Putnam
Tax Smart
Equity Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
10-31-00
[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 during
which the global securities markets, the mutual fund industry, and
Putnam itself have experienced tremendous growth and change.
As we look to the future, we are certain that the changes will be
breathtaking in their scope. What will not change is the Trustees'
dedication to serving the best interests of our shareholders.
We welcome the challenges that lie ahead and are confident that Putnam
and your Board will continue to face those challenges successfully as
they have for more than 60 years. We look forward to helping 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
December 20, 2000
REPORT FROM FUND MANAGEMENT
Robert S. Beck
Paul E. Marrkand
Matthew C. Halperin
Michael K. Arends
Over the 12 months ended October 31, 2000, changing conditions in the
stock markets created both favorable and unfavorable conditions for both
growth and value stocks. As a result, most stock funds dedicated to one
of these stock types outperformed at times, but delivered disappointing
returns for the year. While Putnam Tax Smart Equity Fund did not escape
the impact of recent market volatility, its style-neutral approach
produced returns that more than doubled those of its Lipper category
average and were more than five times the results of the Standard &
Poor's 500 [REGISTRATION MARK] Index. See pages 6 and 7 for more details.
Total return for 12 months ended 10/31/00
Class A Class B Class C Class M
NAV POP NAV CDSC NAV CDSC NAV POP
-----------------------------------------------------------------------
32.06% 24.46% 31.03% 26.03% 31.03% 30.03% 31.53% 27.00%
-----------------------------------------------------------------------
Past performance is not indicative of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* ACTIVE MANAGEMENT APPROACH DIFFERS FROM OTHER TAX-MANAGED FUNDS
One of the common yardsticks used to assess a fund's tax efficiency is
portfolio turnover, which signifies the amount of trading activity. A
low portfolio turnover is often said to be a sign that a fund will have
lower capital gain distributions because it is not realizing gains. Over
the past four years, in a rising-market environment, low-turnover funds
have been able to deliver attractive returns. But in a more volatile
market, we believe a far more active approach is needed.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Software 10.2%
Regional Bells 8.2%
Electric utilities 7.8%
Pharmaceuticals 6.9%
Insurance 6.7%
Footnote reads:
*Based on net assets as of 10/31/00. Holdings will vary over time.
Our bottom-up, company-by-company approach to stock selection starts
with a focus list of high-quality, mid- to large-capitalization stocks
compiled through quantitative screening, recommendations from our Global
Equity Research group, and the collective knowledge of the management
team. Daily buy and sell decisions are made by continually comparing the
market price of each company with our valuation based on our present
value model. (Present value is an industry term used to indicate the sum
of the company's future discounted cash flows available to equity
owners.) When new information is discovered and input into our model,
the valuation changes. If we have purchased a stock at a higher price
because of previous assumptions in our model, and the new assumptions
lower its value, we admit our mistake and sell the security because it
is no longer undervalued. This process not only keeps us disciplined but
generates losses that can be used to offset the gains that occur when
our decisions prove more profitable. This can help us keep the
portfolio tax efficient.
There is a lot more to our decision process than price comparisons,
however. Behind each stock in the portfolio is a detailed fundamental
analysis combined with a tremendous amount of hands-on research. We meet
directly with company management, competitors, suppliers and customers
to arrive at our determination of a company's present value,
participating in approximately 2,000 such meetings in any given year.
These meetings are an invaluable opportunity for the team to communicate
directly with the people who create the company's long-term value.
* TECHNOLOGY STOCKS MAKE STRONG CONTRIBUTION TO PERFORMANCE
While your fund does not make sector bets, its performance may reflect
the strength -- or weakness -- of a particular sector as an indirect
result of our stock selection. For the most part, the fund benefited
from the technology companies we chose, despite the extraordinary
volatility that has dominated this sector for much of the year. Our
screening process eschews small-capitalization companies and focuses the
team's attention on mid-cap and large companies. A few examples follow.
Juniper Networks, which provides new IP (Internet protocol)
infrastructure solutions for the world's leading service providers, is
one example of the type of technology stock we have targeted. Although
it has since been sold from the portfolio, the stock was one of the
fund's top performers for the year.
Lipper Analytical Services ranked Putnam Tax Smart Equity Fund's class A
shares in the top 11% of all multi-cap core funds tracked for 1-year
performance, as of 10/31/00. The fund was ranked 40 out of 379 funds.
Average return for this fund classification over this period was 14.61%;
the fund's class A share total return for the period was 32.06%.
Lipper is an industry research firm whose rankings are based on total
return performance, vary over time, and do not reflect the effects of
sales charges. The fund began operations 7/1/99; shares were not tracked
for longer periods and performance of other share classes will vary.
Past performance is not indicative of future results.
Another successful stock pick was Extreme Networks, which produces
gigabyte Ethernet switching solutions. Its products, designed to enable
service providers with a simpler, lower-maintenance method for managing
and prioritizing the ever-increasing levels of Internet traffic, are
based on Layer 3 switches, also known as hardware-based wire-speed
routers. These routers offer faster speeds than traditional
software-based routers and are simpler and less expensive. The fund's
position in Extreme Networks was sold prior to the close of the fiscal
year.
