Putnam
Minnesota
Tax Exempt
Income Fund
ANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Despite Minnesota's rather limited supply of municipal securities,
we have found significant income and value investment opportunities.
Health care and long-term care have been particularly fruitful sectors
for the fund, as have industrial revenue bonds."
-- Leslie J. Burke, manager
Putnam Minnesota Tax Exempt Income Fund
* "Surging tax revenues in most states helped bolster municipal
credit bond ratings. Standard and Poor's says the number of ratings
upgrades in this year's first quarter was more than nine times the number
of downgrades."
-- The Wall Street Journal, April 8, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
18 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Analyzing risk premiums, yield spreads, call dates, yield curves, credit
ratings, supply-and-demand dynamics, taxable versus tax-exempt yield
relationships, and a host of other factors is all in a day's work for Putnam's
Tax-Exempt Bond Group. The result was another period of competitive
performance for Putnam Minnesota Tax Exempt Income Fund's fiscal year that
closed on May 31, 1998.
Using her knowledge of Minnesota's tax-exempt bond environment and backed by
Putnam's extensive credit analysis capability, Fund Manager Leslie Burke made
the strategic and tactical decisions that provided these positive results. In
the following report, Leslie discusses the fund's performance during fiscal
1998 and then takes a look at prospects for the tax-exempt market, especially
with regard to Minnesota, in the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Manager
Leslie J. Burke
The 12 months ended May 31, 1998, marked another period of solid performance
for Putnam Minnesota Tax Exempt Income Fund. While supply-and-demand dynamics
and concerns over the situation in Asia did produce some price and yield
fluctuations, the municipal bond market generally experienced little
volatility over the course of the year. Within this quiet playing field, there
were fewer opportunities for profit, but Putnam Minnesota Tax Exempt Income
Fund continued to deliver what it promised shareholders: a reliable stream of
income exempt from state and federal taxes along with relatively low share
price volatility. For the 12 months ended May 31, 1998, the fund provided a
total return of 7.90% at net asset value (2.73% at public offering price) for
class A shares. Results for class B and class M shares can be found on pages 9
and 10 of this report.
* MUNICIPAL BOND MARKET BOASTS ATTRACTIVE PRICES, ROBUST SUPPLY AND DEMAND
Despite the relative calm that has fallen over the $1.3 trillion municipal
bond market, prices on these bonds have actually become especially attractive
relative to the Treasury market -- a state of affairs that has not occurred
since the flat-tax scare of 1996. By the end of May, municipal bonds (as
represented by 30-year insured municipals) were offering almost 90% of the
yield of long-term Treasury bonds. Since the typical level is 84%, the current
percentage makes municipal prices remarkably low.
The bargain prices in this market have maintained investors' interest and
enabled demand to keep pace with supply. Also noteworthy is the unusually flat
tax-exempt yield curve. With the 30-year bond paying only a modest 30 to 40
basis points over a 10-year bond, investors are not compensated for taking on
higher risk. For this reason, we often find the best value (attractive yield
with minimal volatility) in the intermediate-plus range of the yield curve --
anywhere from 10 to 20 years.
Low interest rates also acted as a catalyst for municipal bond refundings and
new issues in recent months. In fact, 1998 so far has been most notable for
its huge supply, including the sale of the largest municipal bond issue in
history -- $3.4 billion by the Long Island Power Authority in May. Of course,
in Minnesota, the situation is a bit different. The state's robust economy
continues to limit the borrowing needs of many municipalities, although
overall the municipal bond supply has increased over the period.
* FUND MAINTAINS FLEXIBILITY, STAYS FULLY INVESTED
As the period drew to a close, a number of crosscurrents continued to drive
the financial markets. The U.S. economy remained quite exuberant with strong
employment and solid income growth fueling robust consumer spending. Indeed,
the Federal Reserve Board remained on alert for indications that economic
strength was producing any uptick in inflation or incipient inflationary
pressures. Through the end of the period, however, Fed action was restrained
by concerns that the Asian recessions might yet have additional negative
consequences for the U.S. economy, since manufacturers in various industries
had already reported declines in exports to Asia and tough competition from
cheaper Asian imports.
