Putnam
Tax-Free
Health Care
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-00
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years in which
Putnam has experienced tremendous growth and transformed itself from a
respected U.S. investment management firm to a financial institution
with a global presence.
As the organization makes its way into the new century, we are certain
that the changes that lie ahead will be even more breathtaking in their
scope. What will not change is the Trustees' dedication to serving the
best interests of our shareholders.
We embark upon this new era of Putnam's rich heritage with confidence
and we look forward to the opportunity of continuing to help you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
July 19, 2000
REPORT FROM THE FUND MANAGER
Blake E. Anderson
Since we reported to you last November, at the mid point of Putnam
Tax-Free Health Care Fund's fiscal 2000, the municipal bond market has
exhibited little change. The fund's results for the full year ended May
31, 2000, shown below, were only marginally improved over the midyear
numbers. However, as we begin a new fiscal year, it is encouraging to
note that signs of improvement in the municipal bond market are
beginning to appear.
Total return for 12 months ended 5/31/00
Net asset value Market price
------------------------------------------------
-2.21% -13.19%
------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 5.
* WIDE YIELD SPREAD MAKES LOWER-RATED BONDS ATTRACTIVE
While the Federal Reserve Board's continuing assault on inflation may
not seem at first glance to be good news, we believe the board's
proactive approach will prove favorable for bond investors over the long
haul. Even though the Fed's policy and rising interest rates have been
the main reasons for the choppy municipal bond market this year, a
closer look reveals that municipal bond yields are actually not much
higher and bond prices have not gone much lower than they were last
fall. The greatest movement has come in rates on short-term Treasury
securities and home mortgages.
Rates on 30-year mortgages and on corporate bonds are now close to 9%,
and in the stock market, the Nasdaq has been volatile. These three
indicators historically have suggested a weakening economy, a slowdown
in consumer spending, and ultimately lower interest rates. It is
difficult to know exactly when the economy will slow and interest rates
start to decline, but we believe these signs may be among the
harbingers.
[GRAPHIC OMITTED: horizontal bar chart TOP STATE ALLOCATIONS]
TOP STATE ALLOCATIONS *
California 14.9%
Massachusetts 13.2%
Texas 9.5%
Michigan 7.4%
New Jersey 7.2%
Footnote reads:
*Based on net assets as of 5/31/00. Holdings will vary over time.
Because of the recession-like credit spreads available now, the key
strategy of our municipal bond group during the past six months has been
to increase holdings of bonds rated BBB/Baa and below. Normally these
bonds yield about half a percentage point more than a bond rated
AAA/Aaa; they are currently showing a three-quarter point difference. In
our view, this is a remarkable and attractive yield difference that
adequately compensates investors for the moderately higher risk inherent
in the lower-rated bonds.
* HOSPITALS STILL FEELING MEDICARE PINCH
The past year, difficult enough for municipal bond investors in general,
was even more challenging for investors in the tax-exempt hospital bonds
that make up most of your fund's portfolio. Not only were these
securities buffeted by the rise in interest rates that affected the
entire bond market but they also continued to feel the effects of a
revenue pinch relating to lower Medicare/Medicaid reimbursements.
Hospitals are still working their way out of the cash flow squeeze
precipitated by the changes in Medicare/Medicaid reimbursements mandated
by the federal Balanced Budget Act of 1997. In many cases, these
reimbursements are not covering actual costs for patient care and some
institutions have not been able to implement cost cuts elsewhere to make
up the shortfall. Furthermore, managed-care providers have been
increasingly reluctant to subsidize the difference. Teaching hospitals
have been hit especially hard in this environment.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa/AAA - 43.0%
Aa/AA - 6.3%
A - 1.2%
Baa/BBB - 22.0%
Ba/BB - 16.2%
B - 11.1%
Other -- 0.2%
Footnote reads:
*As a percentage of market value as of 5/31/00. A bond rated Baa/BBB or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality.
