Putnam
Minnesota
Tax Exempt
Income Fund II
[PICURE OF ????]
ANNUAL REPORT
May 31, 1995
[PUTNAM LOGO]
B O S T O N * L O N D O N * T O K Y O
<PAGE>
Performance highlights
> "Yields are high relative to Treasuries, so there's every reason to stick
with munis."
Business Week, June 19, 1995
> "Munis currently are one of the best deals going . . . . Muni funds still
offer tempting tax-free yields averaging 4.8%--the taxable equivalent of
6.7% for someone in the 28% tax bracket."
Morningstar analyst Patricia Brady, cited in Money's Guide, Summer 1995
FISCAL 1995 RESULTS AT A GLANCE
<TABLE>
<CAPTION>
Class A Class B
Total return: NAV POP NAV CDSC
<S> <C> <C> <C> <C> <C>
(change in value during
period plus reinvested
distributions)
12 months ended 5/31/95 7.90% 2.75% 7.17% 2.17%
Class A Class B Class M
Share value NAV POP NAV NAV POP
5/31/94 $8.79 $9.23 $8.77 -- --
4/3/95 -- -- -- $8.77 $9.06
5/31/95 8.95 9.40 8.92 8.95 9.25
Distributions No. Income Capital gains(2) Total
Class A 12 $0.500702 -- $ 0.500702
Class B 12 0.450094 -- 0.450094
Class M 2 0.072082 -- 0.072082
Class A Class B
Current return NAV POP NAV
End of period
Current dividend rate(3) 5.47% 5.20% 4.91%
Taxable equivalent(4) 9.90 9.41 8.88
Current 30-day SEC yield(5) 5.40 5.14 4.75
Taxable equivalent(4) 9.77 9.30 8.59
</TABLE>
Performance data represent past results and will differ for each share class.
For performance over longer periods, see pages 8 and 9. POP assumes 4.75%
maximum sales charge for class A shares and 3.25 % for class M shares.
Performance for class M shares, which became effective 4/3/95, is not shown
because of the brevity of the reporting period. CDSC assumes 5% maximum
contingent deferred sales charge. (2)Capital gains 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. (3)Income portion of most recent
distribution, annualized and divided by NAV or POP at end of period.
(4)Assumes maximum combined state and federal tax rates of 44.73%. Results
for investors subject to lower tax rates would not be as advantageous.
(5)Based only on investment income, calculated using SEC guidelines.
2
<PAGE>
From the Chairman
[picture of George Putnam]
(copyright)Karsh, Ottawa
Dear Shareholder:
Putnam Minnesota Tax Exempt Income Fund II's manager, Howard Manning,
couldn't be more pleased with the municipal bond market's impressive comeback
from the sustained decline of 1994. Mindful of the uncertainties still
hovering in the background, however, he has begun taking steps aimed at
preserving some of the fund's gains achieved during the final months of the
fiscal year ended May 31, 1995.
At the same time, Howard is optimistic about prospects for fiscal 1996. The
recovery in the tax-exempt bond market, while substantial, has lagged that of
other fixed-income markets, leading him to believe the rally may have some
staying power.
Municipal bond investors already have shaken off the jitters ignited by a
flat-tax proposal recently thrown into the legislative hopper. In its purest
form, a flat tax would eliminate the federal income tax advantage of
municipal bonds. We do not believe Congress would enact any such restrictive
provision.
Howard provides more discussion of these and other issues in the report that
follows.
Respectfully yours,
[signature of George Putnam]
George Putnam
Chairman of the Trustees
July 19, 1995
3
<PAGE>
Report from the Fund Manager
Howard Manning
The stormy mood of the bond markets over the past 12 months tested the nerves
of most municipal bond investors--and the mettle of their funds' managers.
As the Federal Reserve Board persevered in raising short-term interest rates
through the second half of 1994, bond prices continued their prolonged slide.
Not surprisingly, Putnam Minnesota Tax Exempt Income Fund II's performance at
the end of calendar 1994 mirrored the negative direction of the overall
market. However, since then, the fund--and the market--have strengthened
considerably.
> RENEWED BOND MARKET STRENGTH REFLECTED IN FUND PERFORMANCE
In just the first three months of 1995, municipal bonds became the
best-performing fixed-income category. The average municipal bond fund
returned close to 7% over this period as the market responded positively to
lower interest rates and diminished concerns about inflation.
As the economy continued to exhibit signs of slowing down in the second
quarter, investor optimism drove Treasury and corporate bond prices higher.
Municipal bonds, however, lagged as investors were attracted by the stock
market's strength and lured away from tax-exempt bonds by the prospect of a
flat tax.
Your fund's 12-month performance reflects these ups and downs. For the fiscal
year ended May 31, 1995, your fund's total returns were 7.90% for class A
shares and 7.17% for class B shares, both at net asset value.
The fund also continued to generate an attractive level of income free from
federal and Minnesota income taxes throughout the period. Its 5.47% current
dividend rate for class A shares at the end of the period was equivalent to a
taxable yield of 9.90% for investors in the maximum combined federal and
state tax bracket of 44.73%. Those in lower brackets would also have been
able to benefit, though not to the same extent.
4
<PAGE>
> CAPTURING OPPORTUNITIES WHILE MINDING CALL PROTECTION
Your fund, like the vast majority of municipal bond funds, began the year
defensively positioned relative to interest rates. This means the portfolio's
duration was especially short. Duration is a mathematical formula that
indicates how much bond prices will move up or down with each
percentage-point shift in interest rates. Like maturity, with which it is
often confused, duration is measured in years. The shorter the duration, the
less volatility you can expect from the portfolio.
While this defensive strategy had helped protect net asset value initially,
it also left the portfolio less responsive to the unfolding rally. We have
since taken aggressive steps to reposition holdings to reflect the current
market environment and outlook.
Our first step was to lengthen duration by buying bonds with relatively long
maturities and lower coupons (that is, discount bonds) and long-term
zero-coupon bonds. We believe these bonds offer the potential for the
greatest gains when interest rates decline. A longer portfolio duration
reflects a more positive outlook on the economy and on interest rates.
