Putnam
Tax-Free
Health Care
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The past six months have been a difficult period for most fixed-income
markets, and the municipal health-care market has been no exception.
Nonetheless, Putnam Tax-Free Health Care Fund held its own amid
challenging conditions, once again demonstrating the prudence of fund
manager Blake Anderson's strategy for generating high current income with
minimal risk. Indeed, while the fund's short-term performance may be
unremarkable, its long-term performance remains quite impressive (see
page 7).
Total return for 6 months ended 11/30/99
Net asset value Market price
- ----------------------------------------------------------------------
-2.51% -16.55%
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Past performance is no indication of future results. Performance
information for longer periods begins on page 7.
* MUNICIPAL MARKET OFFERS OPPORTUNITY
Although there are no guarantees in investing, if history tells us
anything about bond investing, it is this: buying a bond fund after a bad
year is a smart thing to do. The bond market has endured its toughest year
since 1994, and the second-worst year on record, the result of continuing
fears of inflation and three moves by the Federal Reserve Board to raise
interest rates. But after the bond bear markets of 1989 and 1994,
investors experienced considerable opportunities. We believe that similar
opportunities are present now.
As of December 1, 1999, an A-rated municipal revenue bond offered a 6%
yield, which if you are in the top 39.6% tax bracket, is like getting an
11% taxable yield. Such levels of income aren't even available on
lower-rated, higher-yielding (junk) bonds at present. With inflation still
remarkably low at 3% or less, this means that after-tax, after-inflation
returns are the highest they've been in years.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
VMIG1 -- 0.9%
B and below -- 9.7%
BB/Ba -- 16.2%
BBB/Baa -- 15.9%
A -- 2.1%
AAA/Aaa -- 52.9%
AA/Aa -- 2.3%
Footnote reads:
*As a percentage of market value as of 11/30/99. A bond rated BBB/Baa or
higher is considered investment grade. All ratings reflect Moody's and
Standard & Poor's descriptions unless noted otherwise. Percentages may
include unrated bonds considered by Putnam Management to be of comparable
quality. Ratings will vary over time.
While municipal bonds have historically yielded about 85% of comparable
U.S. Treasury bonds, that ratio has now reached nearly 100%. And the
interest income is tax exempt. That's the good news. The painful news is
that as interest rates rise, bonds prices fall, and the total return of
municipal bond funds, including your fund, will inevitably reflect this
relationship.
* HEALTH-CARE SECTOR UNDERPERFORMS SLIGHTLY
For experienced investors, today's well-valued health-care issues offer
considerable opportunity. As credit spreads between health-care bonds and
other municipal bonds have widened, this sector's performance has lagged
and bond values have become very attractive. While the supply of
health-care issues has remained moderate over the period, demand has been
slack. Investor concerns centered around potential adverse effects of the
Y2K issue on health-care institutions as well as a lingering pall cast
over the sector following 1998's Philadelphia Graduate Hospital default.
In addition, reduced increases in Medicare spending due to the Balanced
Budget Act of 1997 have forced many hospitals to cut expenses, although
some institutions have not been able to respond quickly enough to avoid
short-term operating losses. As a result, credit ratings downgrades have
exceeded upgrades over the past six months, and the health-care sector has
underperformed.
[GRAPHIC OMITTED: horizontal bar chart TOP STATE ALLOCATIONS]
TOP STATE ALLOCATIONS*
California 15.2%
Massachusetts 13.5%
Michigan 9.8%
Texas 9.6%
New Jersey 5.8%
Footnote reads:
*These holdings represent 53.9% of the fund's net assets as of 11/30/99.