Ratings will vary over time.
While this has been a difficult time for owning hospital bonds, it has
also been a good time for buying them. Credit spreads have been
unusually wide and hospital credits have been among the cheapest
available. For bondholders in a market such as we have seen over the
past year, this has meant sailing into a headwind, making little
progress on price appreciation. For buyers, it has meant the chance to
pick up potentially attractive securities at reasonable prices and we
have done that in several instances.
* CAREFUL SELECTION IS STILL MAIN FOCUS
Our strategy has been to identify the strongest markets and then focus
on the individual hospitals within those markets. Among the criteria we
consider are an area's demographics, the quality of a hospital's
management, and the scope of a hospital's services. We pay particular
attention to hospitals that offer essential services.
We may also invest in a hospital to achieve a strategic objective or to
take advantage of a potentially favorable opportunity. Southampton
Hospital in New York's affluent Suffolk County is an excellent example.
The facility, situated on some of the most valuable real estate on Long
Island, was poorly run and headed for financial crisis until a new
take-charge board of directors brought in dynamic management that is
turning it around. We acquired some of the facility's bonds for your
fund early in fiscal 2000 and remain optimistic about the prospects for
this acquisition. While this holding was viewed favorably at the end of
the period, like all others in the portfolio, it is subject to review
and adjustment in accordance with the fund's investment strategy and
holdings may vary in the future.
* OUTLOOK: MUNI'S WILL BENEFIT AS FED POLICIES TAKE HOLD
The economy is beginning to respond to the Fed's tightening process that
began more than a year ago. Retail sales, housing starts, consumer
credit, employment, and employment costs all have begun to reflect a
slowdown in economic growth. In our opinion, the Fed is near a turning
point, and as more slowing in business occurs during the remainder of
the year, the board should assume a neutral stance.
Morningstar, Inc., an independent rating agency, gave Putnam Tax-Free
Health Care Fund its highest rating of 5 stars for overall performance
based on the 3- and 5-year periods ended June 30, 2000. Of the 187
closed-end municipal bond funds rated, the top 10% received 5 stars.*
Footnote reads:
*Past performance is not indicative of future results. Morningstar ratings
reflect risk-adjusted performance through 6/30/00 and are subject to
change every month. Morningstar ratings are calculated from a fund's
3-year return (with fee adjustment) in excess of 90-day Treasury bill
returns and a risk factor that reflects performance below 90-day Treasury
bill returns. For 3- and 5-year performance, the fund received 4 stars and
5 stars, respectively, with 187 funds rated in each case. The top 10% of
the funds in an investment category receive 5 stars.
As the Fed's response to the economic slowing plays out over the next
several months, we believe the municipal bond market environment will
improve and the spreads between credit sectors tighten to more realistic
levels.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 5/31/00, 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 5/31/00
Lehman Bros.
Market Municipal Consumer
NAV price Bond Index price index
-----------------------------------------------------------------------------
1 year -2.21% -13.19% -0.86% 3.07%
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5 years 30.24 22.67 28.55 12.55
Annual average 5.43 4.17 5.15 2.39
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Life of fund since (6/29/92) 66.09 37.12 58.31 22.18
Annual average 6.62 4.07 5.97 2.56
-----------------------------------------------------------------------------
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 redeemed may be worth more or less than their
original cost.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/00
--------------------------------------------------------------------
Distributions (number) 12
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Income $0.9055
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Capital gains1 --
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Total $0.9055
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Share value: NAV Market price
--------------------------------------------------------------------
5/31/99 $14.50 $14.563
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5/31/00 13.18 11.750
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Current return (end of period)
--------------------------------------------------------------------
Current dividend rate2 6.83% 7.66%
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Taxable equivalent3 11.31 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 POP at end of period.
3 Assumes maximum 39.6% federal tax rate. Results for investors subject
to lower tax rates would not be as advantageous.