[Tabular representation of bar chart]
PORTFOLIO QUALITY OVERVIEW*
<TABLE>
<CAPTION>
<S> <C>
Percentage Rating
45.7% AAA/Aaa
16.8% AA
18.6% A
1.6% BBB
8.9% Baa
8.4% Below BB and unrated
</TABLE>
*Based on net assets at 5/31/95. Based on Standard & Poor's and Moody's
ratings terminology. Investment-grade securities are those rated BBB or above
by Standard & Poor's or Baa or above by Moody's Investor Service, Inc. (May
vary over time)
5
<PAGE>
As part of our overall call protection strategy, we have stepped up purchases
of discount, noncallable, and zero-coupon bonds. We believe your fund is now
well protected against early bond calls. In fact, the upcoming call
redemption period in June and July, while potentially damaging to individual
bondholders, may ultimately be beneficial to your fund. This is likely to
happen if Minnesota investors whose bonds were redeemed race into the
municipal market to reinvest their assets, thus driving up demand for the
remaining bonds.
> QUALITY IS ALWAYS A HIGH PRIORITY
Keeping in mind that your fund's objective is to seek current income
consistent with capital preservation, we carefully guard the quality of your
fund's holdings. Currently, approximately 82% of the portfolio is invested in
bonds rated A or higher, and 60% in bonds rated AA or higher. Although we
don't shy away from investing a portion of the portfolio in lower-rated bonds
to help provide an attractive yield when our research supports it, the price
differences between top- and lower-quality bonds are currently too small to
justify taking on additional credit risk.
Minnesota has consistently maintained conservative debt and financial
policies, resulting in a relatively low supply of new bond issues. Should the
demand for tax-exempt investments increase from 1994 levels, the diminished
supply is likely to have a beneficial effect on the value of your bonds.
Furthermore, as we suspected, the legislative initiative to curtail the
tax-exempt status of Minnesota municipal bonds has fallen by the wayside,
resulting in another potential demand booster.
Your fund's holdings mirror our confidence in Minnesota's economy and its
stable property and commercial base. The portfolio is broadly diversified,
with more substantial portions invested in state and local general-obligation
bonds, major Minnesota utilities, and water and sewer bonds. Health-care
bonds make up some 26% of the portfolio.
> A BRIGHT OUTLOOK FOR THE FUTURE
While current fundamentals are positive for all bonds, the specter of a flat
tax has unsettled the municipal bond market during this rally. In our
opinion, the market has reacted to the perceived effects of flat-tax rhetoric
and not to any hard facts. According to
6
<PAGE>
TOP 10 HOLDINGS (5/31/95)
Rochester Health Care Facility
Revenue bonds
Minneapolis & St. Paul, Hsg. & Redev. Auth Health Care System
Revenue bonds
Saint Paul Housing & Redev. Auth.
Sales tax revenue bonds
Minnesota State Housing Finance Agency
Single-family mortgage revenue bonds
Saint Paul Housing & Redev. Auth.
Hospital revenue bonds
Southern Minnesota Municipal Power Agency
Supply system revenue bonds
North St. Paul Maplewood Independent School Dist. No. 622
Revenue bonds
Minnesota Public Facilities Authority
Water pollution control revenue bonds
Northern Minnesota Municipal Power Agency
Electrical system revenue bonds
Saint Cloud Hospital Facilities
Revenue bonds
These holdings represent 54.2% of the fund's net assets. Portfolio holdings
will vary in future.
The Wall Street Journal (May 5, 1995), "[Analysts] say that any such [tax
law] changes are far off in the future--1997 at the earliest--and that
overhauling the current tax system is a far more difficult task than many
investors now believe. As a result, they argue, there's a buying opportunity
in municipals."
We believe that the municipal bond market can turn the corner successfully in
the months ahead. Predictions of diminishing supply are coming true. New
issues in 1995 are projected to be less than half of issuance in 1993.*
Moreover, municipals currently offer excellent value relative to Treasury
bonds. Finally, it now appears the Fed has engineered a "soft landing," which
promises slow but steady growth with low inflation. Since we don't see a
recession waiting in the wings, we believe there is plenty of steam left in
the municipal bond market for fiscal 1996 and beyond.
*Source: Business Week, June 19, 1995.
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 5/31/95, there is no guarantee the fund will continue to hold
these securities in the future.
7
<PAGE>
Performance summary
This section provides, at a glance, information about your fund's performance.
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 back into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might have grown each
year over varying periods.
Performance should always be considered in light of a fund's investment
strategy. Putnam Minnesota Tax Exempt Income Fund II is designed for investors
seeking a high level of current income free from federal income tax consistent
with preservation of capital.
TOTAL RETURN FOR PERIODS ENDED 5/31/95
<TABLE>
<CAPTION>
Lehman Bros.
Class A Class B Municipal
NAV POP NAV CDSC Bond Index CPI
<S> <C> <C> <C> <C> <C> <C>
1 year 7.90% 2.75% 7.17% 2.17% 9.11% 3.19%
- -------------------------------------------------------------------------------------------
5 years 44.64 37.77 -- -- 51.33 17.80
Annual average 7.66 6.62 -- -- 8.64 3.33
- -------------------------------------------------------------------------------------------
Life of class A 49.26 42.23 -- -- 58.18 21.18
Annual Average 7.40 6.48 -- -- 8.52 3.48
- -------------------------------------------------------------------------------------------
Life of class B -- -- 6.83% 2.94% 9.97 5.40
Annual average -- -- 3.58% 1.55% 5.18 2.84
- -------------------------------------------------------------------------------------------
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 6/30/95
(most recent calendar quarter)
<TABLE>
<CAPTION>
Class A Class B
NAV POP NAV CDSC
<S> <C> <C> <C> <C>
1 year 6.68% 1.67% 5.98% 0.98%
- -------------------------------------------------------------------------
5 years 41.49 34.79 -- --
Annual average 7.19 6.15 -- --
- -------------------------------------------------------------------------
Life of class A 47.09 40.16 -- --
Annual average 7.02 6.11 -- --
- -------------------------------------------------------------------------
Life of class B -- -- 5.37% 1.54%
Annual average -- -- 2.70 0.78
- -------------------------------------------------------------------------
</TABLE>
Fund performance data do not take into account any adjustment for taxes
payable on reinvested distributions or for Class A shares, distribution fees
prior to implementation at the Class A distribution plan in 1990. The fund
began operations on 10/23/89 offering shares now known as class A. Class B
shares became effective 7/15/93 and class M shares on 4/3/95. Performance for
class M shares not shown due to brevity of reporting period. Performance data
represent past results, will differ for each share class and are no assurance
of future results. Investment returns and net asset value will fluctuate so
an investor's shares, when sold, may be worth more or less than their
original cost.
