield spreads between lower- and higher-rated issues are now at the
point at which we believe current market rates on lower-rated issues do not
compensate investors for the additional credit risk. Consequently, we have
shifted some assets to higher rated tax-free bonds. Over the long term,
however, we expect yield spreads in the high-grade versus the low-grade sector
to widen somewhat, reverting to historical norms.
Recently your fund's Trustees approved a shift in policy that will allow us to
purchase what are known as distressed securities. These include bonds in
default or bonds issued by facilities that are in the midst of restructuring
or rebuilding programs. Professional bond rating agencies like Moody's
Investor Services may rate these securities between B and Baa or even as low
as C. They generally trade in the over-the-counter (OTC) market, in which less
well-publicized, lesser-known issues are traded, and the intensive research we
are able to provide is most important. Over full market cycles, this extra
investment flexibility may prove valuable.
* MARKET OUTLOOK
Much of the first half of the fund's fiscal year has been characterized by an
ongoing tug of war between high economic growth (negative for the bond market)
and favorable low inflation news (positive for the bond market). Late in
October, the Pacific Rim crisis and the upheaval in the worldwide equity
markets created ripple effects, most notably in the high-grade taxable bond
markets.
Although the Pacific Rim crisis is still the focus of worldwide markets, U.S.
economic growth remained robust, supported by such favorable labor conditions
as low unemployment, which recently reached a low 4.6% nationwide. While the
municipal markets seem to be settling down, there still may be periods of
moderate volatility.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Cochise County (Arizona) Industrial Development
Revenue bonds
Orange County (California) Health Facilities Authority
Inverse floating bond
Bexar County (Texas) Health Facilities Development Corp.
Revenue bonds
New Jersey Health Care Facilities Financing Authority
(Kimball Medical Center)
Revenue bonds
San Francisco City and County Community International Airport
Inverse floating bond
Dickinson County (Michigan)
Hospital revenue bonds
Kansas City, Missouri, Industrial Development Authority
Health facilities revenue bonds
Massachusetts State Turnpike Authority
Revenue bonds
Michigan State Hospital Finance Authority
(Garden City Hospital)
Revenue bonds
Corona County (California)
Certificate of participation
Footnote reads:
These holdings represent 26.1% of the fund's net assets as of 11/30/97.
Portfolio holdings will vary over time.
From a technical standpoint, the market for tax-free health-care securities is
likely to continue to benefit from the fact that demand outstrips supply.
However, we believe that between now and the next quarter the market may back
up a little, which would favor a conservative portfolio with a short duration,
such as your fund's.
We still believe there will be moderate upward pressure on interest rates over
the long term. With a stable portfolio of high-yielding securities, a low
turnover and ongoing research, we expect to reap benefits from investments we
made as long as four or five years ago. Our focus on key strategies, such as
reducing call risk and careful selection, especially among the lower quality
credits, should continue to benefit shareholders in the second half of its
fiscal year.
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 11/30/97, 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 the preservation of capital through a portfolio of securities in the
health-care sector.
TOTAL RETURN FOR PERIODS ENDED 11/30/97
Lehman
Brothers
Market Municipal Consumer
NAV price Bond Index Price Index
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6 months 5.81% 6.31% 5.40% 0.87%
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1 year 8.95 15.93 7.18 1.83
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5 years 51.39 48.98 42.06 13.73
Annual average 8.65 8.30 7.27 2.61
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Life of fund (6/29/92) 59.00 43.53 46.99 15.19
Annual average 8.93 6.89 7.37 2.64
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TOTAL RETURN FOR PERIODS ENDED 12/31/97
(most recent calendar quarter)
Market
NAV price
- ------------------------------------------------------------------------------
6 months 5.89% 7.72%
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1 year 10.36 16.35
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5 years 51.73 51.49
Annual average 8.70 8.66
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Life of fund (6/29/92) 61.06 46.20
Annual average 9.03 7.14
- ------------------------------------------------------------------------------
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 11/30/97
- ------------------------------------------------------------------------------
Distributions (common shares)
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Number 6
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Income $0.45
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Capital gains1 --
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Total $0.45
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Share value (common shares): NAV Market price
- ------------------------------------------------------------------------------
5/31/97 $14.56 $14.125
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11/30/97 14.94 14.563
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Current return (common shares): NAV Market price
- ------------------------------------------------------------------------------
End of period
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Current dividend rate2 6.02% 6.18%
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Taxable equivalent3 9.97 10.23
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1 Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject
to the federal alternative minimum tax. Investment income may be subject
to state and local taxes.