TOTAL RETURN FOR PERIODS ENDED 6/30/00 (most recent calendar quarter)
Market
NAV price
---------------------------------------------------------------------
1 year -0.04% -10.48%
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5 years 32.49 24.14
Annual average 5.79 4.42
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Life of fund (since 6/29/92) 68.29 40.91
Annual average 6.72 4.38
---------------------------------------------------------------------
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 shares, not including
any initial or contingent deferred sales charge.
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, preceded by the Report of independent
accountants, 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.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended May 31, 2000
To the Trustees and Shareholders of
Putnam Tax-Free Health Care Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio (except for bond ratings) and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial
position of Putnam Tax-Free Health Care Fund (the "fund") at May 31,
2000, and the results of its operations, the changes in its net assets
and the financial highlights for the periods indicated, in conformity
with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at May 31,
2000 by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 7, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
May 31, 2000
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 (98.2%) (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 Aa $ 2,100,000
Arizona (4.7%)
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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 6,746,850
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 1,821,094
----------------
8,567,944
California (14.9%)
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Anaheim, Pub. Fin. Auth. Lease Rev. Bonds
(Cap. Appn. Sub. Impt.), Ser. C, FSA
12,485,000 zero %, 9/1/34 Aaa 1,451,381
17,000,000 zero %, 9/1/30 Aaa 2,571,250
17,000,000 zero %, 9/1/29 Aaa 2,741,250
1,000,000 CA Statewide Cmnty. Dev. Auth. COP
(The Internext Group), 5 3/8s, 4/1/30 BBB 796,250
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- 3,360,000
17,105,000 Riverside Cnty., Asset Leasing Corp. Leasehold
Rev. Bonds (Riverside Cnty. Hosp.), zero %,
MBIA, 6/1/25 Aaa 3,527,906
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 $3,237,720) (RES) (SEG) AAA/P 3,521,250
4,750,000 San Francisco, City & Cnty. Arpts. Rev. Bonds,
FGIC, 7.386s, 5/1/25 (acquired 1/3/96,
cost $5,354,105) (RES) Aa3 5,308,125
1,000,000 San Joaquin Hills, Trans. Corridor Agcy. Toll
Road Rev. Bonds, Ser. A, zero %, MBIA, 1/15/32 AAA 137,500
4,075,000 Valley Hlth. Syst. COP, 6 7/8s, 5/15/23 BB+ 3,799,938
----------------
27,214,850
Colorado (2.2%)
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3,000,000 CO Hlth. Facs. Auth. Rev. Bonds
(Hosp. Impt.-NCMC, Inc.),
5 3/4s, FSA 5/15/19 AAA 2,902,500
1,500,000 Denver, Hlth. & Hosp. Rev. Bonds, Ser. A,
5 3/8s, 12/1/28 Baa2 1,153,125
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4,055,625
Connecticut (4.0%)
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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 3,749,830
1,200,000 9 1/2s, 5/1/13 Aaa 1,284,348
2,000,000 CT State Hlth. & Edl. Fac. Auth. Rev. Bonds
(Norwalk Health Care Inc.), Ser. A, 8.7s, 7/1/22 AAA/P 2,197,500
----------------
7,231,678
Florida (4.0%)
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4,850,000 Orange Cnty., Hlth. Fac. Auth. IFB, Ser. 91-C,
MBIA, 7.605s, 10/29/21 Aaa 5,238,000
2,000,000 St. Johns Cnty., Hlth. Care Indl. Dev. Auth. Rev.
Bonds (Glenmoor St. Johns Project), Ser. A,
8s, 1/1/30 B+/P 1,955,000
----------------
7,193,000
Georgia (1.7%)
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1,000,000 Forsyth Cnty., Hosp. Auth. Rev. Bonds
(Babtist Hlthcare Sys.), 6 1/4s, 10/1/18 B/P 843,750
2,000,000 GA Muni. Elec. Pwr. Auth. Rev. Bonds, Ser. Y,
AMBAC, 6.4s, 1/1/13 Aaa 2,162,500
----------------
3,006,250
Illinois (1.8%)
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IL Dev. Fin. Auth. Rev. Bonds (Cmnty. Rehab.