8
<PAGE>
Terms and definitions
[Tabular representation of line graph]
GROWTH OF $10,000
Date Black Grey White
10/23/89 9525 10000 10000
5/31/90 9834 10453 10287
5/31/91 10701 11506 10796
5/31/92 11650 12636 11123
5/31/93 12852 14148 11481
5/31/94 13182 14497 11744
5/31/95 14223 15818 12118
Cumulative total return of a $10,000
investment through 5/31/95
Lehman Bros. Municipal
Bond Index ($15,818)
Fund at POP ($14,223)
CPI ($12,118)
[End of tabular representation]
Past performance is no assurance of future results. A $10,000 investment in
the fund's class B shares at inception would have been valued at $10,683 on
5/31/95 ($10,294 with a redemption at the end of the period).
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
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 maximum 4.75% sales charge for class A shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's 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.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index does not take into account brokerage commissions or
other costs, may include bonds different from those in the fund, and may pose
different risks than the fund.
Consumer Price Index (CPI) is a commonly used measure of inflation; it does
not represent an investment return.
9
<PAGE>
A Putnam perspective on risk and reward
You've probably been told how important it is to understand the relationship
between an investment's potential rewards and its accompanying risks. Given
the cautionary nature of such instructions, it may take most investors a
while to realize that risk has a positive side.
Every risk signals a potential reward. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes
in their rates of return or, in some cases, in their principal values.
Experienced investors know that no investment is truly risk free and are
therefore willing to take on some measure of risk in order to increase their
potential gains.
The greater the risk, the greater the potential reward.
Accepting an appropriate level of investment risk can give you a better
chance of outpacing inflation over time and seeking to maximize your
investment's return. How much risk? Your
> A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds, this
is a measure of how sensitive a fund's holdings are to changes in general
market conditions. Remember, though, that securities that lose value quickly
in market declines may also show the strongest gains in more favorable
environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type
of risk is a particular concern for fixed-income investors. However,
interest-rate increases can also have a substantial negative effect on the
stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your
money will begin to lose its purchasing power. Stock investments are
generally considered among the best ways of addressing inflation risk over
the long term.
10
<PAGE>
financial advisor's feedback and your time horizon can make all the
difference in determining how much risk is compatible with your investment
goals and your peace of mind.
> FITTING YOUR FUND SELECTION TO YOUR
RISK TOLERANCE
How do you find the right balance between investment risks and their
potential rewards? It's helpful to understand the types of risks that can
apply to different types of investments, and to look at your own portfolio
with this perspective.
For short-term goals, your first priority may be managing market risk.
Longer-term investors may be more concerned with inflation risk. And all
income-oriented investors should consider interest-rate, credit, and
prepayment risks carefully. Within each of Putnam's four investment
categories, you can select funds with differing levels of risk and reward
potential to customize your portfolio.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's
issuer will not be able to meet its payment, while prepayment risk involves
the premature payoff of a loan, with a resulting loss of interest income.
Professional management and in-depth research are invaluable in managing both
these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at
their perceived market values. Liquidity risk can affect the price of
securities held in the fund's portfolio and, thus, the fund's share prices.
This list covers only the most general types of risks; however, each
investment will also have its own specific risks. You will find a more
detailed discussion of these risk considerations in each fund's prospectus.
11
<PAGE>
Relative risk/reward potential of Putnam funds
These illustrations provide a simplified guide to the risk/reward potential
for funds within each category of the Putnam Family of Funds and are not
intended as investment advice. Your investment advisor can help you evaluate
your risk tolerance.
These rankings are relative only to Putnam funds and should not be compared
to other investments. There is no guarantee that one Putnam fund will be less
volatile than another, since each fund has its own investment risks. That's
why it is essential to read the fund's prospectus before investing.
PUTNAM GROWTH FUNDS
[WAVE GRAPH LISTING OF FUNDS FROM LOW RISK TO HIGH RISK]
PUTNAM GROWTH AND
INCOME FUNDS
[WAVE GRAPH LISTING OF FUNDS FROM LOW RISK TO HIGH RISK]
(1)Foreign investments are subject to certain risks, such as currency
fluctuations and political developments, that are not present with
domestic investments.
(2)This fund invests all or a portion of its assets in small to medium-sized
companies, which increases the risk of price fluctuations.
(3)While U.S. government backing of individual securities does not insure
your principal, which will fluctuate, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal.
12
<PAGE>
PUTNAM INCOME FUNDS
PUTNAM TAX-FREE FUNDS(6)
[WAVE GRAPH LISTING OF FUNDS FROM LOW RISK TO HIGH RISK]
*State tax-free funds available for Arizona, California, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, and
Pennsylvania. Not available in all states.
LIFESTAGE(SM) 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 are:
> Putnam Asset Allocation: Balanced Portfolio
> Putnam Asset Allocation: Conservative Portfolio
> Putnam Asset Allocation: Growth Portfolio
Please call your financial advisor -- or Putnam at 1-800-225-1581 -- to
obtain a prospectus for any Putnam fund. The prospectus contains more
complete information, including risk considerations, charges, and expenses.
Read it carefully before you invest or send money.
(4)The fund is managed to maintain a steady price of $1.00 per share,
although there is no assurance this price can be maintained in the future.
(5)The lower credit ratings of high-yield corporate and municipal bonds
reflect a greater possibility that adverse changes in the economy or their
issuers may affect their ability to pay principal and interest on the
bonds.
(6)Income may be subject to state and local taxes. Capital gains, if any, are
taxable for federal and, in most cases, state purposes.
(7)Bond insurance does not guarantee principal or protect against changes in
market price.
13
<PAGE>
Report of Independent Accountants
For the Fiscal Year Ended May 31, 1995
To the Trustees and Shareholders of
Putnam Minnesota Tax Exempt Income Fund II
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (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 Minnesota Tax Exempt Income Fund II (the "fund") at May
31, 1995, and the results of its operations, the changes in its net assets,
and the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. 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 generally
accepted auditing standards 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, 1995 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 12, 1995
14
<PAGE>
Portfolio of investments owned
May 31, 1995
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (100.0%)*
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Minnesota (97.5%)
-------------------------------------------------------------------------------------------
$3,500,000 Bass Brook, Poll. Control, Rev. Bonds (Pwr. &
Lt. Co. Project), 6s, 7/1/22 A $3,491,250
1,000,000 Bloomington, Independent School Dist. No. 271
Rev. Bonds, 5-1/4s, 2/1/14 AA 951,250
700,000 Breckenridge, Hosp. Facs. Rev. Bonds
(Franciscan Sisters Hlth., Care), Prerefunded,
9-3/8s, 9/1/17 AAA/P 786,625
500,000 Centennial Independent School Dist. No. 012
Rev. Bonds, Ser. A, FGIC, 7.15s, 2/1/12 AAA 552,500
1,000,000 Duluth, Gross Rev. Bonds (Duluth
Entertainment), 7.6s, 12/1/11 Baa 1,098,750
950,000 Duluth, Hosp. Rev. Bonds (St. Luke's Hosp.