* DEFENSIVE PORTFOLIO PROTECTS PERFORMANCE
In seeking to generate high current income with below-market risk, the
fund's portfolio tends to be fairly defensive. Over the past six months,
it has retained a barbell shape with holdings concentrated at both ends of
the investment-grade spectrum. The bulk of the fund's assets is invested
in premium coupon bonds -- those selling at prices above par value and
whose coupons are higher than current market rates. Currently nearly 53%
of portfolio holdings are securities of the highest credit quality
(AAA/Aa), while 15.9% of the holdings are invested in these premium
coupon, BBB/Baa-rated bonds. In addition to their obvious income-producing
benefits, these high-coupon bonds actually provide the fund with a hedge
against market downturn. In declining markets such as the recent one, when
yields are rising and bond prices are declining, their price declines
less, helping to cushion the fund's share price.
Another defensive aspect of your fund's management in recent months has
been its neutral to slightly short portfolio duration. With interest rates
rising over the period, this positioning kept the fund flexible for the
higher income opportunities that continued to become available rather than
tying up assets in bonds with lower yields. This strategy helped the fund
produce maximum income while preserving as much value as possible.
* BOTTOM-UP ANALYSIS GUIDES SECURITY SELECTION
Your fund relies on careful market analysis, in-depth industry knowledge,
and diligent credit research to uncover appropriate holdings for the
portfolio -- those offering the right combination of risk and reward.
These techniques are especially helpful to fund performance in
environments like that of the past six months, when broad market forces
seem allied against the health-care sector. During the recent period,
Putnam's team of credit analysts discovered several undervalued bonds with
hidden credit potential among life-care and assisted living facilities. In
addition, as an investor selloff of weak, generic investment-grade
hospital bonds led many of these bonds to lose value, the lower-grade
hospital bonds handpicked by your investment team performed well.
In April, the fund enjoyed an added bonus when its Rehabilitation Hospital
of Cape Cod bonds were prerefunded. Purchased with a BB rating, these
bonds were upgraded to a AAA rating in April of 1999. In a prerefunding, a
bond issuer floats a second bond in order to pay off the first bond at its
first call date. The proceeds from the sale of the second bond are
invested in AAA-rated Treasury securities. The first bond is then said to
be prerefunded and its credit rating usually rises significantly, which is
what happened here.
* PROSPECTS BRIGHTEN
Although the Fed raised interest rates for a third time this year in
November, the increase was anticipated and the market reacted favorably.
Undoubtedly there will be some stumbling blocks ahead and we could see
another interest-rate increase if the economy doesn't begin to slow down.
On the other hand, we are approaching a period of historically strong
demand in the municipal market, as a large number of bonds pay coupons on
January 1, 2000, motivating investors to seek reinvestment opportunities.
Your fund manager will remain focused on generating high income with
below-market risk, continuing to utilize Putnam's credit team to sift
through the health-care market for bonds with the right mix of return and
risk.
* UPCOMING TRANSITION ANNOUNCED
This is the last letter to you and the other shareholders of Putnam
Tax-Free Health Care Fund that I will be signing. After more than 30 years
as Chairman of the Trustees and President of the Putnam Funds, the time
has come for me to step aside. In June, John Hill will become Chairman.
John is currently an independent Trustee and has served on the board for
the past 14 years. In addition, my son, George Putnam, III, will take on
the role of President. I am confident that the leadership of the funds
will be in exceptionally strong hands.
I will become Chairman Emeritus, remain a shareholder, and stay in close
touch with the funds. It has been my privilege to serve you.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 19, 2000
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 11/30/99, there is no guarantee the fund will
continue to hold these securities in the future.
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 11/30/99
Lehman Bros.
