Putnam
Tax-Free
Health Care
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-98
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Although the health-care sector of the municipal bond market has undergone
some challenges in recent months, it has also continued to offer some
rewarding opportunities. Putnam Tax-Free Health Care Fund was able to take
full advantage of these opportunities, thanks to in-depth credit research
that enabled the fund's manager, Blake Anderson, to identify attractively
priced bonds that were both creditworthy and solid income producers. For
the six months ended November 30, 1998, the fund returned 1.94% at net
asset value and 10.13% at market price. You can find additional
performance information on pages 6 and 7.
* MUNICIPAL BOND PRICES NOW EXCEPTIONALLY ATTRACTIVE
After a turbulent autumn, the municipal bond market has calmed down and
even slightly outperformed the Treasury market. Long-term municipal bond
yields are approximately the same as the 30-year Treasury bond yield --
exhibiting a remarkable level of cheapness relative to Treasuries.
We arrived at these unprecedented yield ratios after a string of
international problems set off stock market volatility and bond market
rallies. As foreign investors and hedge fund investors panicked about
plummeting stock markets, they began a flight to quality -- selling
investments with virtually any element of risk and rushing to the relative
safety of U.S. Treasury bonds. This buying drove up the prices of
Treasuries while pushing down their yields. Since foreign investors do not
benefit from the tax advantages of municipal bonds, prices in this market
didn't rise as much as those of Treasuries. As a result, for the past
several months, municipal bond yields have been extremely close or equal
to Treasury yields, making municipal bonds an exceptional choice for U.S.
investors.
* HEALTH-CARE BONDS UNDERPERFORM AMID FEDERAL BUDGET, Y2K CONCERNS
During the semiannual period, performance of health-care bonds lagged
behind that of other sectors, although these issues continue to provide
respectable returns. Three main factors contributed to the sector's recent
difficulties. The first involved the default of bonds issued by the
prominent Philadelphia Graduate Hospital system last July affecting less
than .5% of the portfolio. As the hospital reorganizes, the gap between
yields of lower-rated versus higher-rated health-care securities should
create some attractive income and appreciation opportunities. However, the
event also influenced investor's perceptions of the health care sector,
leading to a more cautious outlook.
The Federal Balanced Budget Act of 1997 added more uncertainty to the
health-care bond picture. This law throws into question the amount of
reimbursement hospitals can expect from various government programs in the
future. These programs, including Medicaid and Medicare, provide a large
part of hospital revenues. In anticipation of lower reimbursements, many
hospitals have undertaken another wave of cost-cutting, which investors
perceive as putting pressure on hospital margins.
Another factor contributing to underperformance in this sector is the
uncertainty created by the looming year 2000 (Y2K) problem. Investors are
concerned that major computer systems such as those administered by
Medicare and Medicaid may not be prepared to deal with the software
problems that will occur at the turn of the next year and a slowdown in
payments could result. If this occurs, some hospitals may have difficulty
meeting their expenses.
* STRATEGY STAYS FOCUSED ON INCOME OPPORTUNITIES, CREDIT SELECTION
Periods of underperformance often create opportunities for investors with
the capacity to evaluate the market properly. For shareholders of this
fund, the past six months were no exception. Many of the best-managed
hospitals anticipated the various problems now confronting the health-care
industry and have already taken steps to mitigate their effects. Indeed,
it is these well-managed hospitals that form the backbone of your fund's
portfolio. In addition, Putnam's credit analysts and bond traders continue
to use their in-depth expertise and extensive data bank of health-care
information to unearth numerous "story" bonds -- bonds with attractive
fundamentals priced inexpensively because the sellers have been frightened
by stories of problems plaguing the market.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Cochise County (Arizona) Industrial Development
Revenue bonds
San Francisco City and County Community International Airport
Revenue bonds
Bexar County (Texas) Health Facilities Development Corp.