Project), Prerefunded, 9s, 5/1/18 AAA 1,085,375
500,000 Fergus Falls, Cmnty. Dev. Rev. Bonds
(Lincoln--St. Andrews Assn. Project), 8-3/4s,
11/1/06 BBB/P 514,375
1,800,000 Hutchinson Indl. Dev. Rev. VRDN (Hutchinson
Technical Inc. Project), 4.05s, 6/1/04 A-1 1,800,000
1,565,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise
Cascade Corp. Project), 7.2s, 10/1/24 Baa 1,658,900
2,210,000 Jackson Cnty., Hsg. & Redev. Auth. Indl. Dev.
Rev. Bonds (Chemical Equip. Project), 8-3/4s,
12/1/09 BBB/P 2,384,038
MN Agricultural & Econ. Dev. Board Rev. Bonds
(Small Bus. Dev. Loan Program)
575,000 Ser. E-Lot 1, 8-1/2s, 8/1/10 BB/P 605,906
390,000 Ser. A-Lot 1, 8-1/4s, 8/1/09 BB/P 408,038
400,000 Ser. A-Lot 2, 8.2s, 8/1/09 BB/P 421,500
MN Pub. Fac. Auth. Wtr. Poll. Control Rev.
Bonds
1,500,000 Ser. A, 6.95s, 3/1/13 AAA 1,640,625
3,000,000 Ser. A, 6-1/2s, 3/1/14 AAA 3,202,500
3,000,000 MN State Duluth Arpt. Tax Increment Rev Bonds,
Ser. A, 6-1/4s, 8/1/14 AA 3,082,500
1,000,000 MN State Higher Ed. Fac. Auth. Mtge. Rev. Bonds
(St. Thomas U.), Prerefunded, Ser. 3-C,
7-1/8s, 9/1/14 Aaa 1,123,750
1,500,000 MN State Hsg. Fin. Agcy. Dev. Rev. Bonds Ser.
A, 6.95s, 2/1/14 A 1,573,125
MN State Hsg. Fin. Agcy. Single Fam. Mtge. Rev.
Bonds
190,000 Ser. C, 8-1/2s, 7/1/19 AA 199,738
350,000 Ser. A, 7.45s, 7/1/22 AA 375,813
2,000,000 Ser. E 6.8s, 7/1/25 AA 2,095,000
15
<PAGE>
MUNICIPAL BONDS AND NOTES*
PRINCIPAL AMOUNT RATINGS** VALUE
Minnesota (continued)
--------------------------------------------------------------------------------------
$1,820,000 Ser. B-1, 6-3/4s, 1/1/26 AA $1,863,225
1,000,000 Ser. Q, 6.7s, 1/1/17 AA 1,041,250
1,500,000 Ser. B, 5.65s, 7/1/22 AA 1,391,250
Mahtomedi Indpt. Sch. Dist. No. 832 Rev.
Bonds
1,275,000 Ser. B, MBIA, zero%, 2/1/17 AAA 364,969
1,575,000 Ser. B, MBIA, zero%, 2/1/16 AAA 478,406
Minneapolis & St. Paul Hsg. & Redev. Auth.
Hlth. Care Syst. Rev. Bonds
2,000,000 (Hlth. One Obligated Group), Ser. A, MBIA,
6-3/4s, 8/15/14 AAA 2,142,500
2,350,000 (Healthspan), Ser. A, AMBAC, 5s, 11/15/13 AAA 2,170,813
4,000,000 (Group Hlth. Plan Inc. Project), 6.9s,
10/15/22 A 4,265,000
1,000,000 Minneapolis, Cmnty. Dev. Agcy. Hlth. Care
Facs. Rev. Bonds (Walker Methodist Hlth.
Project), 9-1/2s, 4/1/10 A 1,033,750
Minneapolis, Cmnty. Dev. Agcy. Supported
Dev. Rev. Bonds
600,000 Ser. 87-1, 8-5/8s, 12/1/12 BBB 639,750
1,105,000 (Grace-Lee Products Inc.) Ser. 91-3,
8-1/4s, 12/1/11 BBB 1,214,119
400,000 Minneapolis, Cmnty. Econ. Dev. Agcy. Rev.
Bonds (Shaw Acquisition Fireman Insurance),
9-1/4s, 6/1/05 A 412,000
1,150,000 Minneapolis, Coml. Dev. Rev. Bonds (Mt.
Sinai Hosp. Assn. Project), Prerefunded,
9-1/2s, 11/1/06 AAA 1,254,938
750,000 Minneapolis, Hlth. Care Fac. Rev. Bonds
(Baptist Residence Project), 8.7s, 11/1/09 BB/P 825,938
810,000 Minneapolis, Hosp. Rev. Bonds (Lifespan
Inc.), Ser. B, 9-1/8s, 12/1/14 A 916,313
350,000 Minneapolis-St. Paul, Hsg. Fin. Board
Multi-Fam. Rev. Bonds (Riverside Plaza),
GNMA Coll., 8.2s, 12/20/18 AAA 368,813
740,000 Minneapolis St. Paul, Hsg. Fin. Board Single
Fam. Mtge. Rev. Bonds (Phase VI), Ser. A,
GNMA Coll., 8.3s, 8/1/21 AAA 753,875
Morris, Hosp. Facs. Rev. Bonds (Stevens
Cmnty. Mem. Hosp.),
250,000 Ser. A, 8-1/4s, 5/1/10 AAA/P 290,000
500,000 Ser. B, 8-1/4s, 5/1/10 AAA/P 580,000
915,000 New Ulm, Hosp. Facs. Rev. Bonds (Hlth. Ctr.
Syst. Project) Prerefunded, Ser. C, 10s,
10/1/14 AAA 959,606
250,000 New York Mills, Independent School Dist. No.
553 Rev. Bonds Ser. A, 6.8s, 2/1/15 Baa 272,188
North St. Paul Maplewood Independent School
Dist. No. 622 Rev. Bonds
2,000,000 Ser. A, MBIA, 7.1s, 2/1/19 AAA 2,205,000
3,000,000 Ser. A, MBIA, 6-7/8s, 2/1/15 AAA 3,288,750
3,915,000 Northern MN Muni. Pwr. Agcy. Elec. Syst.