Amid these competing forces, the future direction of interest rates remains
unclear. Will the strong economy eventually convince the Fed to raise
short-term rates or will the Asian financial crisis slow growth enough to
prevent such a move? Given this uncertainty, we have positioned the fund
flexibly with a neutral duration. Duration is a mathematical measure used to
indicate how much the prices of portfolio holdings are likely to move up or
down with each percentage-point shift in interest rates.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART OF TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 26.9%
Housing 11.7%
Education 9.9%
Utilities 9.7%
Water and
sewer 7.0%
Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.
When we believe interest rates are more likely to move in one direction or
another, we carefully adjust the fund's duration profile in order to manage
its interest-rate risk more effectively. In the present environment, however,
a fairly neutral duration appears to us to be the most prudent way to keep the
fund ready for potential interest-rate changes while minimizing share price
volatility and continuing to pursue a steady stream of current income.
Although the uncertain interest-rate climate has not prompted us to take a
more emphatic stand on portfolio duration, the attractive prices of municipal
securities are a compelling argument for staying fully invested in the market.
Because this move could extend the fund's duration farther out than we deem
prudent, we have balanced the fund's municipal investments by selling Treasury
futures contracts, a strategy that has the effect of shortening duration.
The current supply-and-demand situation has also made it wise to keep the fund
fully invested. While the supply of municipal securities has been quite high
for most of the year, there were signs that new issuance was tapering off
toward mid May. Furthermore, by remaining fully invested, the fund was
positioned to capitalize on gains resulting from any rise in prices during a
potential surge in demand preceding the seasonal swell in coupon payments on
June 1 and July 1.
* PURSUING INCOME AND VALUE
In a municipal market boasting attractive prices and a flat yield curve, a
focus on value rather than duration management has dominated the fund's
investment strategy. Essentially this means emphasizing issues that offer the
best relative value along with structural components that will enhance the
fund's income stream while minimizing its share price volatility. For the most
part, we have found these issues among the intermediate-plus bonds mentioned
above.
[GRAPHIC OMITTED: PIE CHART OF CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Baa -- 8.3%
A -- 14.1%
Aa -- 21.8%
Ba -- 7.8%
Aaa -- 48.0%
Footnote reads:
* As a percentage of market value as of 5/31/98. A bond rated Baa or higher is
considered investment grade. All ratings reflect Moody's descriptions unless
noted otherwise; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
In terms of sectors, the health-care and long-term care industries provided
the most productive opportunities for income and value over the period. In the
health-care sector, we added several hospital holdings during the past six
months including Big Lake Hospital, Children's Health, and Fairview Hospital.
Among long-term care facilities, we added The Northfield Project and a group
of nursing homes for the Board of Social Ministry. All of the new holdings are
solid credits with strong coupons to enhance the fund's income stream. While
these holdings, as well as others discussed in this report, were viewed
favorably at the end of the period, all holdings are subject to review and
adjustment in accordance with the fund's investment strategy and may well vary
in the future.
To capitalize on Minnesota's favorable economic climate, we invested in
industrial revenue bonds. Specifically we took a position in bonds issued to
finance an expansion of the Minneapolis International Airport and added to the
fund's position in projects issued for Boise Cascade, a long-term holding that
continues to provide solid income for the fund. Paper companies fall into an
industrial category known as late cyclicals, meaning that they typically begin
to outperform similar commodities once an economic expansion is fully under
way. Although the current growth cycle has already lasted longer than many
economists and policymakers thought possible, we believe that Minnesota's
economy is still strong enough for the fund to reap additional performance
benefits from its Boise Cascade investment.
* NONCALLABLE BONDS ENHANCE PERFORMANCE, PRICE STABILITY
In our pursuit of securities that provide strong income and solid relative
value, we have continued to seek out noncallable bonds. Because callable bonds
have the option of being called away by the issuer at a certain future date --
usually if interest rates are lower than when the bonds are first issued --
investing in noncallable bonds or bonds with distant call dates enables the
fund to provide the most durable level of income. Unfortunately Minnesota's
tight securities supply also limits the availability of noncallable
securities. During the recent period, however, we did purchase some
high-coupon noncallable bonds issued by the University of Minnesota.