Revenue bonds
Orange County (Florida) Health Facilities Authority
Inverse floating rate bonds
New Jersey Health Care Facilities Financing Authority
(Kimball Medical Center)
Revenue bonds
Dickinson County (Michigan)
Hospital revenue bonds
Kansas City, Missouri, Industrial Development Authority
Health facilities revenue bonds
Michigan State Hospital Finance Authority (Garden City Hospital)
Revenue bonds
City of Corona (California)
Certificate of participation
Valley Health System (California)
Certificate of participation
Footnote reads:
These holdings represent 26.4% of the fund's net assets as of 11/30/98.
Portfolio holdings will vary over time.
Overall your fund remains focused on income generation, pursuing a
conservative strategy that relies on relative value trading and credit
research to generate the best possible risk-adjusted returns. In keeping
with this prudent approach, Blake continued to keep the fund's duration
neutral to slightly short over the period. Duration, which is measured in
years, expresses a fund's sensitivity to changes in interest rates. The
shorter the duration, the less sensitive a fund is to interest-rate
movements. Conversely the longer a fund's duration, the more it is
affected by interest-rate changes.
With health-care bonds and municipal bonds in general now trading at
extremely attractive levels, this asset class has become more appealing
than ever to U.S. investors. In the coming months, Blake will continue to
utilize Putnam's research staff to help identify appropriate buying
opportunities. He will remain focused on income while taking care to
follow the dictates of prudent credit selection.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
A -- 3.9%
Baa/BBB -- 26.1%
Ba/BB -- 18.5%
B -- 5.7%
Other -- 0.4%
VMIG1 -- 1.1%
Aaa/AAA -- 42.1%
Aa/AA -- 2.2%
Footnote reads:
*As a percentage of market value as of 11/30/98. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions and Standard & Poor's(R) descriptions; percentages may
include unrated bonds considered by Putnam Management to be of comparable
quality. Ratings will vary over time.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 20, 1999
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 11/30/98, there is no guarantee the fund will
continue to hold these securities in the future. Funds investing in a
single sector may be subject to more volatility than funds investing in a
diverse group of sectors.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its 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 11/30/98
Lehman Bros.
Market Municipal Bond Consumer
NAV price Index Price Index
- ------------------------------------------------------------------------------
6 months 1.94% 10.13% 3.84% 0.74%
- ------------------------------------------------------------------------------
1 year 6.00 13.40 7.77 1.55
- ------------------------------------------------------------------------------
5 years 40.36 49.18 37.81 12.48
Annual average 7.02 8.33 6.63 2.38
- ------------------------------------------------------------------------------
Life of fund
(since 6/29/92) 68.53 62.76 58.41 16.98
Annual average 8.47 7.88 7.43 2.47
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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 11/30/98
- ------------------------------------------------------------------------------
Distributions (common shares)
- ------------------------------------------------------------------------------
Number 6
- ------------------------------------------------------------------------------
Income $0.45
- ------------------------------------------------------------------------------
Capital gains1 --
- ------------------------------------------------------------------------------
Total $0.45
- ------------------------------------------------------------------------------
Share value (common shares) NAV Market price
- ------------------------------------------------------------------------------
5/31/98 $15.02 $14.50
- ------------------------------------------------------------------------------
11/30/98 14.86 15.50
- ------------------------------------------------------------------------------
Current return (common shares)
- ------------------------------------------------------------------------------
End of period
- ------------------------------------------------------------------------------
Current dividend rate2 6.06% 5.81%
- ------------------------------------------------------------------------------
Taxable equivalent3 10.03 9.62
- ------------------------------------------------------------------------------
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 and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(most recent calendar quarter)
Market
NAV price
- -----------------------------------------------------------------------
6 months 2.20% 7.19%
- -----------------------------------------------------------------------
1 year 5.35 11.90
- -----------------------------------------------------------------------
5 years 39.21 50.22
Annual average 6.84 8.48
- -----------------------------------------------------------------------
Life of fund (6/29/92) 69.68 64.01
Annual average 8.46 7.90
- -----------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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.