2 Income portion of most recent distribution, annualized and divided by
NAV or market price at end of period.
3 Assumes maximum 39.6% combined federal rate. Results for investors
subject to lower tax rates would not be as advantageous.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities and 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 assumes reinvestment of all distributions
and interest payments and does not take into account brokerage fees or
taxes. Securities in the fund do not match those in the index and
performance of the fund will differ. 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.
Portfolio of investments owned
November 30, 1997 (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
IFB -- Inverse Floating Rate Bonds
IF COP -- Inverse Floating Rate Certificate of Participation
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.8%) *
PRINCIPAL AMOUNT RATING** VALUE
Arizona (4.5%)
<S> <C> <C> <C>
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$ 6,420,000 Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.), Ser. B, 8 1/2s, 12/1/21 BBB-/P $ 7,318,800
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 2,090,625
--------------
9,409,425
California (15.5%)
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Anaheim, Pub. Fin. Auth. Lease Rev. Bonds
Appn. Sub. Pub. Impt.), Ser. C
17,000,000 FSA, zero %, 9/1/30 Aaa 2,932,500
17,000,000 FSA, zero %, 9/1/29 Aaa 3,081,250
1,940,000 CA Hlth. Fac. Fin. Auth. Rev. Bonds (Merritt
Peralta Hosp.), Ser. A, 7 1/2s, 5/1/09 Baa3 2,070,950
4,000,000 Corona, COP (Vista Hosp. Syst., Inc.), Ser. C,
8 3/8s, 7/1/11 B/P 4,480,000
2,000,000 Metropolitan Wtr. Dist. Rev. Bonds, Ser. C, 5s, 7/1/27 Aa2 1,925,000
17,105,000 Riverside Cnty., Asset Leasing Corp. Leasehold
Rev. Bonds (Riverside Cnty. Hosp.), MBIA,
zero %, 6/1/25 Aaa 3,827,244
3,000,000 San Bernardino Cnty., IF COP (PA-100-Med. Ctr. Fin.),
MBIA, 8.710s, 8/1/28 (acquired 6/27/95,
cost $3,237,720) [DBL. DAGGERS] AAA/P 3,948,750
4,750,000 San Francisco, City & Cnty. Cmnty. Intl. Arpts. IFB,
FGIC, 7.457s, 5/1/25 (acquired 1/3/96,
cost $5,354,105) [DBL. DAGGERS] AAA 5,302,188
4,145,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BB+/P 4,414,425
--------------
31,982,307
Connecticut (3.8%)
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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 4,182,500
1,200,000 9 1/2s, 5/1/13 Aaa 1,429,500
2,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care, Inc.), Ser. A, 8.7s, 7/1/22 BB-/P 2,262,500
--------------
7,874,500
Florida (3.5%)
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4,850,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA,
8.695s, 10/29/21 Aaa 5,826,063
1,270,000 Palm Beach Cnty., Hlth. Fac. Auth. Rev. Bonds
(JFK Med. Ctr. Inc.), 8 7/8s, 12/1/18 AAA/P 1,355,484
--------------
7,181,547
Georgia (1.1%)
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2,000,000 GA Muni. Elec. Auth. Special Obligation Rev. Bonds
(Crossover Ser.), AMBAC, 6.4s, 1/1/13 Aaa 2,295,000
Illinois (1.9%)
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IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.)
2,270,000 8 3/4s, 7/1/11 BB/P 2,525,375
1,165,000 Prerefunded, 8 3/4s, 7/1/11 BB/P 1,347,031
--------------
3,872,406
Kentucky (1.8%)
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2,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst.),
MBIA, 8.786s, 10/1/14 Aaa 2,382,500
1,375,000 Muhlenberg Cnty., Rev. Bonds (Muhlenberg Cmnty.