Honeywell International is a manufacturing company involved with
aerospace, automotive, chemical, plastic, and electronic products. After
disappointing earnings were preannounced in June, the company was
selling below its present value and we established a position. In
mid-October, General Electric announced its acquisition of the company
at a price approximately the same as our present value -- further
demonstrating the effectiveness of our methodology. Although this stock,
as well as others mentioned in this report, was viewed favorably at the
end of the period, all portfolio holdings are subject to review and
adjustment in accordance with the fund's investment strategy and may
vary in the future.
* STOCK SELECTION PROCESS ALSO EFFECTIVE OUTSIDE TECHNOLOGY
Quaker Oats, purchased in February, is another stock we bought when it
was selling for less than what we considered its present value. While
its primary business, cereal and breakfast foods, was not making much
progress, its Gatorade sports beverage is immensely popular and is sold
in more than 45 countries outside of North America. It was the Gatorade
business that prompted Pepsi-Cola to try to acquire Quaker, but talks
ended without a merger shortly before the end of the fiscal year. The
stock price rose over the past six months; we sold part of the position
when it approached target price levels and as of the end of the fiscal
year, the remaining position had appreciated well above that due to
acquisition speculation. We took profits on it as we began fiscal 2001.
Another key contributor to your fund's performance was FPL Group, Inc.,
a Florida public utility holding company that supplies power to
approximately 3.8 million people and invests in independent power
projects. We purchased it in June, considering it undervalued. This
fall, the company completely renovated its Web site, allowing
commercial, industrial, and residential customers to manage their
accounts online and offering analyst presentations, annual reports and
other material of interest to investors. This focus on an improved
cyber-relationship with customers and investors has improved investor
perceptions of the company and helped boost its stock price.
* REALIZING LOSSES HELPS PREVENT CAPITAL GAIN DISTRIBUTIONS
While your management team is proud of its successful picks this year,
there were several cases where we realized we had made the wrong call
and opted to realize the loss. Such situations can actually be positive
for your fund's strategy, because they create losses that can be used to
offset gains, reducing the likelihood that the fund will be required to
distribute capital gains to shareholders.
One such case was Eli Lilly & Co., a pharmaceutical company best known
for its Prozac antidepressant. Our assessment of the company's value
reflected expectations that its new drug, Zovant, for the treatment of
sepsis or blood poisoning, would be a blockbuster product. However,
Lilly had been engaged in efforts to develop a reformulated version of
its highly successful Prozac, which is scheduled to go off-patent next
year. These efforts were recently abandoned, reducing future cash flow
expectations for the company, and consequently reducing its present
value. As a result, we eliminated the position.
Another disappointment was Sprint PCS Group, the only 100% digital
nationwide wireless communications provider. While we believe Sprint PCS
continues to offer growth potential, its cash flow will be much lower
than we had expected. Realizing the loss was a decision that made more
sense for the fund and was based on a lower present value.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
General Electric Co.
Conglomerate
Microsoft Corp.
Software
SBC Communications, Inc.
Regional Bells
Verizon Communications
Regional Bells
Cisco Systems, Inc.
Communications equipment
American General Corp.
Insurance
ExxonMobil Corp.
Oil and gas
Citigroup, Inc.
Financial
Comerica, Inc.
Banking
Entergy Corp.
Electric utilities
Footnote reads:
These holdings represent 27.5% of the fund's net assets as of 10/31/00.
Portfolio holdings will vary over time.
As we begin fiscal 2001, we are confident that our active management
approach remains the best strategy to deliver capital appreciation while
reducing the impact of capital gains distributions and the resulting
taxes on your investment. While we expect market volatility to continue
over the near term, the current environment has provided us with many
opportunities to purchase shares of solid companies at attractive
prices, which should serve the fund well in the year ahead.
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 10/31/00, there is no guarantee the fund
will continue to hold these securities in the future. This fund invests
a portion of its assets in midsize companies. Such investments increase
the risk of greater price fluctuations. This fund has different
risk/reward characteristics from other growth funds because of its
tax-managed investment style. It is not a suitable investment for IRAs
and other non-taxpaying accounts.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Tax Smart Equity Fund, designed for investors seeking long-term growth
of capital on an after-tax basis, invests primarily in common stocks of
U.S. companies.