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, 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. Securities indexes assume reinvestment of all
distributions and interest payments and do not take in account brokerage
fees or taxes. Securities in the fund do not match those in the indexes
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.
<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1998 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FNMA Coll. -- Federal National Mortgage Association Collateralized
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
MUNICIPAL BONDS AND NOTES (98.8%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C> <C>
Alaska (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 2,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 AA $ 2,205,000
Arizona (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
6,380,000 Cochise Cnty., Indl. Dev. Rev. Bonds (Sierra Vista
Cmnty. Hosp.), Ser. B, 8 1/2s, 12/1/21 BBB-/P 7,217,375
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 2,008,590
--------------
9,225,965
California (15.8%)
- --------------------------------------------------------------------------------------------------------------------------
Anaheim, Pub. Fin. Auth. Lease Rev. Bonds
(Cap. Appn. Sub. Pub. Impt.), Ser C
17,000,000 FSA, zero %, 9/1/30 Aaa 3,400,000
17,000,000 FSA, zero %, 9/1/29 Aaa 3,570,000
1,835,000 CA Hlth. Fac. Fin. Auth. Rev. Bonds
(Merritt Peralta Hosp.), Ser. A, 7 1/2s, 5/1/09 Baa3 1,905,409
4,000,000 Corona, COP (Hosp. Syst. Inc.), Ser. C,
8 3/8s, 7/1/11 B-/P 4,535,000
17,105,000 Riverside Cnty., Asset Leasing Corp. Leasehold
Rev. Bonds (Riverside Cnty. Hosp.), MBIA,
zero %, 6/1/25 AAA 4,468,681
3,000,000 San Bernardino Cnty., IF COP (PA-100-Med.
Ctr. Fin.), MBIA, 9.6959s, 8/1/28
(acquired 6/27/95, cost $3,237,720) (RES) (SEG) Aaa/P 4,027,500
4,750,000 San Francisco, City & Cnty. Cmnty. Intl. Arpts.
Rev. Bonds, FGIC, 8.043s, 5/1/25
(acquired 1/3/96, cost $5,354,105) (RES) AAA 6,002,813
4,145,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BB+/P 4,476,600
--------------
32,386,003
Colorado (0.7%)
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1,500,000 Denver, Hlth. & Hosp. Rev. Bonds, Ser. A,
5 3/8s, 12/1/28 Baa2 1,496,250
Connecticut (3.7%)
- --------------------------------------------------------------------------------------------------------------------------
CT State Dev. Auth. 1st Mtge. Rev. Bonds
(Inter-Church Residences Inc.)
3,500,000 9 5/8s, 4/1/21 Aaa 4,077,500
1,200,000 9 1/2s, 5/1/13 Aaa 1,395,000
2,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care Inc.), Ser. A, 8.7s, 7/1/22 BB-/P 2,235,000
--------------
7,707,500
Florida (2.8%)
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4,850,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA,
9.04s, 10/29/21 Aaa 5,771,500
Georgia (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Forsyth Cnty., Hosp. Auth. Rev. Bonds
(Babtist Hlthcare Sys), 6 1/4s, 10/1/18 B/P 987,500
2,000,000 GA Muni. Elec. Auth. Pwr. Rev. Bonds, Ser. Y,
AMBAC, 6.4s, 1/1/13 AAA 2,355,000
--------------
3,342,500
Illinois (1.8%)
- --------------------------------------------------------------------------------------------------------------------------
IL Dev. Fin. Auth. Rev. Bonds
(Cmnty. Rehab. Providers Fac.)