Rev. Bonds, Ser. A, 7-1/4s, 1/1/16 A 4,242,875
1,950,000 Northfield, College Fac. Rev. Bonds (St.
Olaf College Project), 6.4s, 10/1/21 A 2,037,750
1,800,000 Owatonna, Hosp. Rev. Bonds (Hlth. Ctr. Syst.
Project) Prerefunded, Ser. C, 10s, 10/1/14 AAA 1,887,750
16
<PAGE>
MUNICIPAL BONDS AND NOTES*
PRINCIPAL AMOUNT RATINGS** VALUE
Minnesota (continued)
--------------------------------------------------------------------------------------
$ 2,500,000 Owatonna, Pub. Util. Comm. Pub. Util. Rev.
Bonds Ser. A, AMBAC, 5.45s, 1/1/16 AAA $ 2,428,125
1,000,000 Plymouth, Multi-Fam. Hsg. Dev. Rev. Bonds
(Harbor Lane Apt. Project), 5.95s, 9/1/18 AA 968,750
1,170,000 Ramsey & Washington Cntys., Res. Recvy. Rev.
Bonds (Northern States Pwr. Co. Project),
Ser. A, 6-3/4s, 12/1/06 AA 1,253,363
Robbinsdale, Hosp. Rev. Bonds (North
Memorial Med. Ctr.), Ser. B, AMBAC
2,000,000 5-1/2s, 5/15/23 AAA 1,920,000
1,390,000 5.45s, 5/15/13 AAA 1,365,675
Rochester, Hlth. Care Fac. IFB
(Mayo Foundation),
3,000,000 Ser. E, 7.724s, 11/15/12 AA 3,202,500
3,300,000 Ser. E, 7.22s, 11/15/15 AA 3,427,875
Rochester Hlth Care Fac. Rev Bonds
3,000,000 (Olmsted Med. Group), 7-1/2s, 7/1/19 BB/P 3,067,500
2,500,000 SCA Realty, Multi Fam. Mtg. Rev. Bonds
(Burnsville), Ser. A-9, FSA, 7.1s, 1/1/30 AAA 2,615,625
St. Cloud Hosp. Facs. Rev. Bonds (St. Cloud
Hosp.), Ser. C, AMBAC
2,400,000 6-3/4s, 7/1/11 AAA 2,589,000
1,500,000 5-1/4s, 10/1/13 AAA 1,432,500
St. Paul Hsg. & Redev. Auth. Sales Tax Rev.
Bonds
5,500,000 (Civic Center Project), MBIA, 5.55s,
11/1/23 AAA 5,369,375
2,000,000 (Civic Ctr. Project), 5.45s, 11/1/13 A 1,937,500
St. Paul, Hsg. & Redev. Auth. Hosp. Rev.
Bonds
2,000,000 (Healtheast Project), Ser. B, 9-3/4s,
11/1/17 Baa 2,185,000
2,745,000 (Healtheast Project), Ser A, 6-5/8s,
11/1/17 Baa 2,672,944
2,000,000 (St. Paul Ramsey Med. Ctr. Project),
AMBAC, 5.55s, 5/15/23 AAA 1,952,500
2,500,000 Sartell, Poll. Control Rev. Bonds (Champion
Intl. Project), 6.95s, 10/1/12 Baa 2,650,000
Southern MN Muni. Pwr. Agcy. Supply Syst.
Rev. Bonds
300,000 Prerefunded, Ser. A, 8-1/8s, 1/1/18 AAA 332,625
1,000,000 Prerefunded, Ser. A, 5-3/4s, 1/1/18 AAA 1,043,750
2,000,000 Refunded, Ser. B, 5-3/4s, 1/1/11 AAA 2,135,000
11,500,000 Ser. A, MBIA, zero%, 1/1/21 AAA 2,573,125
Western MN Muni. Pwr. Agcy. Supply Rev.
Bonds
675,000 Ser. A, 9-1/4s, 1/1/04 A 707,063
1,300,000 Ser. A, 7s, 1/1/13 A 1,361,750
------------
115,143,931
Puerto Rico (2.5%)
--------------------------------------------------------------------------------------
3,075,000 PR Cmnwlth. G.O. Rev. Bonds Ser. A, MBIA,
5-3/8s, 7/1/22 AAA 2,936,625
--------------------------------------------------------------------------------------
Total Investments (cost $112,649,991)*** $118,080,556
--------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Key to Abbreviation of Municipal Instruments
IFB --Inverse Floating Bonds
G.O. Bonds --General Obligation Bonds
VRDN --Variable Rate Demand Notes
Key to Abbreviation of Insurers
AMBAC --American Municipal Bond Assurance Corporation
FGIC --Federal Guaranty Insurance Corporation
FSA --Financial Security Assurance
FHA --Federal Housing Administration Insured
GNMA Coll. --Government National Mortgage Association
Collateralized
MBIA --Municipal Bond Investors Assurance Corporation
* Percentages indicated are based on net assets of $118,117,374, which
corresponds to a net asset value per Class A, Class B and Class M shares
of $8.95, $8.92, and $8.95 respectively.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at May 31, 1995 for the securities listed.
Ratings are generally ascribed to securities at the time of issuance.
While the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which the agencies would ascribe to these
securities at May 31, 1995. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. The ratings are not covered by the
Report of Independent Accountants.
*** The aggregate identified cost for Federal income tax purposes is
$112,691,829, resulting in gross unrealized appreciation and depreciation
of $5,970,132 and $581,405, respectively, or net unrealized appreciation
of $5,388,727.
The rates shown on VRDNS and IFBs, which are securities paying variable
interest rates that vary inversely to changes in the market interest rates,
are the current interest rates at May 31, 1995, which are subject to change
based on the terms of the security.