Market Municipal Consumer
NAV price Bond Index price index
- ------------------------------------------------------------------------------
6 months -2.51% -16.55% -1.87% 1.32%
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1 year -1.62 -19.00 -1.08 2.68
- ------------------------------------------------------------------------------
5 years 43.48 27.27 43.85 12.49
Annual average 7.49 4.94 7.54 2.38
- ------------------------------------------------------------------------------
Life of fund (since 6/29/92) 65.80 31.83 56.70 20.11
Annual average 7.05 3.79 6.24 2.50
- ------------------------------------------------------------------------------
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 11/30/99
- -----------------------------------------------------------------------------
Distributions (common shares)
- -----------------------------------------------------------------------------
Number 6
- -----------------------------------------------------------------------------
Income $0.45
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Capital gains1 --
- -----------------------------------------------------------------------------
Total $0.45
- -----------------------------------------------------------------------------
Share value (common shares) NAV Market price
- -----------------------------------------------------------------------------
5/31/99 $14.50 $14.563
- -----------------------------------------------------------------------------
11/30/99 13.69 11.750
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Current return (common shares) (end of period)
- -----------------------------------------------------------------------------
Current dividend rate2 6.57% 7.66%
- -----------------------------------------------------------------------------
Taxable equivalent3 10.88 12.68
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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 and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 12/31/99 (most recent calendar quarter)
Market
NAV price
- --------------------------------------------------------------------------
6 months -2.74% -20.14%
- --------------------------------------------------------------------------
1 year -3.36 -23.35
- --------------------------------------------------------------------------
5 years 38.79 21.66
Annual average 6.78 4.00
- --------------------------------------------------------------------------
Life of fund (since 6/29/92) 63.99 25.72
Annual average 6.82 3.10
- --------------------------------------------------------------------------
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 and principal value 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 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.
A guide to the financial statements
These sections of the report constitute the fund's financial
statements.
The fund's portfolio lists all the fund's investments and their values as
of the last day of the reporting period. Holdings are organized by asset
type and industry sector, country, or state to show areas of concentration
and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are subtracted
from this total. The result is divided by the number of shares to
determine the net asset value per share, which is calculated separately
for each class of shares. (For funds with preferred shares, the amount
subtracted from total assets includes the net assets allocated to
remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for
the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that remain
in the portfolio -- any change in unrealized gains or losses over the
period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of
the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed here
may not match the sources listed in the Statement of operations because
the distributions are determined on a tax basis and may be paid in a
different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also
includes the current reporting period. For open-end funds, a separate
table is provided for each share class.
<TABLE>
<CAPTION>
The fund's portfolio
November 30, 1999 (Unaudited)
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
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 (97.9%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C>
Alaska (1.1%)
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$ 2,000,000 Valdez, Marine Term. Rev. Bonds (Sohio Pipeline),
7 1/8s, 12/1/25 Aa1 $ 2,135,000
Arizona (4.6%)
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6,380,000 Cochise Cnty., Indl. Dev. Rev. Bonds (Sierra Vista
Cmnty. Hosp.), Ser. B, 8 1/2s, 12/1/21 AAA 6,890,400
1,875,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.), Ser. A,
8 1/8s, 12/1/22 B/P 1,898,438
--------------
8,788,838
California (15.2%)
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Anaheim, Pub. Fin. Auth. Lease Rev. Bonds
12,485,000 (Pub. Impts.), Ser. C, FSA, zero %, 9/1/34 Aaa 1,513,805
17,000,000 (Cap. Appn. Sub. Pub. Impt.), Ser. C, FSA,
zero %, 9/1/30 Aaa 2,635,000
17,000,000 (Cap. Appn. Sub. Pub. Impt.), Ser. C, FSA,
zero %, 9/1/29 Aaa 2,805,000
1,000,000 CA Statewide Cmnty. Dev. Auth. COP
(The Internext Group), 5 3/8s, 4/1/30 BBB 835,000
4,000,000 Corona, COP (Hosp. Syst. Inc.), Ser. C, 8 3/8s,
7/1/11 (acquired 3/5/96, cost $4,000,000) (RES) B-/P 3,800,000
17,105,000 Riverside Cnty., Asset Leasing Corp. Leasehold
Rev. Bonds (Riverside Cnty. Hosp.), MBIA,
zero %, 6/1/25 Aaa 3,613,431
3,000,000 San Bernardino Cnty., IF COP (PA-100-Med.