Providers Fac.)
2,105,000 8 3/4s, 7/1/11 B/P 2,220,754
1,080,000 8 3/4s, 7/1/11 Prerefunded AAA/P 1,133,006
----------------
3,353,760
Kentucky (1.2%)
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Jefferson Cnty., Hosp. IFB, MBIA
1,400,000 9.242s, 10/23/14 Aaa 1,480,500
600,000 6.436s, 10/23/14 Aaa 656,250
----------------
2,136,750
Louisiana (0.8%)
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1,500,000 LA Local Govt. Env. Facs. Cmnty. Dev. Auth. Rev.
Bonds (St. James Place), Ser. A, 8s, 11/1/19 B-/P 1,492,500
Maryland (1.5%)
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2,695,000 Berlin, Hosp. Rev. Bonds (Atlantic Gen. Hosp. Fac.),
8 3/8s, 6/1/22 BB-/P 2,708,475
Massachusetts (13.2%)
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1,500,000 MA State Dev. Fin. Agcy. Rev. Bonds
(Merrimack Place), 6 3/4s, 7/1/30 B/P 1,290,000
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
3,300,000 (Waltham-Weston Hosp. & Med. Ctr.),
Ser. B, 8 3/8s, 7/1/15 Baa3 3,374,217
3,685,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s,
8/15/24 AAA/P 4,104,169
3,360,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba1 3,513,082
2,000,000 (Charlton Memorial Hosp.), Ser. B, 7 1/4s, 7/1/07 A1 2,089,600
2,650,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s, 11/15/18 AAA/P 2,842,125
3,500,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s,
11/15/22 Aaa 3,714,375
3,000,000 MA Hsg. Fin. Agcy. Rev. Bonds (Residential Dev.),
Ser. E, FNMA Coll., 6 1/4s, 11/15/12 Aaa 3,082,500
----------------
24,010,068
Michigan (7.4%)
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4,500,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 Ba1 5,068,125
MI State Hosp. Fin. Auth. Rev. Bonds
4,130,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba3 4,377,800
500,000 (Sinai Hosp.), 6.7s, 1/1/26 Baa2 438,750
1,500,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa3 1,224,375
3,100,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth.), 6s, 1/1/39
(acquired 12/31/98, cost $3,225,625) (RES) B-/P 2,321,125
----------------
13,430,175
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 1,434,875
Missouri (0.9%)
-------------------------------------------------------------------------------------------------------------------
1,700,000 MO State Hlth. & Edl. Fac. Auth. Hlth. Fac. Rev.