2,190,000 8 3/4s, 7/1/11 BB/P 2,395,313
1,125,000 Prerefunded, 8 3/4s, 7/1/11 AAA/P 1,265,625
--------------
3,660,938
Kentucky (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,000,000 Jefferson Cnty., Hosp. IFB (Alliant Hlth. Syst.),
MBIA, 9.242s, 10/1/14 AAA 2,407,500
Maryland (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
2,780,000 Berlin, Hosp. Rev. Bonds (Atlantic Gen. Hosp. Fac.),
8 3/8s, 6/1/22 BB-/P 2,981,550
Massachusetts (15.8%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 MA Hsg. Fin. Agcy. Rev. Bonds (Residential Dev.),
Ser. E, FNMA Coll., 6 1/4s, 11/15/12 Aaa 3,240,000
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 2,365,932
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 Baa3 3,609,375
2,500,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba2 2,554,750
3,940,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s,
8/15/24 BB/P 4,442,350
3,360,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Baa3 3,725,400
2,000,000 (Charlton Memorial Hosp.), Ser. B, 7 1/4s, 7/1/07 A2 2,212,500
2,715,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s, 11/15/18 AAA/P 3,122,250
3,500,000 (Sisters Providence Hlth. Syst), Ser. A,
6 5/8s, 11/15/22 Aaa 4,003,125
MA State Indl. Fin. Agcy. Rev. Bonds
925,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB-/P 968,105
2,090,000 (Morton Hosp. & Med. Ctr.), Ser. A,
8 3/4s, 7/1/11 Aaa 2,184,405
--------------
32,428,192
Michigan (9.5%)
- --------------------------------------------------------------------------------------------------------------------------
4,500,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB- 5,191,875
MI State Hosp. Fin. Auth. Rev. Bonds
4,130,000 (Garden City Hosp.), 8 1/2s, 9/1/17 BB 4,723,688
1,750,000 (Sinai Hosp.), 6.7s, 1/1/26 A3 1,953,438
3,000,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 3,270,000
1,500,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa3 1,539,375
3,000,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care, Inc.), 8 3/8s, 7/1/23 B-/P 2,850,000
--------------
19,528,376
Minnesota (0.7%)
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1,300,000 Rochester, Hlth. Fac. Rev. Bonds
(Olmsted Med. Group), 7 1/2s, 7/1/19 BB+/P 1,525,875
Missouri (3.3%)
- --------------------------------------------------------------------------------------------------------------------------
4,700,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds
(Park Lane Med. Ctr.), 8 3/4s, 1/1/15 BB+/P 4,920,289
1,700,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac. Rev. Bonds
(Jefferson Memorial Hosp.), 6.8s, 5/15/25 Baa2 1,859,375
--------------
6,779,664
New Hampshire (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
1,910,000 (Alice Peck Day Memorial Hosp.), 9 3/8s, 11/1/20 BB+/P 2,093,838
1,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 BB/P 995,000
--------------
3,088,838
New Jersey (5.1%)
- --------------------------------------------------------------------------------------------------------------------------
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
3,600,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 3,933,000
5,000,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 Baa3 5,443,750
1,000,000 (Columbus Hosp.), Ser. A, 7 1/2s, 7/1/21 Ba2 1,043,750
--------------
10,420,500
New York (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,400,000 NY City, Hlth. & Hosp. Corp. VRDN (Hlth. Syst.),
Ser. D, 2.65s, 2/15/26 VMIG1 1,400,000
800,000 NY State Hsg. Fin. Agcy. VRDN (Special Surgery
Hosp. Staff), Ser. A, 3.1s, 11/1/10 VMIG1 800,000
--------------
2,200,000
Ohio (1.0%)
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1,940,499 Holland, Indl. Dev. Mtge. Rev. Bonds (Spring Meadow
Extended Care), FHA Insd., 11s, 4/15/13 A-/P 2,046,392
Pennsylvania (10.0%)
- --------------------------------------------------------------------------------------------------------------------------
2,210,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(UPMC Health), Ser. B, MBIA, 6s, 7/1/24 AAA 2,547,025
2,770,000 College Township, Indl. Dev. Auth. 1st Mtge.
Hlth. Fac. Rev. Bonds (Nittany Valley
Rehab. Hosp.), 7 5/8s, 11/1/07 BBB-/P 3,098,938
2,000,000 Langhorne Manor Boro Higher Ed. Hlth. Auth.