Ctr. Fin.), MBIA, 6 1/2s, 8/1/28 (acquired 6/27/95,
cost $3,237,006) (RES) (SEG) AAA/p 3,686,250
4,750,000 San Francisco, City & Cnty. Arpts. Rev. Bonds,
FGIC, 7.386s, 5/1/25 (acquired 1/3/96,
cost $5,327,006) (RES) AAA 5,515,937
1,000,000 San Joaquin Hills, Trans. Corridor Agcy. Toll Road
Rev. Bonds, Ser. A, MBIA, zero %, 1/15/32 AAA 142,500
4,145,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BBB- 4,150,181
--------------
28,697,104
Colorado (2.2%)
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3,000,000 CO Hlth. Facs. Auth. Rev. Bonds (Hosp. Impt.-
NCMC, Inc.), 5 3/4s, 5/15/19 AAA 2,940,000
1,500,000 Denver, Hlth. & Hosp. Rev. Bonds, Ser. A,
5 3/8s, 12/1/28 Baa2 1,243,125
--------------
4,183,125
Connecticut (3.9%)
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CT State Dev. Auth. 1st Mtge. Rev. Bonds
(Inter-Church Residences Inc.)
3,500,000 9 5/8s, 4/1/21 Aaa 3,854,375
1,200,000 9 1/2s, 5/1/13 Aaa 1,320,000
2,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care Inc.), Ser. A, 8.7s, 7/1/22 AAA/P 2,257,500
--------------
7,431,875
Florida (2.9%)
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4,850,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C, MBIA,
7.605s, 10/29/21 Aaa 5,419,875
Georgia (1.6%)
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1,000,000 Forsyth Cnty., Hosp. Auth. Rev. Bonds
(Babtist Hlthcare Sys), 6 1/4s, 10/1/18 B/P 901,250
2,000,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds, Ser. Y,
AMBAC, 6.4s, 1/1/13 Aaa 2,187,500
--------------
3,088,750
Illinois (1.8%)
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IL Dev. Fion. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.)
2,105,000 8 3/4s, 7/1/11 B/P 2,268,138
1,080,000 8 3/4s, 7/1/11 Prerefunded AAA/P 1,154,250
--------------
3,422,388
Kentucky (1.1%)
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Jefferson Cnty., Hosp. IFB, MBIA
1,400,000 8.989s, 10/23/14 Aaa 1,484,000
600,000 6.436s, 10/23/14 Aaa 684,750
--------------
2,168,750
Maryland (1.5%)
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2,740,000 Berlin, Hosp. Rev. Bonds (Atlantic Gen. Hosp. Fac.),
8 3/8s, 6/1/22 BB-/P 2,832,475
Massachusetts (13.5%)
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1,500,000 MA State Dev. Fin. Agcy. Rev. Bonds
(Merrimack Place), 6 3/4s, 7/1/30 B/P 1,363,125
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 AAA 3,446,190
3,685,000 (Rehab. Hosp. Cape & Islands), Ser. A,
7 7/8s, 8/15/24 AAA/P 4,200,900
3,360,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba1 3,578,400
2,000,000 (Charlton Memorial Hosp.), Ser. B, 7 1/4s, 7/1/07 A1 2,127,500
2,650,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s, 11/15/18 AAA/P 2,911,687
3,500,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s,
11/15/22 Aaa 3,815,000
3,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds
(Residential Dev.), Ser. E, FNMA Coll.,
6 1/4s, 11/15/12 Aaa 3,142,500
900,000 MA State Indl. Fin. Agcy. Rev. Bonds (Odd Fellows
Home of MA), 9.6s, 1/1/15 AAA/P 921,780
--------------
25,507,082
Michigan (9.8%)
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4,500,000 Dickinson Cnty., Hosp. Rev. Bonds (Memorial
Hosp. Syst.), 8 1/8s, 11/1/24 Ba1 5,225,625
MI State Hosp. Fin. Auth. Rev. Bonds