Hosp.), 9 1/2s, 8/1/10 AAA/P 1,450,969
--------------
3,833,469
Maryland (1.5%)
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2,815,000 Berlin, Hosp. Rev. Bonds (Atlantic Gen. Hosp. Fac.),
8 3/8s, 6/1/22 BB-/P 3,012,050
Massachusetts (16.9%)
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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/P 2,469,750
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 Baa3 3,580,500
2,500,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba2 2,583,775
4,000,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s,
8/15/24 BB/P 4,400,000
1,000,000 (Beth Israel Hosp.), 7 3/4s, 7/1/08 A2 1,041,880
3,250,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba1 3,416,563
2,000,000 (Charlton Memorial Hosp.), Ser. B, 7 1/4s, 7/1/07 A2 2,210,000
2,775,000 (Cooley Dickinson Hosp.), Ser. A, 7 1/8s, 11/15/18 AAA/P 3,180,844
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
3,500,000 (Sisters Providence Hlth. Syst), Ser. A,
6 5/8s, 11/15/22 Baa2 3,727,500
MA State Indl. Fin. Agcy. Rev. Bonds
950,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB-/P 1,012,938
2,175,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s, 7/1/11 Aaa 2,359,875
5,000,000 MA State Tpk. Auth. Rev. Bonds, Ser. A, MBIA,
5 1/8s, 1/1/23 Aaa 4,912,500
--------------
34,896,125
Michigan (10.9%)
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4,500,000 Dickinson Cnty., Hosp. Rev. Bonds (Memorial
Hosp. Syst.), 8 1/8s, 11/1/24 Ba1 5,208,750
1,500,000 MI State Hosp. Fin. Auth. Adj. Rate Rev. Bonds
(Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB+ 1,506,585
MI State Hosp. Fin. Auth. Rev. Bonds
4,130,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba3 4,486,213
1,750,000 (Sinai Hosp.), 6.7s, 1/1/26 A2 1,929,375
3,000,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
Svcs. for Aging), 9.4s, 5/15/20 Aaa 3,393,750
1,500,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa3 1,513,125
1,350,000 Tawas City Hosp. Fin. Auth. Rev. Bonds
(St. Joseph's Hosp.), Ser. A, 8 1/2s, 3/15/12 BB+/P 1,387,692
3,000,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care), 8 3/8s, 7/1/23 B-/P 3,000,000
--------------
22,425,490
Minnesota (1.0%)
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600,000 North Suburban Hospital Dist. VRDN (Anoka &
Ramsey Cnty. Hosp., Hlth. Ctr.), 4.1s, 8/1/14 AA 600,000
1,300,000 Rochester Hlth. Care Fac. Rev. Bonds (Olmsted
Med. Group), 7 1/2s, 7/1/19 BB+/P 1,407,250
--------------
2,007,250
Missouri (3.4%)
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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+/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 Baa2 1,844,500
--------------
6,944,500
New Hampshire (1.0%)
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1,910,000 NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
(Alice Peck Day Memorial Hosp.), 9 3/8s, 11/1/20 BB+/P 2,127,263
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 Aaa 4,023,000
5,000,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 Baa3 5,375,000
--------------
9,398,000
New York (0.6%)
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1,245,000 NY State Hsg. Fin. Agcy. VRDN (Special Surgery
Hosp. Staff), Ser. A, 3.9s, 11/1/10 VMIG1 1,245,000
Ohio (1.5%)
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1,992,799 Holland, Indl. Dev. Mtge. Rev. Bonds (Spring Meadow
Extended Care), FHA Insd., 11s, 4/15/13 A-/P 2,087,238
1,000,000 Lucas Cnty., Hlth. Fac. VRDN (Lutheran
Homes Society), 3.8s, 11/1/19 A-1+ 1,000,000
--------------
3,087,238
Pennsylvania (11.1%)
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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 3,142,620
2,980,000 College Township, Indl. Dev. Auth. 1st Mtge. Hlth.
Fac. Rev. Bonds (Nittany Valley Rehab. Hosp.),
7 5/8s, 11/1/07 BB/P 3,311,525
2,000,000 Langhorne Manor Boro Higher Ed. Hlth. Auth.
Rev. Bonds (Lower-Bucks Hosp.), 7.35s, 7/1/22 Ba3 2,120,000
1,800,000 Lebanon Cnty., Good Samaritan Hosp. Auth. Rev.