TOTAL RETURN FOR PERIODS ENDED 10/31/00
Class A Class B Class C Class M
(inception dates) (7/1/99) (10/1/99) (10/1/99) (3/28/00)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 32.06% 24.46% 31.03% 26.03% 31.03% 30.03% 31.53% 27.00%
------------------------------------------------------------------------------
Life of fund 31.76 24.19 30.43 26.42 30.43 30.43 31.08 26.44
Annual average 22.86 17.55 21.92 19.12 21.92 21.92 22.38 19.13
------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 10/31/00
Standard & Poor's Consumer
500 Index price index
------------------------------------------------------------------------------
1 year 6.09% 3.45%
------------------------------------------------------------------------------
Life of fund 5.76 4.63
Annual average 4.27 3.44
------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 5.75% and
3.50%, respectively. Class B share returns for the 1-, 5- and 10-year,
if available, and life-of-fund periods reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first year, declines to
1% in the sixth year, and is eliminated thereafter. Returns shown for
class B and class M shares for periods prior to their inception are
derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares
the higher operating expenses applicable to such shares. For actual
class M share returns, see page 24. For class C shares, returns for
periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the CDSC
currently applicable to class C shares, which is 1% for the first year
and is eliminated thereafter, and the higher operating expenses
applicable to class C shares. All returns assume reinvestment of
distributions at NAV. Investment return and principal value will
fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost. Performance reflects an expense
limitation currently or previously in effect, without which total
returns would have been lower. For a portion of these periods, the fund
was offered on a limited basis and had limited assets.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 7/1/99
Fund's class A S&P 500 Consumer price
Date shares at POP Index index
7/1/99 9,425 10,000 10,000
9/30/99 8,940 9,376 10,096
12/31/99 11,092 10,771 10,156
3/31/00 12,355 11,018 10,307
6/30/00 11,916 10,725 10,373
9/30/00 12,195 10,621 10,445
10/31/00 $12,419 $10,576 $10,463
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B shares
would have been valued at $13,043 ($12,642 with the contingent deferred
sales charge); a $10,000 investment in the fund's class C shares would
have been valued at $13,043, and no contingent deferred sales charges
would apply; a $10,000 investment in the fund's class M shares would
have been valued at $13,108 ($12,644 at public offering price). See
first page of performance section for performance calculation methods.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 10/31/00
Class A Class B Class C Class M
------------------------------------------------------------------------------
Distributions* -- -- -- --
------------------------------------------------------------------------------
Share value: NAV POP NAV NAV NAV POP
------------------------------------------------------------------------------
10/31/99 $8.67 $9.20 $8.67 $8.67 $ -- $ --
------------------------------------------------------------------------------
3/28/00+ -- -- -- -- 12.08 12.52
------------------------------------------------------------------------------
10/31/00 11.45 12.15 11.36 11.36 11.43 11.84
------------------------------------------------------------------------------
*The fund did not make any distributions during the period.
+Inception of class M shares.
TOTAL RETURN FOR PERIODS ENDED 9/30/00 (most recent calendar quarter)
Class A Class B Class C Class M
(inception dates) (7/1/99) (10/1/99) (10/1/99) (3/28/00)
NAV POP NAV CDSC NAV CDSC NAV POP
------------------------------------------------------------------------------
1 year 36.41% 28.56% 35.45% 30.45% 35.45% 34.45% 35.84% 31.14%
------------------------------------------------------------------------------
Life of fund 31.07 23.54 29.85 25.85 29.85 29.85 30.39 25.77
Annual average 24.17 18.42 23.24 20.19 23.24 23.24 23.65 20.14
------------------------------------------------------------------------------
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. See first
page of performance section for performance calculation method.
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.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
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.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 5.75% maximum sales charge for class A
shares and 3.50% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C shares and assumes redemption at the
end of the period. Your fund's class B CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth year,
the CDSC no longer applies. The CDSC for class C shares is 1% for one
year after purchase.
COMPARATIVE BENCHMARKS
Standard & Poor's 500 Composite Stock Price Index is an index of common
stocks frequently used as a general measure of stock market performance.
The index assumes reinvestment of all distributions and interest
payments and does not take into account brokerage fees or taxes.
Securities in the fund do not match those in the index and performance
of the fund will differ. It is not possible to invest directly in an
index.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
WELCOME TO WWW.PUTNAMINVESTMENTS.COM
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term performance
* your current account value, portfolio value and transaction history
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much
more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course,
you can also access it via Netscape or Microsoft Internet Explorer,
using an independent Internet service provider.
New features will be added to the site regularly. So be sure to bookmark us at
http://www.putnaminvestments.com
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
To the Trustees of Putnam Tax Smart Funds Trust and
Shareholders of Putnam Tax Smart Equity Fund
(a series of Putnam Tax Smart Funds Trust)
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, 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
Smart Equity Fund (the "fund") at October 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 of America. 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 of America, 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 October 31,
2000 by correspondence with the custodian, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 4, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
October 31, 2000
COMMON STOCKS (95.5%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Aerospace/Defense (1.7%)
-------------------------------------------------------------------------------------------------------------------
41,900 General Dynamics Corp. $ 2,998,469
98,800 Lockheed Martin Corp. 3,541,980
41,200 United Technologies Corp. 2,876,275
-------------
9,416,724
Banking (5.6%)
-------------------------------------------------------------------------------------------------------------------
145,400 Bank of America Corp. 6,988,288
37,700 Bank of New York Company, Inc. (The) 2,170,106
185,400 Comerica, Inc. 11,181,938