4,130,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba3 4,496,538
1,750,000 (Sinai Hosp.), 6.7s, 1/1/26 A- 1,699,687
3,000,000 MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 3,130,020
1,500,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa3 1,357,500
3,100,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth.), 6s, 1/1/39 (acquired 12/31/98,
cost $3,100,000) (RES) B-/P 2,635,000
--------------
18,544,370
Minnesota (0.8%)
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1,300,000 Rochester Hlthcare Fac. Rev. Bonds (Olmsted
Med. Group), 7 1/2s, 7/1/19 BB+/P 1,467,375
Missouri (3.4%)
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4,600,000 Kansas City, Indl. Dev. Auth. Hlth. Fac. Rev. Bonds
(Park Lane Med. Ctr.), 8 3/4s, 1/1/15 BB+/P 4,696,968
1,700,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac. Rev. Bonds
(Jefferson Memorial Hosp.), 6.8s, 5/15/25 Baa2 1,727,625
--------------
6,424,593
New Hampshire (2.3%)
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1,500,000 NH Bus. Fin. Auth. Rev. Bonds (Alice Peck
Day Hlth. Syst.), Ser. A, 7s, 10/1/29 BB+/P 1,387,500
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
1,910,000 (Alice Peck Day Memorial Hosp.), 9 3/8s, 11/1/20 BB+/P 2,054,472
1,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 AAA 862,500
--------------
4,304,472
New Jersey (5.8%)
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1,000,000 NJ Econ. Dev. Auth. Assisted Living Rev. Bonds
(Meridian Assisted Living), 6 3/4s, 8/1/30 B\P 917,500
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
3,440,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 3,575,502
4,755,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 AAA 4,956,945
1,450,000 (Columbus Hosp.), Ser. A, 7 1/2s, 7/1/21 B2 1,453,625
--------------
10,903,572
New York (2.5%)
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1,700,000 NY State Hsg. Fin. Agcy. VRDN (Special Surgery
Hosp. Staff), Ser. A, 3.55s, 11/1/10 VMIG2 1,700,000
2,000,000 Suffolk Cnty., Indl. Dev. Agcy. Cont. Care Ret. Rev.
Bonds (Jefferson's Ferry), Ser. A, 7 1/4s, 11/1/28 BB-/P 1,992,500
1,000,000 Suffolk Cnty., Indl. Dev. Agcy. Fac. Rev. Bonds
(Southampton Hosp.), Ser. A, 7 1/4s, 1/1/20 B-/P 983,750
--------------
4,676,250
Oklahoma (0.4%)
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1,000,000 OK Dev. Fin. Auth. Rev. Bonds (Hillcrest Healthcare),
Ser. A, 5 5/8s, 8/15/29 Baa2 820,000
Pennsylvania (5.7%)
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2,210,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(UPMC Hlth.), Ser. B, MBIA, 6s, 7/1/24 Aaa 2,237,625
2,545,000 College Township, Indl. Dev. Auth. 1st Mtge. Hlth.
Fac. Rev. Bonds (Nittany Valley Rehab. Hosp.),
7 5/8s, 11/1/07 BBB-/P 2,665,888
1,285,000 PA State Higher Ed. Assistance Agcy. Student Loan,
Ser. A&B, 7 1/4s, 7/1/18 (acquired various dates
from 11/2/95 to 9/24/96, cost $1,285,000) (RES)
(In default)(NON) CCC 424,050
2,950,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp. IFB,
FGIC, 6.611s, 3/6/12 Aaa 2,887,313
1,000,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth. Hosp.
Rev. Bonds (Graduate Hlth. Syst.), Ser. B, 6 1/4s,
7/1/13 (acquired 8/28/96, cost $940,480) (RES)
(In default) (NON) B2 330,000
2,090,000 York Cnty., Indl. Dev. Auth. lst Mtge. Hlth. Fac. Rev.