Bonds (Jefferson Memorial Hosp.),
6.8s, 5/15/25 Baa2 1,617,125
New Hampshire (2.2%)
-------------------------------------------------------------------------------------------------------------------
1,500,000 NH Bus. Fin. Auth. Rev. Bonds (Alice Peck Day
Hlth. Syst.), Ser. A, 7s, 10/1/29 BB+/P 1,278,750
NH Higher Ed. & Hlth. Fac. Auth. Rev. Bonds
1,910,000 (Alice Peck Day Memorial Hosp.),
9 3/8s, 11/1/20 BB+/P 2,000,649
1,000,000 (Rivermead at Peterborough), 5 3/4s, 7/1/28 BB/P 792,500
----------------
4,071,899
New Jersey (7.2%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 NJ Econ. Dev. Auth. Assisted Living Rev. Bonds
(Meridian Assisted Living), 6 3/4s, 8/1/30 B/P 857,500
NJ Hlth. Care Fac. Fin. Auth. Rev. Bonds
3,440,000 (St. Elizabeth Hosp.), Ser. B, 8 1/4s, 7/1/20 Aaa 3,506,048
4,755,000 (Kimball Med. Ctr.), Ser. C, 8s, 7/1/13 Baa3 4,860,704
2,500,000 (Trinitas Hosp. Oblig. Group), 7 1/2s, 7/1/30 BBB- 2,471,875
1,450,000 (Columbus Hosp.), Ser. A, 7 1/2s, 7/1/21 B2 1,330,375
----------------
13,026,502
New York (2.5%)
-------------------------------------------------------------------------------------------------------------------
1,700,000 NY City, Hlth. & Hosp. Corp. VRDN, Ser. A,
3.9s, 2/15/26 Aa3 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 1,930,000
1,000,000 Suffolk Cnty., Indl. Dev. Agcy. Fac. Rev. Bonds
(Southampton Hosp.), Ser. A, 7 1/4s, 1/1/20 B-/P 918,750
----------------
4,548,750
Ohio (0.5%)
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1,000,000 Montgomery Cnty., Hosp. Rev. Bonds
(Kettering Med. Ctr.), 6 3/4s, 4/1/22 Baa1 926,250
Oklahoma (0.4%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 OK Dev. Fin. Auth. Rev. Bonds (Hillcrest Healthcare),
Ser. A, 5 5/8s, 8/15/29 Baa2 763,750
Pennsylvania (5.7%)
-------------------------------------------------------------------------------------------------------------------
2,210,000 Allegheny Cnty., Hosp. Dev. Auth. Rev. Bonds
(UPMC Hlth.), Ser. B, MBIA, 6s, 7/1/24 Aaa 2,174,088
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- 2,614,988
1,285,000 PA State Higher Ed. Assistance Agcy. Student
Loan, Ser. A&B, 7 1/4s, 7/1/18 (In default) (NON) Ca 424,050
2,950,000 Philadelphia, Hosp. & Higher Ed. Fac. Auth.
Hosp. IFB, FGIC, 7.767s, 3/6/12 Aaa 2,761,938
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) (In default) (NON) (RES) 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- 2,131,800
----------------
10,436,864
South Carolina (2.2%)
-------------------------------------------------------------------------------------------------------------------
3,000,000 SC Jobs Econ. Dev. Auth. Rev. Bonds
(St. Francis Hosp.-Franciscan Sisters), 7s, 7/1/15 Baa1 3,198,750
800,000 SC Jobs Econ. Dev. Auth. Hosp. Fac. Rev. Bonds
(Palmetto Hlth. Alliance), Ser. A, 7 3/8s, 12/15/21 Baa1 799,000
----------------
3,997,750
South Dakota (1.1%)
-------------------------------------------------------------------------------------------------------------------
2,500,000 SD Hlth. & Ed. Fac. Auth. Rev Bonds
(Prairie Lakes), 5.65s, 4/1/22 Baa2 1,931,250
Tennessee (2.3%)
-------------------------------------------------------------------------------------------------------------------
2,500,000 Johnson City, Hlth. & Edl. Facs. Rev. Bonds
(Mtn. States Hlth.), Ser. A, 7 1/2s, 7/1/33 Baa2 2,409,375
1,700,000 Metropolitan Govt. Nashville & Davidson Cnty.,
Tenn. Wtr. & Swr. IFB, AMBAC, 9.23s, 1/1/22 Aaa 1,812,625
----------------
4,222,000
Texas (9.5%)
-------------------------------------------------------------------------------------------------------------------
3,650,000 Amarillo, Hlth. Fac. Hosp. Corp. IFB (High Plains
Baptist Hosp.), FSA, 9.443s, 1/1/22 (SEG) Aaa 3,969,375
5,000,000 Bexar Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(St. Luke's Lutheran Hosp.), 7.9s, 5/1/11 AAA/P 5,325,000
930,000 Cherokee Cnty., Hlth. Fac. Dev. Corp. Rev. Bonds
(Nancy Travis Memorial Hosp.), 10s, 5/15/13 B/P 1,025,325
2,500,000 Georgetown, Hlth. Facs. Dev. Corp. Rev. Bonds,
6 1/4s, 8/15/29 BB+ 2,015,625
3,700,000 Lufkin, Hlth. Fac. Dev. Corp. Rev. Bonds
(Mem. Hlth. Syst. of East TX), 5.7s, 2/15/28 BBB- 2,821,250
North Central Hlth. Fac. Dev. Corp. Rev.