* OUTLOOK IS CAUTIOUSLY OPTIMISTIC
While the Asian crisis has been widely publicized as negative for economic
growth around the world, it has produced some positive effects in the United
States. Fears of the financial turmoil in Asia and other emerging markets have
helped keep interest rates low. In turn, low interest rates have helped
improve corporate balance sheets, contributed to low unemployment, and helped
bring out additional municipal securities supply. Minnesota's economy has more
than kept pace with the national trend, and it continues to provide a
favorable credit backdrop for the state's municipal bond market.
Our outlook for the municipal market remains fairly positive. With municipal
bond supply relatively high and demand on the upswing, securities valuations
are unlikely to remain so inexpensive relative to Treasuries. Municipal
investors stand to benefit from any price appreciation that may occur as this
supply-and-demand imbalance straightens out. Eventually, however, today's
economic good times may give way to slightly higher inflation, and so we
remain somewhat cautious. In our opinion, this is not a good time to expose
the portfolio to bonds with longer maturities and higher interest-rate risk.
Accordingly we believe the fund's neutral duration, and emphasis on low call
risk and in-depth credit research will continue to produce the best returns in
the months 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 5/31/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Minnesota Tax Exempt Income Fund is designed for investors seeking a high
level of current income free from federal and state income tax consistent
with preservation of capital.
TOTAL RETURN FOR PERIODS ENDED 5/31/98
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (4/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 7.90% 2.73% 7.20% 2.20% 7.70% 4.20%
- ------------------------------------------------------------------------------
5 years 32.39 26.13 27.51 25.51 30.34 26.05
Annual average 5.77 4.75 4.98 4.65 5.44 4.74
- ------------------------------------------------------------------------------
Life of fund 78.55 70.15 67.12 67.12 72.92 67.32
Annual average 6.97 6.38 6.15 6.15 6.58 6.17
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98
Lehman Bros. Consumer
Municipal Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 9.39% 1.69%
- ------------------------------------------------------------------------------
5 years 38.53 12.90
Annual average 6.74 2.46
- ------------------------------------------------------------------------------
Life of fund 96.00 29.62
Annual average 8.16 3.07
- ------------------------------------------------------------------------------
Past performance is not indicative of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-year
(where 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. 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. Returns shown for
class A shares have not been adjusted to reflect payments under the class
A distribution plan prior to its implementation.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distribution (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.453916 $0.392783 $0.426624
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Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Total $0.453916 $0.392783 $0.426624
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/97 $8.95 $9.40 $8.92 $8.94 $9.24
- ------------------------------------------------------------------------------
5/31/98 9.19 9.65 9.16 9.19 9.50
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.85% 4.62% 4.20% 4.55% 4.40%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.78 8.36 7.60 8.23 7.96
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 4.71 4.49 4.06 4.41 4.27
- ------------------------------------------------------------------------------
Taxable equivalent3 8.52 8.12 7.35 7.98 7.73
- ------------------------------------------------------------------------------
1Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
3Assumes maximum 44.73% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (4/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 7.23% 2.13% 6.54% 1.54% 7.04% 3.59%
- ------------------------------------------------------------------------------
5 years 31.01 24.74 26.24 24.24 28.96 24.75
Annual average 5.55 4.52 4.77 4.44 5.22 4.52
- ------------------------------------------------------------------------------
Life of fund 79.48 71.04 67.89 67.89 73.77 68.15
Annual average 6.97 6.38 6.15 6.15 6.57 6.17
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. 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.
[GRAPHIC OMITTED: MOUNTAIN CHART OF GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
PLOT POINTS
Cumulative total return of
a $10,000 investment since
10/23/89
Fund's class A Lehman Bros. Consumer Price
Date shares at POP Municipal Bond Index Index
10/23/89 9,525 10,000 10,000
5/31/90 10,300 10,453 10,287
5/31/91 11,353 11,507 10,796
5/31/92 12,242 12,637 11,122
5/31/93 13,665 14,149 11,480
5/31/94 12,927 14,499 11,743
5/31/95 15,048 15,824 12,118
5/31/96 15,545 16,547 12,468
5/31/97 16,725 17,919 12,746
5/31/98 17,015 19,600 12,962
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 $16,712 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$17,292 at net asset value ($16,732 at public offering price). 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 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 and 3.25% for class M 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. 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.