Bonds, Ser. B, 8 1/4s, 11/1/18 BBB+ 1,968,750
4,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (United Hosp.), Ser. B, 8 3/8s, 11/1/11 AAA 4,385,000
Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp. Rev.
Bonds (Graduate Hlth. Syst.)
1,285,000 7 1/4s, 7/1/18 -Ba2 1,355,675
1,000,000 Ser. B, 6 1/4s, 7/1/13 -Ba2 998,750
2,950,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp. IFB,
FGIC, 6.5s, 3/4/12 Aaa 2,957,375
2,450,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac. Rev.
Bonds (Rehabilitation Hosp. of York), 7 1/2s, 9/1/07 BB/P 2,639,875
--------------
22,879,570
South Carolina (1.6%)
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3,000,000 SC Jobs Econ. Dev. Auth. Econ. Dev. Rev. Bonds
(St. Francis Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 3,240,000
Tennessee (0.9%)
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1,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.266s, 1/1/22 Aaa 1,914,625
Texas (7.4%)
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3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains
Baptist Hosp.), FSA, 8.987s, 1/3/22 Aaa 4,288,750
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 5,818,750
1,015,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 B/P 1,267,481
1,560,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Woodlands Med. Ctr.), 8.85s, 8/15/14 A-/P 1,700,400
2,000,000 North Central TX, Hlth. Fac. Dev. Corp. IFB
(Baylor Hlth. Care Syst.), Ser. B, 7.54s, 5/15/08 Aa2 2,170,000
--------------
15,245,381
Utah (0.6%)
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1,000,000 Salt Lake City, Hosp. IFB (IHC Hosps., Inc.),
9.667s, 5/15/20 Aaa 1,181,250
Vermont (0.9%)
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1,870,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds
(Northwestern Med. Ctr.), 6 1/4s, 9/1/18 BBB 1,937,788
Virginia (0.6%)
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1,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB (Fairfax Hosp. Syst.),
Ser. C, 9.557s, 8/29/23 Aaa 1,216,250
Washington (1.1%)
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2,125,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9 1/4s, 9/1/10 BBB/P 2,350,777
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 Baa1 2,190,000
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Total Investments (cost $190,617,409) *** $ 203,747,211
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* Percentages indicated are based on net assets of $206,310,538.
** The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at
November 30, 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 November 30, 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 $190,617,409,
resulting in gross unrealized appreciation and depreciation
of $13,826,153 and $696,351, respectively, or net unrealized
appreciation of $13,129,802.
[DBL. DAGGER] Restricted, excluding 144A securities, as to public resale.
The total market value of restricted securities held at
November 30, 1997, was $9,250,938 or 4.5% of net assets.
The rates shown on IFBs and IF COPs, which are securities
paying interest rates that vary inversely to changes in the
market interest rates, and VRDNs are the current interest
rates at November 30, 1997.
The fund had the following insurance concentration greater
than 10% at November 30, 1997 (as a percentage of net assets):
MBIA 10.1%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1997 (Unaudited)
(aggregate face value $19,877,157)
Unrealized
Total Aggregate Face Expiration Appreciation/
Value Value Date (Depreciation)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
U.S. Treasury Bond
Futures (short) $11,561,188 $11,414,969 Dec 97 $(146,219)
U.S. Municipal Index
Futures (long) 8,559,688 8,462,188 Dec 97 97,500
- ----------------------------------------------------------------------------------------
$ (48,719)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $190,617,409) (Note 1) $203,747,211
- ---------------------------------------------------------------------------------------------------
Cash 436,293
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 3,526,322
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 75,000
- ---------------------------------------------------------------------------------------------------
Total assets 207,784,826
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 6,906
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,035,444
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 358,056
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 32,274
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,441
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,127
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 32,040
- ---------------------------------------------------------------------------------------------------
Total liabilities 1,474,288
- ---------------------------------------------------------------------------------------------------
Net assets $206,310,538
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $191,840,293
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 884,387
- ---------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments (Note 1) 504,775
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 13,081,083
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $206,310,538
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value per share ($206,310,538 divided by 13,807,168 shares) $14.94
- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended November 30, 1997 (Unaudited)
<S> <C>
Tax exempt interest income: $ 7,121,894
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 721,678
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 114,431
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,068
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,334
- --------------------------------------------------------------------------------------------------
Reports to shareholders 17,477
- --------------------------------------------------------------------------------------------------
Auditing 14,218
- --------------------------------------------------------------------------------------------------
Legal 1,167
- --------------------------------------------------------------------------------------------------
Postage 15,031