Bonds (Rehabilitation Hosp. of York), 7 1/2s, 9/1/07 BBB-/P 2,181,438
--------------
10,726,314
South Carolina (1.7%)
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3,000,000 SC Jobs Econ. Dev. Auth. Rev. Bonds (St. Francis
Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 3,127,500
South Dakota (1.1%)
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2,500,000 SD State Hlth. & Ed. Fac. Auth. Rev Bonds
(Prairie Lakes), 5.65s, 4/1/22 BBB+ 2,146,875
Tennessee (1.0%)
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1,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 8.783.s, 1/1/22 Aaa 1,874,250
Texas (9.6%)
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3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains
Baptist Hosp.), FSA, 8.936s, 1/1/22 (SEG) Aaa 4,097,125
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 5,518,750
960,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 B/P 1,087,200
2,500,000 Georgetown, Hlth. Facs. Dev. Corp. Rev. Bonds,
6 1/4s, 8/15/29 BB+ 2,221,875
3,700,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds (Mem. Hlth.
Syst. of East TX), 5.7s, 2/15/28 BBB 3,195,875
North Central Hlth. Fac. Dev. Corp. Rev.
Bonds (Hosp.)
1,810,000 Ser. B, 7.861s, 5/15/08 Aa2 1,900,500
190,000 Ser. B, 7.861s, 5/15/08, Prerefunded AA 201,638
--------------
18,222,963
Utah (0.6%)
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1,000,000 Salt Lake City, Hosp. IFB (IHC Hosps. Inc.),
9.92s, 5/15/20 Aaa 1,067,500
Vermont (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
1,870,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds
(Northwestern Med. Ctr.), 6 1/4s, 9/1/18 BBB 1,774,163
Virginia (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB (Fairfax
Hosp. Syst.), Ser. C, 9.327s, 8/29/23 Aaa 1,120,000
Washington (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,125,000 Grant Cnty., Pub. Hosp. Dist. No. 1 Rev. Bonds
(Samaritan Hosp.), 9 1/4s, 9/1/10 BBB/P 2,226,935
West Virginia (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
1,900,000 Randolph Cnty. Rev. Bonds (Davis Memorial Hosp.),
Ser. A, 7.65s, 11/1/21 Baa1 $ 2,025,875
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $185,942,593) (b) $ 185,128,269
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $189,082,507.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
November 30, 1999 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, 1999. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $188,917,298, resulting in gross unrealized appreciation and
depreciation of $6,040,986 and $9,830,015, respectively, or net unrealized depreciation of $3,789,029.
(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, 1999 was $16,391,237 or 8.7% of net assets.
(SEG) A portion of these securities was pledged and segregated with the custodian to cover margin requirements for futures
contracts at November 30, 1999.
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, 1999.
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1999 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
Muni Bond Future $10,010,000 $10,341,443 Dec 99 $(331,443)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $185,942,593) (Note 1) $185,128,269
- -----------------------------------------------------------------------------------------------
Cash 4,237,574
- -----------------------------------------------------------------------------------------------
Interest receivable 3,085,261
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 20,000
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 34,125
- -----------------------------------------------------------------------------------------------
Total assets 192,505,229
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,035,418
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 2,012,486
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 332,685
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 12,787
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,098
- -----------------------------------------------------------------------------------------------
Other accrued expenses 28,248
- -----------------------------------------------------------------------------------------------
Total liabilities 3,422,722
- -----------------------------------------------------------------------------------------------
Net assets $189,082,507
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $191,839,876
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 617,079
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,228,681)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (1,145,767)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $189,082,507
Computation of net asset value
- -----------------------------------------------------------------------------------------------
Net asset value per share ($189,082,507 divided by 13,807,168 shares) $13.69
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended November 30, 1999 (Unaudited)
<S> <C>
Tax exempt interest income: $ 6,703,332
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 686,835
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 99,421
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 6,230
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,256
- -----------------------------------------------------------------------------------------------
Reports to shareholders 11,385
- -----------------------------------------------------------------------------------------------
Auditing 22,084
- -----------------------------------------------------------------------------------------------
Legal 1,989
- -----------------------------------------------------------------------------------------------
Exchange listing fees 12,152
- -----------------------------------------------------------------------------------------------
Postage 16,277
- -----------------------------------------------------------------------------------------------
Other 7,554
- -----------------------------------------------------------------------------------------------
Total expenses 867,183
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (39,283)
- -----------------------------------------------------------------------------------------------