Rev. Bonds (Lower-Bucks Hosp.), 7.35s, 7/1/22 Ba3 2,117,500
1,800,000 Lebanon Cnty., Good Samaritan Hosp. Auth.
Rev. Bonds, Ser. B, 8 1/4s, 11/1/18 BBB+ 1,916,730
4,000,000 Montgomery Cnty., Higher Ed. & Hlth. Auth. Hosp.
Rev. Bonds (UTD Hosp.), Ser. B, 8 3/8s, 11/1/11 AAA 4,265,720
1,285,000 PA State Higher Ed. Assistance Agcy. Student Loan,
Ser. A&B, 7 1/4s, 7/1/18 (In default) (NON) CCC 514,000
1,000,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp.
Rev. Bonds (Graduate Hlth. Syst.), Ser. B,
6 1/4s, 7/1/13 (In default) (NON) CCC 400,000
2,950,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp.
IFB, FGIC, 6.702s, 3/6/12 Aaa 3,163,875
2,275,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac.
Rev. Bonds (Rehabilitation Hosp. of York),
7 1/2s, 9/1/07 BBB-/P 2,491,125
--------------
20,514,913
South Carolina (1.6%)
- --------------------------------------------------------------------------------------------------------------------------
3,000,000 SC Jobs Econ. Dev. Auth. Rev. Bonds (St. Francis
Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 3,266,250
Tennessee (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.57s, 1/1/22 Aaa 1,991,125
Texas (9.2%)
- --------------------------------------------------------------------------------------------------------------------------
3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains
Baptist Hosp.), FSA, 9.190s, 1/3/22 Aaa 4,375,438
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Lukes Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 5,800,000
990,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 B/P 1,197,900
3,700,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds
(Mem. Hlth. Syst. of East TX), 5.7s, 2/15/28 BBB 3,741,625
1,520,000 Montgomery Cnty., Hlth. Fac. Dev. Corp. Rev.
Bonds (Woodlands Med. Ctr.), 8.85s, 8/15/14 A-/P 1,599,040
North Central Hlth. Fac. Dev. Corp. Rev. Bonds
(Hosp.), Ser. B
1,810,000 7.86s, 5/15/08 Aa2 1,991,000
190,000 Prerefunded, 7.86s, 5/15/08 AA 211,375
--------------
18,916,378
Utah (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Salt Lake City, Hosp. IFB (IHC Hosps. Inc.), 9.363s,
5/15/20 (acquired 6/6/97, cost $1,171,200) (RES) Aaa 1,162,500
Vermont (1.0%)
- --------------------------------------------------------------------------------------------------------------------------
1,870,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds
(Northwestern Med. Ctr.), 6 1/4s, 9/1/18 BBB 1,963,500
Virginia (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB (Fairfax Hosp. Syst.),
Ser. C, 9.992s, 8/29/23 Aaa 1,201,250
Washington (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
2,125,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9 1/4s, 9/1/10 BBB/P 2,348,125
West Virginia (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,950,000 Randolph Cnty. Rev. Bonds (Davis Memorial Hosp.),
Ser. A, 7.65s, 11/1/21 Baa1 2,184,000
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $190,305,106) (b) $ 202,750,584
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $205,151,907.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
November 30, 1998 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, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $190,305,106, resulting in gross unrealized appreciation and
depreciation of $15,989,979 and $3,544,501, respectively, or net unrealized appreciation of $12,445,478.
(NON) Non-income producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at November 30, 1998 was $11,192,813 or 5.5% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at November 30, 1998.
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, 1998.