Bonds (Hosp.)
1,810,000 Ser. B, 7.861s, 5/15/08 Aa2 1,868,825
190,000 Ser. B, 7.861s, 5/15/08 Prerefunded AA 198,313
----------------
17,223,713
Utah (0.6%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Salt Lake City, Hosp. IFB (IHC Hosps. Inc.), 9.363s,
AMBAC, 5/15/20 Aaa 1,051,250
Vermont (0.9%)
-------------------------------------------------------------------------------------------------------------------
1,870,000 VT Edl. & Hlth. Bldg. Fin. Agcy. Rev. Bonds
(Northwestern Med. Ctr.), 6 1/4s, 9/1/18 BBB 1,647,938
Virginia (0.6%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Fairfax Cnty., Indl. Dev. Auth. IFB (Fairfax Hosp.
Syst.), Ser. C, 9.577s, 8/29/23 Aaa 1,082,500
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 2,178,529
West Virginia (1.1%)
-------------------------------------------------------------------------------------------------------------------
1,900,000 Randolph Cnty. Rev. Bonds (Davis Memorial Hosp.),
Ser. A, 7.65s, 11/1/21 Baa1 1,992,621
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $185,954,615) (b) $ 178,654,641
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $181,990,577.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at May 31, 2000 for the securities
listed. Ratings are generally ascribed to securities at the time of
issuance. While the agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at May 31, 2000. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the Report
of independent accountants.
(b) The aggregate identified cost on a tax basis is $185,954,615,
resulting in gross unrealized appreciation and depreciation of
$3,628,364 and $10,928,338, respectively, or net unrealized depreciation
of $7,299,974.
(NON) Non-income-producing security.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at May 31, 2000 was
$14,840,500 or 8.2% of net assets.
(SEG) A portion of these securities were pledged and segregated with the
custodian to cover margin requirements for futures contracts at May 31,
2000.
The rates shown on IFB and IF COP, which are securities paying
interest rates that vary inversely to changes in the market interest
rates, and VRDN's are the current interest rates at May 31, 2000.
----------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
----------------------------------------------------------------------------
Municipal
Bond Index
(Long) $ 280,969 $ 277,235 Jun-00 $ 3,734
Municipal
Bond Index
(Long) 9,672,000 9,438,023 Sep-00 233,977
----------------------------------------------------------------------------
$237,711
----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $185,954,615) (Note 1) $178,654,641
-------------------------------------------------------------------------------------------
Cash 1,499,519
-------------------------------------------------------------------------------------------
Interest receivable 3,118,478
-------------------------------------------------------------------------------------------
Receivable for securities sold 45,000
-------------------------------------------------------------------------------------------
Receivable for variation margin 90,187
-------------------------------------------------------------------------------------------
Total assets 183,407,825
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 1,035,413
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 324,781
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 11,014
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 14,119
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 995
-------------------------------------------------------------------------------------------
Other accrued expenses 30,926
-------------------------------------------------------------------------------------------
Total liabilities 1,417,248
-------------------------------------------------------------------------------------------
Net assets $181,990,577
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Note 1) $191,849,398
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 151,469
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,948,027)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (7,062,263)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $181,990,577
Computation of net asset value
-------------------------------------------------------------------------------------------
Net asset value per share ($181,990,577 divided by 13,807,168 shares) $13.18
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended May 31, 2000
<S> <C>
Tax exempt interest income: $ 13,276,348
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,326,559
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 192,896
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 13,225
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,144
-------------------------------------------------------------------------------------------
Reports to shareholders 21,159
-------------------------------------------------------------------------------------------
Registration fees 75
-------------------------------------------------------------------------------------------
Auditing 38,046
-------------------------------------------------------------------------------------------
Legal 3,349
-------------------------------------------------------------------------------------------
Postage 20,649
-------------------------------------------------------------------------------------------
Exchange listing fee 24,260
-------------------------------------------------------------------------------------------
Other 14,166
-------------------------------------------------------------------------------------------
Total expenses 1,660,528
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (97,211)