Report of independent accountants
To the Trustees and Shareholders of
Putnam Minnesota Tax Exempt Income Fund
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 (the "fund") at May 31,
1998, 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, 1998,
by correspondence with the custodian and the application of alternative
auditing procedures where investments purchased were not yet received by the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 10, 1998
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FNMA Coll. -- Federal National Mortgage Association Collateralized
FRB -- Floating Rate Bonds
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.4%) (a)
PRINCIPAL AMOUNT RATING(RAT) VALUE
<S> <C> <C> <C> <C>
Minnesota (95.9%)
- -------------------------------------------------------------------------------------------------------------------------------
Bemidji, Hosp. Fac. Rev. Bonds
$ 1,200,000 (First Mtge.-North Country Hlth. Svcs.),
5 5/8s, 9/1/21 A $ 1,239,000
1,760,000 (First Mtge.-North Country Hlth. Svcs.),
5 5/8s, 9/1/15 A 1,826,000
500,000 Centennial, Indpt. G.O. Bonds (School Dist. No. 12),
Ser. A, FSA, 7.15s, 2/1/12 Aaa 525,625
1,930,000 Chaska, Indl. Dev. Rev. Bonds
(Lifecore Biomedical, Inc.), 10 1/4s, 9/1/20 BB/P 2,105,456
3,000,000 Cloquet, Poll. Control Rev. Bonds (Potlatch Corp.),
5.9s, 10/1/26 A 3,165,000
885,000 Crystal, Coml. Dev. Rev. Bonds FRB
(Crystal Gallery Mall), 3.8s, 4/15/14 Aa 885,000
1,000,000 Duluth, Gross Rev. Bonds (Duluth Entertainment),
7.6s, 12/1/11 Baa 1,138,750
1,000,000 Duluth, Econ. Dev. Auth. Hlthcare Fac. Rev. Bonds
(Duluth Clinic), AMBAC, 6.3s, 11/1/22 Aaa 1,087,500
500,000 Duluth, Econ. Dev. Auth. Hlthcare Fac. Rev. Bonds
(BSM Prop.), 5 7/8s, 12/1/28 Ba 500,000
500,000 Fergus Falls, Cmnty. Dev. Rev. Bonds
(Lincoln - St. Andrews Assn.), 8 3/4s, 11/1/06 BB/P 507,000
1,000,000 Hutchinson, Indpt. G.O. Bonds (School Dist. No. 423),
Ser. A, 5 3/4s, 2/1/13 Aa 1,076,250
1,565,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise Cascade Corp.),
7.2s, 10/1/24 Baa 1,778,231
1,500,000 Intl. Falls, Poll. Ctr. Rev Bonds (Boise Cascade Corp.),
5.65s, 12/1/22 BBB 1,530,000
1,105,000 Minneapolis, Cmnty. Dev. Agcy. Supported Dev.
Rev. Bonds (Grace-Lee Products Inc.),
Ser. 91-3, 8 1/4s, 12/1/11 A 1,225,169
Minneapolis, G.O. Bonds (Sports Arena)
3,000,000 5.2s, 10/1/24 Aaa 3,045,000
1,500,000 5 1/8s, 10/1/20 Aaa 1,518,750
1,675,000 Minneapolis, Sales Tax G.O. Bonds, 6 1/4s, 4/1/12 Aaa 1,819,469
2,000,000 Minneapolis, Single Family Rev. Bonds (Phase V),
FNMA Coll. & GNMA Coll., 6 1/4s, 4/1/22 Aaa 2,147,500
3,050,000 Minneapolis, Special G.O. Bonds (School Dist. No. 1),
5s, 2/1/12 Aa 3,103,375
530,000 Minneapolis-St. Paul, Hsg. Fin. Board Single Fam. Mtge.