The Fund had the following industry group concentrations greater than 10% on
May 31, 1995 (based on net assets):
Hospitals/Health Care 25.9%
Utilities 15.2
Housing 11.2
The Fund had the following insurance group concentrations greater than 10% at
May 31, 1995 (based on net assets):
MBIA 16.4%
AMBAC 11.7
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of assets and liabilities
May 31, 1995
<TABLE>
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $112,649,991) (Note 1) $118,080,556
- ---------------------------------------------------------------------------------------------
Cash 245,406
- ---------------------------------------------------------------------------------------------
Interest receivable 2,089,625
- ---------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 261,710
- ---------------------------------------------------------------------------------------------
Receivable for securities sold 988,010
- ---------------------------------------------------------------------------------------------
Total assets 121,665,307
- ---------------------------------------------------------------------------------------------
Liabilities
- ---------------------------------------------------------------------------------------------
Payable for securities purchased 2,963,468
- ---------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 65,768
- ---------------------------------------------------------------------------------------------
Distributions payable to shareholders 240,873
- ---------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 171,918
- ---------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 144
- ---------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 3,737
- ---------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,477
- ---------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 45,795
- ---------------------------------------------------------------------------------------------
Other accrued expenses 54,753
- ---------------------------------------------------------------------------------------------
Total liabilities 3,547,933
- ---------------------------------------------------------------------------------------------
Net assets $118,117,374
- ---------------------------------------------------------------------------------------------
Represented by
- ---------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $115,954,754
- ---------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (17,447)
- ---------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (3,250,498)
- ---------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and options 5,430,565
- ---------------------------------------------------------------------------------------------
Total-Representing net assets applicable to capital shares outstanding $118,117,374
- ---------------------------------------------------------------------------------------------
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($98,417,919 divided by 10,999,904 shares) $8.95
- ---------------------------------------------------------------------------------------------
Offering price per share (100/95.25 of $8.95)* $9.40
- ---------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($19,698,426 divided by 2,208,418 shares)+ $8.92
- ---------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($1,029 divided by 115 shares) $8.95
- ---------------------------------------------------------------------------------------------
Offering price per share (100/96.75 of $8.95)** $9.25
- ---------------------------------------------------------------------------------------------
</TABLE>
*On single retail sales of less than $25,000. On sales of $25,000 or more
and on group sales the offering price is reduced.
**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.
19
<PAGE>
Statement of operations
Year ended May 31, 1995
<TABLE>
<S> <C>
Tax exempt interest income $ 7,328,445
- --------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------
Compensation of Manager (Note 2) 643,810
- --------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 77,963
- --------------------------------------------------------------------------
Compensation of Trustees (Note 2) 9,501
- --------------------------------------------------------------------------
Auditing 20,057
- --------------------------------------------------------------------------
Legal 15,790
- --------------------------------------------------------------------------
Postage 10,095
- --------------------------------------------------------------------------
Reports to shareholders 47,685
- --------------------------------------------------------------------------
Administrative services (Note 2) 8,231
- --------------------------------------------------------------------------
Distribution fees--class A (Note 2) 187,341
- --------------------------------------------------------------------------
Distribution fees--class B (Note 2) 116,155
- --------------------------------------------------------------------------
Registration fees 3,671
- --------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 3,360
- --------------------------------------------------------------------------
Other expenses 3,189
- --------------------------------------------------------------------------
Total expenses 1,146,848
- --------------------------------------------------------------------------
Net investment income 6,181,597
- --------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (2,164,286)
- --------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (43,485)
- --------------------------------------------------------------------------
Net realized loss on future contracts (Notes 1 and 3) (547,579)
- --------------------------------------------------------------------------
Net unrealized appreciation of investments and futures
contracts during the year 4,773,882
- --------------------------------------------------------------------------
Net gain on investments 2,018,532
- --------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 8,200,129
- --------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of changes in net assets
<TABLE>
<CAPTION>
Year ended May 31
----------------------------
1995 1994
<S> <C> <C>
- --------------------------------------------------------------------------------
Increase in net assets
- --------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------
Net investment income $ 6,181,597 $ 5,472,524
- --------------------------------------------------------------------------------
Net realized gain/(loss) on investments, options
and futures contracts (Notes 1 and 3) (2,755,350) 177,351
- --------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and futures contracts 4,773,882 (3,593,920)
- --------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 8,200,129 2,055,955
- --------------------------------------------------------------------------------
Distributions to shareholders:
- --------------------------------------------------------------------------------
From net investment income:
- --------------------------------------------------------------------------------
Class A (5,435,247) (5,279,232)
- --------------------------------------------------------------------------------
Class B (711,465) (161,707)
- --------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 11,603,580 21,234,596
- --------------------------------------------------------------------------------
Total increase in net assets 13,656,997 17,849,612
- --------------------------------------------------------------------------------
Net Assets:
- --------------------------------------------------------------------------------
Beginning of year 104,460,377 86,610,765
- --------------------------------------------------------------------------------
End of year (including distributions in excess
of net investment income of $17,447 and $64,452,
respectively) $118,117,374 $104,460,377
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Financial Highlights
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
For the For the
period period
April 3, July 15,
1995 1993
(commencement (commencement
of of
operations) Year operations)
to ended to
May 31 May 31 May 31 Year ended May 31
--------------------------------------------------------
1995 1995 1994 1995 1994
--------------------------------------------------------
Class M Class B Class A
--------------------- --------------------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 8.77 $ 8.77 $ 9.18 $ 8.79 $ 9.06
- ---------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------
Net investment income .08 .45 .39 .51 .51
- ---------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 .15 (.41) 15 (.27)
- ---------------------------------------------------------------------------------------------
Total from investment
operations .25 .60 (.02) .66 .24
- ---------------------------------------------------------------------------------------------
Less Distributions from:
- ---------------------------------------------------------------------------------------------
Net investment income (.07) (.45) (.39) (.50) (.51)
- ---------------------------------------------------------------------------------------------
Total distributions (.07) (.45) (.39) (.50) (.51)
- ---------------------------------------------------------------------------------------------
Net asset value, end of period $ 8.95 $ 8.92 $ 8.77 $ 8.95 $ 8.79
- ---------------------------------------------------------------------------------------------
Total investment return at net
asset value (%) (b) 2.89(c) 7.17 (.32)(c) 7.90 2.57
- ---------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $ 1 $19,698 $8,873 $98,418 $95,587
- ---------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) .21(c) 1.63 1.47(c) .99 1.03
- ---------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .93(c) 5.15 4.23(c) 5.85 5.60
- ---------------------------------------------------------------------------------------------
Portfolio turnover (%) 58.18(c) 58.18 28.19(c) 58.18 28.19
- ---------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Year ended May 31
---------------------------
1993 1992 1991
Class A
---------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 8.74 $ 8.56 $ 8.43
- ----------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------
Net investment income .55 .55(a) .59(a)
- ----------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments .33 .18 .13
- ----------------------------------------------------------------------------
Total from investment operations .88 .73 .72
- ----------------------------------------------------------------------------
Less Distributions from:
- ----------------------------------------------------------------------------
Net investment income (.56) (.55) (.59)
- ----------------------------------------------------------------------------
Total distributions (.56) (.55) (.59)
- ----------------------------------------------------------------------------
Net asset value, end of period $ 9.06 $ 8.74 $ 8.56
- ----------------------------------------------------------------------------
Total investment return at
net asset value (%) (b) 10.33 8.86 8.82
- ----------------------------------------------------------------------------
Net assets, end of period (in thousands) $86,611 $59,914 $16,615
- ----------------------------------------------------------------------------
Ratio of expenses to average net assets
(%) 1.08 .91(a) .66(a)
- ----------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 6.12 6.34(a) 6.84(a)
- ----------------------------------------------------------------------------
Portfolio turnover (%) 37.69 38.79(d) 14.85
- ----------------------------------------------------------------------------
</TABLE>
(a) Reflects an expense limitation incurred by the fund. As a result, net
investment income of the fund for the years ended May 31, 1992, and 1991
reflect expense reductions of approximately $0.02 and $0.07, respectively.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Not annualized.