-------------------------------------------------------------------------------------------
Net expenses 1,563,317
-------------------------------------------------------------------------------------------
Net investment income 11,713,031
-------------------------------------------------------------------------------------------
Net realized loss on investments (Note 1) (573,153)
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (967,014)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (15,829,959)
-------------------------------------------------------------------------------------------
Net loss on investments (17,370,126)
-------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (5,657,095)
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended May 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 11,713,031 $ 12,263,079
--------------------------------------------------------------------------------------------------
Net realized loss on investments (1,540,167) (728,076)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (15,829,959) (5,661,073)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (5,657,095) 5,873,930
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income (12,500,690) (12,425,247)
--------------------------------------------------------------------------------------------------
From net realized gain on investments -- (630,988)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (18,157,785) (7,182,305)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 200,148,362 207,330,667
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $151,469 and $953,987, respectively) $181,990,577 $200,148,362
--------------------------------------------------------------------------------------------------
Number of fund shares
--------------------------------------------------------------------------------------------------
Shares outstanding at beginning and end of year 13,807,168 13,807,168
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $14.50 $15.02 $14.56 $14.11 $14.13
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income .85 .89 .91 .93 .94
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (1.26) (.46) .50 .42 (.03)
------------------------------------------------------------------------------------------------
Total from
investment operations (.41) .43 1.41 1.35 .91
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.91) (.90) (.91) (.90) (.93)
------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.05) (.04) -- --
------------------------------------------------------------------------------------------------
Total distributions (.91) (.95) (.95) (.90) (.93)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $13.18 $14.50 $15.02 $14.56 $14.11
------------------------------------------------------------------------------------------------
Market value,
end of period $11.750 $14.563 $14.500 $14.125 $13.500
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
market value (%)(a) (13.19) 6.89 9.47 11.68 8.74
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $181,991 $200,148 $207,331 $200,987 $194,755
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .88 .90 .89 .90 .92
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 6.19 5.98 6.11 6.45 6.62
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.37 8.53 16.25 7.92 44.68
------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
</TABLE>
NOTES TO FINANCIAL STATEMENTS
May 31, 2000
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, 2000, the fund had a capital loss carryover of approximately
$2,265,000 available to offset future capital gains, if any. The amount
of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$277,000 May 31, 2007
1,988,000 May 31, 2008
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. These differences include temporary and permanent
differences of post-October loss deferrals, defaulted bond interest,
dividends payable and unrealized gains and losses on certain futures
contracts. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations. For the year
ended May 31, 2000, the fund reclassified $14,859 to decrease
undistributed net investment income and $9,522 to increase
paid-in-capital, with a decrease to accumulated net realized loss of
$5,337. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
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 year ended May 31, 2000, fund expenses were reduced by $97,211
under expense offset arrangements with PFTC and brokerage service
arrangements. 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 $606
has been allocated to the fund, and an additional fee for each Trustees
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 year ended May 31, 2000, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $23,887,076 and $22,961,980, respectively. There were no
purchases and sales of U.S. government obligations.
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 2001 will show the tax status of all
distributions paid to your account in calendar 2000.
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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
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One Post Office Square
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CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, 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, III
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
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time, or
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The Putnam Funds
One Post Office Square
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---------------------
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---------------------
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