Net expenses 827,900
- -----------------------------------------------------------------------------------------------
Net investment income 5,875,432
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (293,945)
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (521,539)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the period (9,913,463)
- -----------------------------------------------------------------------------------------------
Net loss on investments (10,728,947)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (4,853,515)
- -----------------------------------------------------------------------------------------------
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
1999* 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 5,875,432 $ 12,263,079
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments (815,484) (728,076)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (9,913,463) (5,661,073)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (4,853,515) 5,873,930
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income (6,212,340) (12,425,247)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- (630,988)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (11,065,855) (7,182,305)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 200,148,362 207,330,667
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $617,079 and $953,987 respectively) $189,082,507 $200,148,362
- ---------------------------------------------------------------------------------------------------------------
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 Nov. 30
operating performance (Unaudited) Year ended May 31
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.50 $15.02 $14.56 $14.11 $14.13 $14.29
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .89 .91 .93 .94 .96
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.79) (.46) .50 .42 (.03) .03
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.36) .43 1.41 1.35 .91 .99
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.90) (.91) (.90) (.93) (1.01)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.05) (.04) -- -- (.14)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.95) (.95) (.90) (.93) (1.15)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.69 $14.50 $15.02 $14.56 $14.11 $14.13
- ---------------------------------------------------------------------------------------------------------------------------------
Market value,
end of period $11.750 $14.563 $14.500 $14.125 $13.500 $13.375
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
market value (%)(a) (16.55)* 6.89 9.47 11.68 8.74 1.20
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $189,083 $200,148 $207,331 $200,987 $194,755 $195,079
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .45* .90 .89 .90 .92 .90
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.03* 5.98 6.11 6.45 6.62 6.85
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.91* 8.53 16.25 7.92 44.68 39.44
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total 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, 1999 (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
of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
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. Restricted
securities are stated at fair value following procedures approved by the
Trustees. Such valuations and procedures are 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). Gains or losses on securities sold are determined on
the identified cost basis.
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. At May 31,
1999, the fund had a capital loss carryover of approximately $277,000
available to offset future capital gains, if any, which will expire on May
31, 2007.
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 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 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, 1999, fund expenses were reduced by
$39,283 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 $594 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. 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
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 a 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, 1999, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $22,643,969 and $24,346,800, respectively. There
were no purchases and sales of U.S. government obligations.
Results of October 7, 1999 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on October 7, 1999.
At the meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 12,302,656 144,509
Hans H. Estin 12,286,113 161,053
John A. Hill 12,300,946 146,220
Ronald J. Jackson 12,301,048 146,117
Paul L. Joskow 12,304,401 142,765
Elizabeth T. Kennan 12,289,774 157,391
Lawrence J. Lasser 12,301,692 145,473
John H. Mullin III 12,304,401 142,765
Robert E. Patterson 12,296,783 150,382
William F. Pounds 12,280,020 167,146
George Putnam 12,291,427 155,738
George Putnam, III 12,293,253 153,912
A.J.C. Smith 12,287,495 159,670
W. Thomas Stephens 12,298,288 148,877
W. Nicholas Thorndike 12,290,153 157,012
A proposal to ratify the selection of PricewaterhouseCoopers LLP as the
independent auditors of your fund was approved as follows: 12,343,037
votes for, and 29,919 votes against, with 74,202 abstentions and broker
non-votes.
All tabulations are rounded to nearest whole number.
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Now you can use your PC to get up-to-date information about your funds, learn
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VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
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Fund information
WEB SITE
www.putnaminv.com
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 Chairman
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
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
Richard A. Monaghan
Vice President
John R. Verani
Vice President
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
BULK RATE
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PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
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