52,900 Fifth Third Bancorp 2,717,738
71,400 Washington Mutual, Inc. 3,141,600
84,100 Zions Bancorp 4,830,494
-------------
31,030,164
Beverage (0.6%)
-------------------------------------------------------------------------------------------------------------------
63,800 PepsiCo, Inc. 3,090,313
Biotechnology (0.9%)
-------------------------------------------------------------------------------------------------------------------
32,600 Genentech, Inc. (NON) 2,689,500
12,700 IDEC Pharmaceuticals Corp. (NON) 2,490,788
-------------
5,180,288
Cable Television (0.9%)
-------------------------------------------------------------------------------------------------------------------
127,300 Comcast Corp. Class A (NON) 5,187,475
Chemicals (0.8%)
-------------------------------------------------------------------------------------------------------------------
97,200 du Pont (E.I.) de Nemours & Co., Ltd. 4,410,450
Communications Equipment (2.8%)
-------------------------------------------------------------------------------------------------------------------
4,500 Brocade Communications Systems (NON) 1,023,188
273,500 Cisco Systems, Inc. (NON) 14,734,813
-------------
15,758,001
Computers (5.0%)
-------------------------------------------------------------------------------------------------------------------
264,300 Cabletron Systems, Inc. (NON) 7,169,138
120,860 EMC Corp. (NON) 10,764,094
88,260 Sun Microsystems, Inc. (NON) 9,785,828
-------------
27,719,060
Conglomerates (6.2%)
-------------------------------------------------------------------------------------------------------------------
440,450 General Electric Co. 24,142,165
186,400 Honeywell International, Inc. 10,030,650
-------------
34,172,815
Consumer Finance (1.6%)
-------------------------------------------------------------------------------------------------------------------
119,500 Household International, Inc. 6,012,344
81,700 MBNA Corp. 3,068,856
-------------
9,081,200
Consumer Goods (1.0%)
-------------------------------------------------------------------------------------------------------------------
82,400 Kimberly-Clark Corp. 5,438,400
Electric Utilities (7.8%)
-------------------------------------------------------------------------------------------------------------------
241,400 CMS Energy Corp. 6,517,800
250,500 CP&L Energy, Inc. 10,098,281
68,800 Duke Energy Corp. 5,946,900
288,000 Entergy Corp. 11,034,000
142,900 FPL Group, Inc. 9,431,400
-------------
43,028,381
Electrical Equipment (0.5%)
-------------------------------------------------------------------------------------------------------------------
68,000 Rockwell International Corp. 2,673,250
Energy (1.3%)
-------------------------------------------------------------------------------------------------------------------
156,800 Baker Hughes, Inc. 5,390,000
22,900 Schlumberger, Ltd. 1,743,263
-------------
7,133,263
Entertainment (1.2%)
-------------------------------------------------------------------------------------------------------------------
121,328 Viacom, Inc. Class B (NON) 6,900,530
Financial (5.5%)
-------------------------------------------------------------------------------------------------------------------
58,100 Associates First Capital Corp. 2,156,963
216,733 Citigroup, Inc. 11,405,574
104,500 Fannie Mae 8,046,500
152,000 Freddie Mac 9,120,000
-------------
30,729,037
Food (3.6%)
-------------------------------------------------------------------------------------------------------------------
222,500 ConAgra, Inc. 4,755,938
184,200 Heinz (H.J.) Co. 7,724,888
26,400 Quaker Oats Co. (The) 2,153,250
258,600 Sara Lee Corp. 5,576,063
-------------
20,210,139
Health Care Services (4.3%)
-------------------------------------------------------------------------------------------------------------------
54,200 Cardinal Health, Inc. 5,135,450
36,800 CIGNA Corp. 4,487,760
165,100 HCA - The Healthcare Corp. 6,593,681
199,300 Tenet Healthcare Corp. 7,834,981
-------------
24,051,872
Insurance (6.7%)
-------------------------------------------------------------------------------------------------------------------
96,800 Ace Ltd. 3,799,400
41,700 AFLAC, Inc. 3,046,706
154,500 Allmerica Financial Corp. 9,743,156
157,400 American General Corp. 12,670,700
46,200 American International Group, Inc. 4,527,600
39,800 Chubb Corp. (The) 3,360,613
-------------
37,148,175
Investment Banking/Brokerage (0.5%)
-------------------------------------------------------------------------------------------------------------------
39,200 Merrill Lynch & Co., Inc. 2,744,000
Medical Technology (2.7%)
-------------------------------------------------------------------------------------------------------------------
79,500 Millipore Corp. 4,173,750
36,400 PE Corp.-PE Biosystems Group 4,258,800
117,200 St. Jude Medical, Inc. (NON) 6,446,000
-------------
14,878,550
Natural Gas Utilities (0.4%)
-------------------------------------------------------------------------------------------------------------------
28,400 Coastal Corp. 2,142,425
Oil & Gas (4.8%)
-------------------------------------------------------------------------------------------------------------------
55,800 BP Amoco PLC ADR (United Kingdom) 2,842,313
140,700 ExxonMobil Corp. 12,548,681
111,690 Royal Dutch Petroleum Co. NV ADR (Netherlands) 6,631,594
61,600 Total Fina Elf S.A. ADR (France) 4,412,100
-------------
26,434,688
Paper & Forest Products (1.4%)
-------------------------------------------------------------------------------------------------------------------
115,600 International Paper Co. 4,233,850
251,500 Smurfit-Stone Container Corp. (NON) 3,395,250
-------------
7,629,100
Pharmaceuticals (6.9%)
-------------------------------------------------------------------------------------------------------------------
105,700 Abbott Laboratories 5,582,281
127,700 American Home Products Corp. 8,108,950
21,200 Johnson & Johnson 1,953,050
91,000 Merck & Co., Inc. 8,184,313
189,547 Pfizer, Inc. 8,186,061
48,243 Pharmacia Corp. 2,653,365
67,600 Schering-Plough Corp. 3,494,075
-------------
38,162,095
Regional Bells (8.2%)
-------------------------------------------------------------------------------------------------------------------
207,300 BellSouth Corp. 10,015,181
317,300 SBC Communications, Inc. 18,304,244
297,800 Verizon Communications 17,216,563
-------------
45,535,988
Retail (0.5%)
-------------------------------------------------------------------------------------------------------------------
50,600 Safeway, Inc. (NON) 2,767,188
Software (10.2%)
-------------------------------------------------------------------------------------------------------------------
63,600 Amdocs Ltd. (NON) 4,122,075
33,000 BEA Systems, Inc. (NON) 2,367,750
149,500 BMC Software, Inc. (NON) 3,036,719
60,000 Cognos, Inc. (Canada) (NON) 2,490,000
229,600 Computer Associates International, Inc. 7,318,500
279,600 Microsoft Corp. (NON) 19,257,450
57,400 Oracle Corp. (NON) 1,894,200
84,800 Rational Software Corp. (NON) 5,061,500
46,000 Siebel Systems, Inc. (NON) 4,827,125
43,250 VERITAS Software Corp. (NON) 6,098,926
-------------
56,474,245
Technology Services (1.4%)
-------------------------------------------------------------------------------------------------------------------
121,160 Convergys Corp. (NON) 5,278,033