Rev. Bonds (Phase VI), Ser. A, GNMA Coll.,
8.3s, 8/1/21 AAA 541,358
Minneapolis & St. Paul, Hsg. & Redev. Auth. Hlthcare
Syst. Rev. Bonds
4,000,000 (Group Hlth. Plan, Inc.), 6.9s, 12/1/22 A 4,425,000
2,000,000 (HlthOne Obligated Group), Ser. A, MBIA,
6 3/4s, 8/15/14 Aaa 2,137,500
1,000,000 (Children's Hlthcare), Ser. A, FSA, 5.7s, 8/15/16 Aaa 1,055,000
2,715,000 Minnetonka, Indpt. Rev. Bonds (School Dist. No. 276),
Ser. B, 5 3/4s, 2/1/22 Aa 2,864,325
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 588,139
400,000 Ser. A-Lot 2, 8.2s, 8/1/09 BB/P 409,144
750,000 Ser. B-Lot 1, 7s, 8/1/16 BB/P 797,813
3,000,000 MN Agricultural & Econ. Dev. Board Rev. Bonds
(Fairview Hosp), Ser. A, MBIA, 5 1/2s, 11/15/17 Aaa 3,146,250
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 3,300,000
3,000,000 Ser. B, 5s, 3/1/18 Aaa 3,007,500
2,245,000 Ser. B, 5s, 3/1/17 Aaa 2,256,225
1,000,000 MN State G.O. Bonds, 6s, 8/1/05 Aaa 1,108,750
3,000,000 MN State Duluth Arpt. Tax Increment G.O. Bonds,
Ser. 95A, 6 1/4s, 8/1/14 Aa 3,247,500
MN State Higher Ed. Fac. Auth. Rev. Bonds
1,000,000 (U. St. Thomas), Ser. 3-C, 7 1/8s, 9/1/14 A 1,077,500
580,000 (U. St. Thomas), Ser. 4-P, 5.4s, 4/1/23 A 586,525
1,000,000 (St. Johns U.), Ser. 4-L, 5.35s, 10/1/17 A 1,011,250
MN State Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
1,640,000 Ser. B-1, 6 3/4s, 1/1/26 Aa 1,750,700
975,000 Ser. Q, 6.7s, 1/1/17 Aa 1,059,094
5,000,000 MN State Hsg. Fin. Agcy. Single Fam. Rev. Bonds,
Ser. E, 6.85s, 1/1/24 Aa 5,368,750
1,500,000 MN State Hsg. Fin. Agcy. Dev. Rev. Bonds, Ser. A,
6.95s, 2/1/14 A 1,593,750
1,000,000 Monticello, Big Lake Cmnty. Hosp. Dist. Rev. Bonds
(Hlthcare Fac.), Ser. A, 5 3/4s, 12/1/19 BBB/P 997,500
Morris Hosp. Fac. Rev. Bonds (Stevens Cmnty.,
Memorial Hosp.)
250,000 Ser. A, 8 1/4s, 5/1/10 AAA/P 271,875
500,000 Ser. B, 8 1/4s, 5/1/10 AAA/P 543,750
1,000,000 North Branch, MN Indpt. G.O. Bonds (School Dist.