(d) Portfolio turnover excludes the impact of assets received from the
acquisition of Putnam Minnesota Tax Exempt Income Fund.
23
<PAGE>
Notes to financial statements
May 31, 1995
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The fund seeks as
high a level of current income exempt from federal income tax and Minnesota
personal income tax as the fund's manager, Putnam Investment Management, Inc.
("Putnam Management"), a wholly owned subsidiary of Putnam Investments, Inc.,
believes is consistent with preservation of capital by investing primarily in
a portfolio of Minnesota tax-exempt securities.
The fund offers class A, class B and class M shares. Class M shares became
effective on April 3, 1995, however there were no shares sold to
non-affiliates as of May 31, 1995. Class A shares are sold with a maximum
front-end sales charge of 4.75%. Class B shares do not pay a front-end sales
charge, but pay a higher ongoing distribution fee than class A shares, and
may be subject to a contingent deferred sales charge if those shares are
redeemed within six years of purchase. Class M shares are sold with a maximum
front-end sales charges of 3.25%, and an ongoing distribution fee that is
higher than class A shares and lower than class B shares. Expenses of the
fund are borne pro-rata by the shareholders 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
policies are in conformity with generally accepted accounting principles.
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.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures The fund may purchase and sell financial futures contracts to
hedge against changes in the values of tax-exempt municipal securities the
fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units
of a particular index or a certain amount of a U.S. Government security at a
set price on a future date.
Upon entering into such a contract the fund is required to pledge to the
broker an amount of cash or securities equal to the minimum "initial margin"
requirements of the futures exchange. Pursuant to the contract, the fund
agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value to the
24
<PAGE>
contract. Such receipts or payments are known as "variation margin" and are
recorded by the fund as unrealized gains or losses. 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.
The potential risk to the fund is that the change in value of the futures
contracts primarily corresponds with the value of underlying instruments
which may not correspond to the change in value of the hedged instruments. In
addition, there is a risk that the fund may not be able to close out its
futures positions due to an illiquid secondary market.
D) Options The fund may, to the extent consistent with its investment
objective and policies, seek to increase its current returns by writing
covered call and put options on securities it owns or in which it may invest.
When a fund writes a call or put option, an amount equal to the premium
received by the fund is included in the fund's "Statement of assets and
liabilities" as an asset and an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market
value of the option written. The current market value of an option is the
last sale price or, in the absence of a sale, the last offering price. If an
option expires on its stipulated expiration date, or if the fund enters into
a closing purchase transaction, the fund realizes a gain (or loss if the
closing purchase transaction exceeds the premium received when the option was
written) without regard to the unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished. If a
written call option is exercised, the fund realizes a gain or loss from the
sale of the underlying security and the proceeds of the sale are increased by
the premium originally received. If a written put option is exercised, the
amount of the premium originally received reduces the cost of the security
that the fund purchases upon exercise of the option.
The risk in writing a call option is that the fund relinquishes the
opportunity to profit if the market price of the underlying security
increases and the option is exercised. In writing a put option, the fund
assumes the risk of incurring a loss if the market price of the underlying
security decreases and the option is exercised. In addition, there is the
risk the fund may not be able to enter into a closing transaction because of
an illiquid secondary market.
The fund may also, to the extent consistent with its investment objectives
and policies, buy put options to protect its portfolio holdings in an
underlying security against a decline in market value. The fund may buy call
options to hedge against an increase in the price of the securities that the
fund ultimately wants to buy. The fund may also buy and sell combinations of
put and call options on the same underlying security to earn additional
income. The premium paid by a fund for the purchase of a put or call option
is included in the fund's "Statement of assets and liabilities" as an
investment and is subsequently "marked-to-market" to reflect the current
market value of the option. If an option the fund has purchased expires on
the stipulated expiration date, the fund realizes a loss in the amount of the
cost of the option. If the fund enters into a closing sale transaction, the
fund realizes a gain or loss, depending on whether proceeds from the closing
sale transaction are greater or less than the cost of the option. If the fund
exercises a call option, the cost of securities acquired by exercising the
call is increased by the premium paid to buy the call. If the fund exercises
a put option, it realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are decreased by the premium origi-
25
<PAGE>
nally paid. The risk associated with purchasing options is limited to the
premium originally paid.
E) 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. Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held and excise tax on
income and capital gains.
At May 31, 1995, the fund had a capital loss carryover of approximately
$1,102,000, which may be available to offset realized gains, if any. This
amount will expire through May 31, 2003. To the extent that capital loss
carryovers are used to offset realized capital gains, it is unlikely that
gains so offset will be distributed to shareholders since any such
distribution might be taxable as ordinary income.
F) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gains distributions, if any, are
recorded on the ex-dividend date and paid annually, or as necessary to meet
the distribution requirements described above.
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 loss deferrals,
post October losses and capital loss carryover.
Reclassifications are made to the fund's capital accounts in order that they
reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations. During the year ended May 31,
1995, the fund reclassified $12,120 to decrease accumulated distributions in
excess of net investment income, $185,720 to increase accumulated net
realized loss on investments, and $173,600 to increase additional paid-in
capital for the year ended May 31, 1995.
G) Amortization of bond premium and discount Any premium resulting from the
purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis. Discount on zero-coupon bonds, stepped-coupon bonds
and original issue discount bonds is accreted according to the effective
yield method.