47,800 Electronic Data Systems Corp. 2,243,613
-------------
7,521,646
Telecommunications (0.5%)
-------------------------------------------------------------------------------------------------------------------
84,100 XO Communications, Inc. (NON) 2,837,052
-------------
Total Common Stocks (cost $465,630,958) $ 529,486,514
<CAPTION>
SHORT-TERM INVESTMENTS (7.3%) (a)
PRINCIPAL AMOUNT VALUE
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------
$ 20,522,000 Interest in $949,877,000 joint repurchase agreement dated
October 31, 2000 with Merrill Lynch, Pierce, Fenner &
Smith, Inc. due November 1, 2000 with respect to various
U.S. Government obligations -- maturity value of
$20,525,762 for an effective yield of 6.60% $ 20,522,000
20,000,000 Interest in $680,000,000 joint repurchase agreement dated
October 31, 2000 with Morgan (J.P.) & Co., Inc. due
November 1, 2000 with respect to various U.S. Government
obligations -- maturity value of $20,003,667 for an
effective yield of 6.60% 20,000,000
-------------
Total Short-Term Investments (cost $40,522,000) $ 40,522,000
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $506,152,958) (b) $ 570,008,514
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $554,442,708.
(b) The aggregate identified cost on a tax basis is $508,745,063,
resulting in gross unrealized appreciation and depreciation of
$68,066,463 and $6,803,012, respectively, or net unrealized appreciation
of $61,263,451.
(NON) Non-income-producing security.
ADR after the name of a foreign holding stands for American
Depositary Receipts representing ownership of foreign securities on
deposit with a domestic custodian bank.
------------------------------------------------------------------------------
Swap Contracts outstanding at October 31, 2000
Unrealized
Notional Termination Appreciation/
Amount Date (Depreciation)
------------------------------------------------------------------------------
Agreement with Lehman Brothers Finance
S.A. dated September 19, 2000 to receive
(pay) the notional amount multiplied by
the return of Foundry Networks, Inc.,
adjusted by a specified spread, and pay
the notional amount multiplied by one
month LIBOR adjusted by a specified
spread. $ 4,739,720 Oct-01 $ 465,178
Agreement with Lehman Brothers Finance
S.A. dated October 17, 2000 to receive
(pay) the notional amount multiplied by
the return of Foundry Networks, Inc.,
adjusted by a specified spread, and pay
the notional amount multiplied by one
month LIBOR adjusted by a
specified spread. 1,353,285 Nov-01 (114,070)
Agreement with Lehman Brothers Finance
S.A. dated December 21, 1999 to receive
(pay) the notional amount multiplied by
the return of Tyco International, LTD,
and pay the notional amount multiplied
by one month LIBOR adjusted by a specified
spread. 5,146,961 Jan-01 4,560,155
------------------------------------------------------------------------------
$11,239,966 $4,911,263
------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $506,152,958) (Note 1) $570,008,514
-------------------------------------------------------------------------------------------
Cash 225
-------------------------------------------------------------------------------------------
Dividends and interest receivable 531,978
-------------------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 5,025,333
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 7,395,947
-------------------------------------------------------------------------------------------
Receivable for securities sold 18,484,849
-------------------------------------------------------------------------------------------
Total assets 601,446,846
Liabilities
-------------------------------------------------------------------------------------------
Payable for securities purchased 45,307,789
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 141,412
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 861,120
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 114,493
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 1,484
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,025
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 294,228
-------------------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 114,070
-------------------------------------------------------------------------------------------
Other accrued expenses 167,517
-------------------------------------------------------------------------------------------
Total liabilities 47,004,138
-------------------------------------------------------------------------------------------
Net assets $554,442,708
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $491,816,796
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (6,140,907)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 68,766,819
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $554,442,708
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($237,615,359 divided by 20,749,204 shares) $11.45
-------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $11.45)* $12.15
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($233,959,932 divided by 20,595,864 shares) ** $11.36
-------------------------------------------------------------------------------------------
Net asset value and offering price per class C share
($79,681,650 divided by 7,012,760 shares) ** $11.36
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($3,185,767 divided by 278,789 shares) $11.43
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $11.43)* $11.84
-------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Year ended October 31, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $25,756) $ 2,310,126
-------------------------------------------------------------------------------------------
Interest 1,096,707
-------------------------------------------------------------------------------------------
Total investment income 3,406,833
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,286,509
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 444,790
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,904
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,573
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 346,043
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,443,453
-------------------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 432,115
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 5,550
-------------------------------------------------------------------------------------------
Amortization of offering expenses (Note 1) 10,245
-------------------------------------------------------------------------------------------
Other 275,067
-------------------------------------------------------------------------------------------
Total expenses 5,261,249
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (69,731)
-------------------------------------------------------------------------------------------
Net expenses 5,191,518
-------------------------------------------------------------------------------------------
Net investment loss (1,784,685)
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (4,698,403)
-------------------------------------------------------------------------------------------
Net realized loss on swap contracts (Note 1) (1,020,714)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