- --------------------------------------------------------------------------------------------------
Exchange listing fees 12,130
- --------------------------------------------------------------------------------------------------
Other 13,846
- --------------------------------------------------------------------------------------------------
Total expenses 919,380
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (38,731)
- --------------------------------------------------------------------------------------------------
Net expenses 880,649
- --------------------------------------------------------------------------------------------------
Net investment income 6,241,245
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,992,369
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the period 3,302,647
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,295,016
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $11,536,261
- --------------------------------------------------------------------------------------------------
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
1997* 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- --------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------
Net investment income $ 6,241,245 $ 12,834,287
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 1,992,369 (63,133)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,302,647 5,885,844
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 11,536,261 18,656,998
- --------------------------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------------------------
From net investment income (6,212,590) (12,425,187)
- --------------------------------------------------------------------------------------------------
Total increase in net assets 5,323,671 6,231,811
Net assets
- --------------------------------------------------------------------------------------------------
Beginning of period 200,986,867 194,755,056
- --------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $884,387 and $855,732, respectively) $206,310,538 $200,986,867
- --------------------------------------------------------------------------------------------------
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 For the period
Per-share Nov. 30 June 29, 1992+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.56 $14.11 $14.13 $14.29 $14.73 $13.89 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45 .93 .94 .96 .98 .95 (d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .38 .42 (.03) .03 (.22) .80
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .83 1.35 .91 .99 .76 1.75
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.90) (.93) (1.01) (1.01) (.84)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.14) (.19) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.90) (.93) (1.15) (1.20) (.91)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.94 $14.56 $14.11 $14.13 $14.29 $14.73
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $14.563 $14.125 $13.500 $13.375 $14.375 $14.625
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 6.31 * 11.68 8.74 1.20 6.46 3.75 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $206,311 $200,987 $194,755 $195,079 $197,326 $203,408
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .45 * .90 .92 .90 .91 .49 (d)*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.05 * 6.45 6.62 6.85 6.58 6.71 (d)*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.61 * 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.
</TABLE>
Notes to financial statements
November 30, 1997 (Unaudited)
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) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. 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.
D) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the six months ended November 30, 1997, the
fund had no borrowings against the line of credit.
E) 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, 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.
F) 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. 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.
G) 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
are accreted according to the yield to maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services, is paid quarterly based on the average net assets of the fund. Such
fee is based on the annual rate of: 0.70% of average weekly net assets.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended November 30, 1997, fund expenses were reduced by
$38,731 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 funds receive an annual Trustees fee of which $531 has been
allocated to the fund 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 has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
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
Purchases and sales of securities
During the six months ended November 30, 1997, purchases and sales of
investment securities other than short-term investments aggregated $19,000,965
and $19,265,302, 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 4, 1997 shareholder meeting
An annual meeting of shareholders of the fund was held on December 4, 1997.
At the meeting, each of the nominees for Trustees was elected, as follows:
Abstentions
Votes and Broker
Votes for withheld Non-Votes
Jameson Adkins Baxter 12,911,507 146,339 3,500
Hans H. Estin 12,906,744 154,602 0
John A. Hill 12,910,479 147,367 3,500
R.J. Jackson 12,909,135 149,461 2,750
Elizabeth T. Kennan 12,911,121 146,725 3,500
Lawrence J. Lasser 12,912,074 145,772 3,500
Robert E. Patterson 12,907,330 150,516 3,500
Donald S. Perkins 12,899,035 162,311 0
William F. Pounds 12,904,116 153,730 3,500
George Putnam 12,906,193 151,653 3,500
George Putnam, III 12,913,899 143,947 3,500
A.J.C. Smith 12,902,719 155,127 3,500
W.T. Stephens 12,909,484 148,862 3,000
W. Nicholas Thorndike 12,909,588 151,758 0
A proposal to ratify the selection of Price Waterhouse LLP as the
independent auditors of your fund was approved as follows: 12,870,837
votes for and 56,123 votes against with 134,386 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
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Blake E. Anderson
Vice President
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
- --------------------
36871 1/98