H) 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 aggregated $13,115. These expenses, which were amortized over a
five-year period based on projected net assets of the fund, concluded this
year ended May 31, 1995.
Note 2
Management fee, administrative services, and other transactions
Compensation of the fund's manager, 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: 0.6% of the first $500 million of
average net assets, 0.5% of the next $500 million, 0.45% of the next $500
million and 0.4% of any amount over $1.5 billion, subject to reduction in any
year by the amount of certain brokerage commissions and fees (less expenses)
received by affiliates of the Manager on the fund's portfolio transactions.
The fund also reimburses the Manager for the compensation and related
expenses of certain officers of the fund and their staff who provide
administra-
26
<PAGE>
tive services to the fund. The aggregate amount of all such reimbursements is
determined annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $690 and an
additional fee for each Trustees' meeting attended. Trustees who are not
interested persons of the Manager and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary Trust
Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor Services,
a division of PFTC.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended May 31, 1995 have been reduced by credits allowed by PFTC.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B 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 Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments,
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Trustees have approved payment by the fund at an
annual rate of 0.20%, 0.85% and 0.50% of the average net assets attributable
to class A, class B and class M shares, respectively.
For the year ended May 31, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $18,588 and $0 from the sale of class
A and class M shares and $20,926 in contingent deferred sales charges from
redemptions of class B shares. A deferred sales charge of up to 1% is
assessed on certain redemptions of class A and class M shares purchased as
part of an investment of $1 million or more. For the year ended May 31, 1995,
Putnam Mutual Funds Corp., acting as underwriter received $7 and $0 on class
A and class M redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 1995, purchases and sales of investment
securities other than short-term municipal obligations aggregated $71,991,713
and $60,993,632 respectively. Purchases and sales of short term municipal
obligations aggregated $13,100,000 and $12,800,000 respectively. In
determining the net gain or loss on securities sold, the cost of securities
has been determined on the identified cost basis.
Written option transactions during the year are summarized as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
<S> <C> <C>
- -----------------------------------------------------------------------
Outstanding at beginning of year -- --
- -----------------------------------------------------------------------
Options written (3,900,000) $(53,953)
- -----------------------------------------------------------------------
Options closed 3,900,000 53,953
- -----------------------------------------------------------------------
Written options outstanding at end of year $ -- $ --
- -----------------------------------------------------------------------
</TABLE>
27
<PAGE>
Note 4
Capital shares
At May 31, 1995, there was an unlimited number of class A, class B and class
M capital shares of beneficial interest authorized. Class M shares became
effective on April 3, 1995 and 115 shares were sold to Putnam Investments
Inc. for $1,000. Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
Year ended May 31
----------------------------
1995
----------------------------
Class A Shares Amount
<S> <C> <C>
- ------------------------------------------------------------------------------
Shares sold 1,196,795 $ 10,352,416
- ------------------------------------------------------------------------------
Shares issued in connection with reinvestment
of dividends 424,124 3,662,044
- ------------------------------------------------------------------------------
1,620,919 14,014,460
Shares repurchased (1,492,954) (12,756,180)
- ------------------------------------------------------------------------------
Net increase (decrease) 127,965 $ 1,258,280
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended May 31
----------------------------
1994
----------------------------
Class A Shares Amount
<S> <C> <C>
- -----------------------------------------------------------------------------
Shares sold 2,011,440 $18,417,919
- -----------------------------------------------------------------------------
Shares issued in connection with reinvestment
of dividends 393,393 3,595,907
- -----------------------------------------------------------------------------
2,404,833 22,013,826
Shares repurchased (1,095,167) (9,963,783)
- -----------------------------------------------------------------------------
Net increase 1,309,666 $12,050,043
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended May 31
----------------------------
1995
----------------------------
Class B Shares Amount
<S> <C> <C>
- -----------------------------------------------------------------------------
Shares sold 1,302,085 $11,228,705
- -----------------------------------------------------------------------------
Shares issued in connection with reinvestment
of dividends 51,457 442,963
- -----------------------------------------------------------------------------
1,353,542 11,671,668
Shares repurchased (156,444) (1,327,368)
- -----------------------------------------------------------------------------
Net increase 1,197,098 $10,344,300
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
July 15, 1993
(commencement of
operations) to
May 31
----------------------------
1994
----------------------------
Class B Shares Amount
<S> <C> <C>
- -----------------------------------------------------------------------------
Shares sold 1,042,351 $9,463,010
- -----------------------------------------------------------------------------
Shares issued in connection with reinvestment
of dividends 10,180 91,406
- -----------------------------------------------------------------------------
1,052,531 9,554,416
- -----------------------------------------------------------------------------
Shares repurchased (41,211) (369,863)
- -----------------------------------------------------------------------------
Net increase 1,011,320 $9,184,553
- -----------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Federal Tax Information
The fund has designated all dividends from net investment income paid during
the fiscal year as exempt-interest dividends. Thus, 100% of these
distributions are exempt from federal income tax. For residents of the state
of Minnesota, 100% of the fund's distributions are also exempt from Minnesota
personal income tax.
The Form 1099 you will receive in January 1996 will show the tax status of
any taxable distributions paid to your account in calendar 1995.
29
<PAGE>
Our commitment to quality service
> CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal every
year since the award's 1990 inception. DALBAR, an independent research firm,
ran more than 10,000 tests of 38 shareholder service components. In every
category, Putnam outperformed the industry standard.
> HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as $25 a month from
a Putnam money market fund or from your checking or savings account.*
> SWITCH FUNDS EASILY.
You can move money from one account to another with the same class of shares
without a service charge. (This privilege is subject to change or
termination.)
> ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than the original
cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
> To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
*Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market.
30
<PAGE>
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Howard Manning
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Minnesota Tax
Exempt Income Fund II. 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. For more
information or to request a prospectus, call toll-free: 1-800-225-1581.
Shares of mutual funds are not deposits of, or guaranteed or endorsed by, any
financial institution, are not insured by the Federal Deposit Insurance
Corporation (FDIC), the Federal Reserve Board, or any other agency, and
involve risk, including the possible loss of the principal amount invested.
31
<PAGE>
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
19002-847/238
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED
AND EDGAR-FILED TEXTS:
(1) Bold and italic typefaces are displayed in normal type.
(2) Headers (e.g., the name of the fund) are omitted.
(3) Certain tabular and columnar headings and symbols are displayed
differently in this filing.
(4) Bullet points and similar graphic signals are omitted.
(5) Page numbering is omitted.
(6) Trademark symbol replaced with (TM)