swap contracts during the year 66,201,015
-------------------------------------------------------------------------------------------
Net gain on investments 60,481,898
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $58,697,213
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
For the period
Year ended July 1, 1999
October 31 to October 31
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment loss $ (1,784,685) $ (23,666)
--------------------------------------------------------------------------------------------------
Net realized loss on investments (5,719,117) (346,284)
--------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 66,201,015 2,419,708
--------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 58,697,213 2,049,758
--------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 445,472,016 45,156,270
--------------------------------------------------------------------------------------------------
Total increase in net assets 504,169,229 47,206,028
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year (Note 5) 50,273,479 3,067,451
--------------------------------------------------------------------------------------------------
End of year (Including undistributed net investment
income of $-- and $--, respectively) $ 554,442,708 $ 50,273,479
--------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS A
--------------------------------------------------------------
For the period
Per-share Year ended July 1, 1999+
operating performance October 31 to October 31
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.67 $8.69
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment loss (a) (.01) (.01)(d)
--------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.79 (.01)
--------------------------------------------------------------
Total from
investment operations 2.78 (.02)
--------------------------------------------------------------
Net asset value,
end of period $11.45 $8.67
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(b) 32.06 (.23)*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $237,615 $23,857
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.16 .44*(d)
--------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.09) (.16)*(d)
--------------------------------------------------------------
Portfolio turnover (%) 224.05 30.65*
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment loss has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage
services arrangements (Note 2).
(d) Reflects an expense limitation. As a result of such limitation,
expenses for the fund reflect a reduction of $0.05, $0.02 and $0.02 per
class A, B, and C share, respectively.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS B
--------------------------------------------------------------
Year For the period
Per-share ended October 1, 1999+
operating performance October 31 to October 31
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.67 $8.35
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment loss (a) (.10) (.01)(d)
--------------------------------------------------------------
Net realized and unrealized
gain on investments 2.79 .33
--------------------------------------------------------------
Total from
investment operations 2.69 .32
--------------------------------------------------------------
Net asset value,
end of period $11.36 $8.67
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(b) 31.03 3.83*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $233,960 $22,535
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.91 .19*(d)
--------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.85) (.12)*(d)
--------------------------------------------------------------
Portfolio turnover (%) 224.05 30.65*
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment loss has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage
services arrangements (Note 2).
(d) Reflects an expense limitation. As a result of such limitation,
expenses for the fund reflect a reduction of $0.05, $0.02 and $0.02 per
class A, B, and C share, respectively.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS C
--------------------------------------------------------------
Year For the period
Per-share ended October 1, 1999+
operating performance October 31 to October 31
--------------------------------------------------------------
2000 1999
--------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.67 $8.35
--------------------------------------------------------------
Investment operations
--------------------------------------------------------------
Net investment loss (a) (.09) (.01)(d)
--------------------------------------------------------------
Net realized and unrealized
gain on investments 2.78 .33
--------------------------------------------------------------
Total from
investment operations 2.69 .32
--------------------------------------------------------------
Net asset value,
end of period $11.36 $8.67
--------------------------------------------------------------
Ratios and supplemental data
--------------------------------------------------------------
Total return at
net asset value (%)(b) 31.03 3.83*
--------------------------------------------------------------
Net assets, end of period
(in thousands) $79,682 $3,882
--------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.91 .19*(d)
--------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.82) (.12)*(d)
--------------------------------------------------------------
Portfolio turnover (%) 224.05 30.65*
--------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment loss has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage
services arrangements (Note 2).
(d) Reflects an expense limitation. As a result of such limitation,
expenses for the fund reflect a reduction of $0.05, $0.02 and $0.02 per
class A, B, and C share, respectively.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
CLASS M
-------------------------------------------------
For the period
Per-share March 28, 2000+
operating performance to October 31
-------------------------------------------------
2000
-------------------------------------------------
<S> <C>
Net asset value,
beginning of period $12.08
-------------------------------------------------
Investment operations
-------------------------------------------------
Net investment loss (a) (.02)
-------------------------------------------------
Net realized and unrealized
loss on investments (.63)
-------------------------------------------------
Total from
investment operations (.65)
-------------------------------------------------
Net asset value,
end of period $11.43
-------------------------------------------------
Ratios and supplemental data
-------------------------------------------------
Total return at
net asset value (%)(b) (5.38)*
-------------------------------------------------
Net assets, end of period
(in thousands) $3,186
-------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .99*
-------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.15)*
-------------------------------------------------
Portfolio turnover (%) 224.05
-------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment loss has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage
services arrangements (Note 2).