- ---------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1998 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- ---------------------------------------------------------------------------------
Municipal Bond
Index (Long) $11,635,125 $11,597,660 Dec-98 $37,465
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $190,305,106) (Note 1) $202,750,584
- -----------------------------------------------------------------------------------------------
Cash 368,348
- -----------------------------------------------------------------------------------------------
Interest receivable 3,427,109
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 20,000
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 46,633
- -----------------------------------------------------------------------------------------------
Total assets 206,612,674
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,035,431
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 363,108
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 20,558
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 10,624
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,066
- -----------------------------------------------------------------------------------------------
Other accrued expenses 29,980
- -----------------------------------------------------------------------------------------------
Total liabilities 1,460,767
- -----------------------------------------------------------------------------------------------
Net assets $205,151,907
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $191,839,876
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 863,034
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (33,946)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 12,482,943
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $205,151,907
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value per share ($205,151,907 divided by 13,807,168 shares) $14.86
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended November 30, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $6,978,698
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 739,353
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 124,525
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,499
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,173
- -----------------------------------------------------------------------------------------------
Reports to shareholders 15,805
- -----------------------------------------------------------------------------------------------
Auditing 14,975
- -----------------------------------------------------------------------------------------------
Postage 18,496
- -----------------------------------------------------------------------------------------------
Exchange listing fees 16,214
- -----------------------------------------------------------------------------------------------
Other 11,120
- -----------------------------------------------------------------------------------------------
Total expenses 949,160
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (12,514)
- -----------------------------------------------------------------------------------------------
Net expenses 936,646
- -----------------------------------------------------------------------------------------------
Net investment income 6,042,052
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (297,277)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 235,070
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the period (1,945,826)
- -----------------------------------------------------------------------------------------------
Net loss on investments (2,008,033)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $4,034,019
- -----------------------------------------------------------------------------------------------
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
1998* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 6,042,052 $ 12,590,268
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (62,207) 2,191,016
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (1,945,826) 4,650,333
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,034,019 19,431,617
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (6,212,779) (12,535,530)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (552,287)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (2,178,760) 6,343,800
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 207,330,667 200,986,867
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed
net investment income of $863,034 and
$1,033,761, respectively) $205,151,907 $207,330,667
- ---------------------------------------------------------------------------------------------------------------
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
Per-share November 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $15.02 $14.56 $14.11 $14.13 $14.29 $14.73
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .91 .93 .94 .96 .98
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.15) .50 .42 (.03) .03 (.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .29 1.41 1.35 .91 .99 .76
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.91) (.90) (.93) (1.01) (1.01)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.04) -- -- (.14) (.19)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.95) (.90) (.93) (1.15) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $14.86 $15.02 $14.56 $14.11 $14.13 $14.29
- ------------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $15.500 $14.500 $14.125 $13.500 $13.375 $14.375
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at market value (%)(a) 10.13* 9.47 11.68 8.74 1.20 6.46
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $205,152 $207,331 $200,987 $194,755 $195,079 $197,326
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .46* .89 .90 .92 .90 .91
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.92* 6.11 6.45 6.62 6.85 6.58
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 3.03* 16.25 7.92 44.68 39.44 36.92
- ------------------------------------------------------------------------------------------------------------------------------------
* 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).
</TABLE>
Notes to financial statements
November 30, 1998 (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) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the provisions
of the Internal Revenue Code applicable to regulated investment companies.
It is also the intention of the fund to distribute an amount sufficient to
avoid imposition of any excise tax under Section 4982 of the Internal
Revenue Code of 1986, as amended. Therefore, no provision has been made
for federal taxes on income, capital gains or unrealized appreciation on
securities held nor for excise tax on income and capital gains.
E) 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.
F) 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 zero coupon bonds and
original issue discount bonds 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, 1998, fund expenses were reduced by
$12,514 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.
Each Trustee of the fund receives an annual Trustee fee, of which $470 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.
Notes 3
Purchase and sales of securities
During the six months ended November 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$8,184,936 and $6,123,266, 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.
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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
John A. Hill, Vice President
Jameson Adkins Baxter
Hans H. Estin
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
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President and Fund Manager
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or visit
our web site (www.putnaminv.com) any time for up-to-date information about
the fund's NAV.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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