(d) Reflects an expense limitation. As a result of such limitation,
expenses for the fund reflect a reduction of $0.05, $0.02 and $0.02 per
class A, B, and C share, respectively.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
Note 1
Significant accounting policies
Putnam Tax Smart Equity Fund (the "fund") is a series of Putnam Tax
Smart Funds Trust (the "trust") which is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The fund seeks long-term growth of capital on an
after-tax basis by investing mainly in common stocks of U.S. companies
that Putnam Investment Management, Inc., ("Putnam Management"), the
fund's manager, a wholly-owned subsidiary of Putnam Investments, Inc.,
believes have potential for long-term growth.
The statement of changes includes information for the period July 1,
1999 (the effective date of registration of the fund with the Securities
and Exchange Commission) through October 31, 1999. Financial information
for the period prior to July 1, 1999 is discussed in Note 5.
The fund offers class A, class B, class C and class M shares. The fund
began offering class M shares on March 28, 2000. Class A shares are sold
with a maximum front-end sales charge of 5.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class C shares
are subject to the same fees and expenses as class B shares, except that
class C shares have a one-year 1.00% contingent deferred sales charge and
do not convert to class A shares. Class M shares are sold with a maximum
front end sales charge of 3.50% and pay an ongoing distribution fee that
is higher than class A shares but lower than class B and class C shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
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 Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, or if no sales
are reported -- as in the case of some securities traded
over-the-counter -- the last reported bid price. Short-term investments
having remaining maturities of 60 days or less are stated at amortized
cost, which approximates market value. Other investments, including
restricted securities, are stated at fair value following procedures
approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Management. These balances may be invested in one or more
repurchase agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Collateral for certain tri-party repurchase agreements is held at the
counterparty's custodian in a segregated account for the benefit of the
fund and the counterparty. Putnam Management is responsible for
determining that the value of these underlying securities is, at all
times, at least equal to the resale price, including accrued interest.
D) 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. Dividend income is
recorded on the ex-dividend date except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received.
E) Equity swap contracts The fund may engage in swap agreements,
which are agreements to exchange the return generated by one instrument
for the return generated by another instrument. To manage its exposure
to equity markets the fund may enter into equity swap agreements, which
involve a commitment by one party to pay interest in exchange for a
market-linked return based on a notional amount. To the extent that the
total return of the security or index underlying the transaction exceeds
or falls short of the offsetting interest rate obligation, the fund will
receive a payment from or make a payment to the counterparty,
respectively. Equity swaps are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss. Payments received or made at the end of the
measurement period are recorded as realized gains or losses. The fund
could be exposed to credit or market risk due to unfavorable changes in
the fluctuation of interest rates or in the price of the underlying
security or index, the possibility that there is no liquid market for
these agreements or that the counterparty may default on its obligation
to perform.
F) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the year ended
October 31, 2000, the fund had no borrowings against the line of credit.
G) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986, as amended. Therefore, no
provision has been made for federal taxes on income, capital gains or
unrealized appreciation on securities held nor for excise tax on income
and capital gains.
At October 31, 2000, the fund had a capital loss carryover of
approximately $3,549,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- ------------------
$ 420,000 October 31, 2007
3,129,000 October 31, 2008
H) 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 losses on wash sale transactions, foreign currency gains
and losses, unrealized gains and losses on certain futures contracts,
net operating loss and swap income adjustment reclassifications.
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 October 31,
2000, the fund reclassified $1,784,685 to decrease accumulated net
investment loss and $1,784,199 to decrease paid-in-capital, with an
increase to accumulated net realized losses of $486. The calculation of
net investment loss per share in the financial highlights table excludes
these adjustments.
I) Expenses of the trust Expenses directly charged or attributable to
any fund will be paid from the assets of that fund. Generally, expenses
of the trust will be allocated among and charged to the assets of each
fund on a basis that the Trustees deem fair and equitable, which may be
based on the relative assets of each fund or the nature of the services
performed and relative applicability to each fund.
J) Unamortized organization expenses Expenses incurred by the fund in
connection with its organization, its registration with the Securities
and Exchange Commission and with various states and the initial public
offering of its shares were $29,801. The offering costs of $22,801 have
been fully amortized as of October 31, 2000. The organization costs of
$7,000 were expensed as incurred.
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 following annual rates: 0.70% of the
first $500 million of average net assets, 0.60% of the next $500
million, 0.55% of the next $500 million, 0.50% of the next $5 billion
0.475% of the next $5 billion, 0.455% of the next $5 billion, 0.44% of
the next $5 billion, and 0.43% thereafter.
Putnam Management has agreed to limit its compensation (and, to the
extent necessary, bear other expenses) through October 31, 2000, to the
extent that expenses of the fund (exclusive of brokerage commissions,
interest, taxes, deferred organizational and extraordinary expense,
credits from Putnam Fiduciary Trust Company (PFTC), a subsidiary of
Putnam Investments, Inc. and payments under the Trust's distribution
plan) would exceed an annual rate of 1.25% of the fund's average 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 PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended October 31, 2000, fund expenses were reduced by
$69,731 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 $622
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.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B, class C and class M shares pursuant to Rule 12b-1
under the Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, Inc., a wholly-owned subsidiary of
Putnam Investments, Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Retail Management, Inc. at an annual rate up to
0.35%, 1.00%, 1.00% and 1.00% of the average net assets attributable to
class A, class B, class C and class M shares, respectively. The Trustees
have approved payment by the fund at an annual rate of 0.25%, 1.00%,
1.00% and 0.75% of the average net assets attributable to class A, class
B, class C and class M shares, respectively.
For the year ended October 31, 2000, Putnam Retail Management, Inc.,
acting as underwriter received net commissions of $734,037 and $8,976
from the sale of class A and class M shares, respectively, and received
$150,275 and $14,391 in contingent deferred sales charges from
redemptions of class B and class C shares, respectively. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended October 31, 2000, Putnam Retail Management
Inc., acting as underwriter received $63 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended October 31, 2000, cost of purchases and proceeds
from sales of investment securities other than short-term investments
aggregated $1,109,980,132 and $686,334,900, respectively. There were no
purchases or sales of U.S. government obligations.
Note 4
Capital shares
At October 31, 2000, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Year ended October 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 20,340,969 $213,075,487
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
20,340,969 213,075,487
Shares
repurchased (2,343,464) (24,995,137)
---------------------------------------------------------------------------
Net increase 17,997,505 $188,080,350
---------------------------------------------------------------------------
For the period July 1, 1999
to October 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 2,456,870 $20,396,153
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
2,456,870 20,396,153
Shares
repurchased (58,112) (487,918)
---------------------------------------------------------------------------
Net increase 2,398,758 $19,908,235
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 19,431,715 $200,586,510
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
19,431,715 200,586,510
Shares
repurchased (1,434,654) (14,935,990)
---------------------------------------------------------------------------
Net increase 17,997,061 $185,650,520
---------------------------------------------------------------------------
For the period October 1, 1999
(commencement of operations)
to October 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 2,600,221 $21,537,910
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
2,600,221 21,537,910
Shares
repurchased (1,418) (11,319)
---------------------------------------------------------------------------
Net increase 2,598,803 $21,526,591
---------------------------------------------------------------------------
Year ended October 31, 2000
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 6,946,457 $72,704,308
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
6,946,457 72,704,308
Shares
repurchased (381,311) (4,033,204)
---------------------------------------------------------------------------
Net increase 6,565,146 $68,671,104
---------------------------------------------------------------------------
For the period October 1, 1999
(commencement of operations) to
October 31, 1999
---------------------------------------------------------------------------
Class C Shares Amount
---------------------------------------------------------------------------
Shares sold 447,614 $3,721,444
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
447,614 $3,721,444
Shares
repurchased -- --
---------------------------------------------------------------------------
Net increase 447,614 $3,721,444
---------------------------------------------------------------------------
For the period March 28, 2000
(commencement of operations) to
October 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 301,417 $3,322,973
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
---------------------------------------------------------------------------
301,417 $3,322,973
Shares
repurchased (22,628) (252,931)
---------------------------------------------------------------------------
Net increase 278,789 $3,070,042
---------------------------------------------------------------------------
Note 5
Initial capitalization and offering
of shares
The fund was established as a Massachusetts business trust on
April 6, 1999. During the period April 6, 1999 to April 14, 1999, the fund
had no operations other than those related to organizational matters,
including the initial capital contribution of $3,000,000 and the issuance
of 352,941 class A shares to Putnam Investments, Inc. on April 14, 1999.
From April 15, 1999 (commencement of operations) to June 30, 1999, the
fund began carrying out its investment objective with the initial
capital contribution. During this period, the fund had $1,590 of net
investment income, $80,235 of net realized losses, and $146,096 of net
unrealized appreciation on investments. The net assets at June 30, 1999
were $3,067,451.
Effective July 1, 1999, the fund was registered under the Securities Act
of 1933.
FEDERAL TAX INFORMATION
(Unaudited)
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
THE PUTNAM FAMILY OF FUNDS
The following is a complete list of Putnam's open-end mutual funds.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Capital Opportunities Fund
Europe Growth Fund
Global Equity Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Technology Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Fund
Balanced Retirement Fund
Classic Equity Fund *
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
International Growth and Income Fund
New Value Fund
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund **
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Growth and Income Fund II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at
www.putnaminvestments.com.
FUND INFORMATION
WEB SITE
www.putnaminvestments.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
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
John J. Morgan, Jr.
Vice President
Justin Scott
Vice President
Robert R. Beck
Vice President and Fund Manager
Paul E. Marrkand
Vice President and Fund Manager
Matthew C. Halperin
Vice President and Fund Manager
Michael K. Arends
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam Tax Smart
Equity Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site:
www.putnaminvestments.com
Not FDIC Insured, May Lose Value, No Bank Guarantee
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
PRST STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN070-66579 2MI 12/00