No. 138), Ser. A, FGIC, 5 1/2s, 2/1/12 Aaa 1,047,500
North St. Paul, Maplewood Indpt. Sch. Dist. No. 622
G.O. Bonds, Ser. A, MBIA
2,000,000 7.1s, 2/1/19 Aaa 2,327,500
3,000,000 6 7/8s, 2/1/15 Aaa 3,472,500
600,000 North Suburban Hospital Dist. VRDN (Anoka &
Ramsey Cnty. Hosp., Hlth. Ctr.), 3.8s, 8/1/14 AA 600,000
Northern MN Muni. Pwr. Agcy. Rev. Bonds
2,000,000 Ser. A, 7 1/4s, 1/1/16 A 2,078,460
2,450,000 FSA, 5 1/2s, 1/1/07 Aaa 2,639,875
1,000,000 Northfield, College Fac. Rev. Bonds
(St. Olaf College), 6.4s, 10/1/21 A 1,066,250
Northfield, Hlthcare Fac. Rev. Bonds
(Retirement Ctr.), Ser. A
1,230,000 6s, 5/1/28 BB/P 1,236,150
690,000 5 3/4s, 5/1/16 BB/P 693,450
1,160,000 Ramsey Cnty., G.O. Bonds, Ser. A, 5 3/8s, 2/1/16 Aaa 1,184,650
Rochester Hlthcare Fac. IFB (Mayo Foundation)
3,000,000 Ser. E, 9.37s, 11/15/12 AA 3,292,500
3,300,000 Ser. H, 9.081s, 11/15/15 (SEG) AA 3,823,875
4,000,000 Rochester, Hlthcare Fac. Rev. Bonds
(Olmsted Med. Group), 7 1/2s, 7/1/19 BB/P 4,390,000
2,440,000 Rochester, Indpt. Sch. G.O. Bonds (Dist. No. 535),
Ser. A, 5 1/4s, 2/1/15 Aaa 2,507,100
2,500,000 Sartell Poll. Control Rev. Bonds (Champion Intl.),
6.95s, 10/1/12 Baa 2,731,250
2,500,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 Aaa 2,796,875
Southern MN Muni. Pwr. Agcy. Syst. Rev. Bonds
1,240,000 Ser. B, 5s, 1/1/13 A 1,236,900
10,000,000 MBIA, zero %, 1/1/20 Aaa 3,350,000
1,760,000 Spring Lake Park, Indpt. Rev. Bonds (School Dist.
No. 16), MBIA, 5 1/4s, 2/1/17 Aaa 1,786,400
2,400,000 St. Cloud, Hosp. Fac. Rev. Bonds, Ser. C, AMBAC,
6 3/4s, 7/1/11 Aaa 2,634,000
St. Paul, Hsg. & Hosp. Redev. Auth. Rev.
Bonds (Hltheast)
3,500,000 Ser. A, 6 5/8s, 11/1/17 Baa 3,780,000
1,000,000 Ser. B, 5.85s, 11/1/17 Baa 1,023,750
500,000 Ser. A, 5.7s, 11/1/15 Baa 509,375
2,475,000 St. Paul, Indpt. COP (School Dist. No. 625),
Ser. C, 5 1/4s, 2/1/16 Aa 2,521,406
3,500,000 Todd Morrison & Stearns Cntys., Indpt. (School Dist.
No. 2753) G.O. Bonds (School Dist. No. 625),
MBIA, 5s, 4/1/17 Aaa 3,500,000
U. of MN Rev. Bonds, Ser. A
1,000,000 5 3/4s, 7/1/18 Aa 1,098,750
3,000,000 5 1/2s, 7/1/08 Aa 3,255,000
4,310,000 Western MN Muni. Pwr. Agcy. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 1/1/06 Aaa 4,832,587
------------
140,425,001
Puerto Rico (2.5%)
- -------------------------------------------------------------------------------------------------------------------------------
2,150,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 2,499,375
1,000,000 Cmnwlth. of PR, Hwy. Trans. Auth. Rev. Bonds, Ser. Y,
MBIA, 6 1/4s, 7/1/13 AAA 1,161,250
------------
3,660,625
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $134,855,213) (b) $144,085,626
- -------------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $146,398,329.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at May 31, 1998
for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While the agencies may
from time to time revise such ratings, they undertake no obligation to do so, and the ratings do not necessarily
represent what the agencies would ascribe to these securities at May 31, 1998. Securities rated by Putnam are indicated
by "/P" and are not publicly rated. Ratings are not covered by the Report of independent accountants.
(b) The aggregate identified cost on a tax basis is $134,855,213, resulting in gross unrealized appreciation and depreciation
of $9,388,084 and $157,671, respectively, or net unrealized appreciation of $9,230,413.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at May 31, 1998.
The rates shown on Floating Rate Bonds (FRB) are the current interest rates at May 31, 1998 which are subject to change
based on the terms of the security.
The rates shown on IFB, which are securities paying interest rates that vary inversely to changes in the market interest
rates, and VRDN's are the current interest rates at May 31, 1998.
The fund had the following industry group concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
Health care 26.9%
Housing 11.7
The fund had the following insurance concentration greater than 10% at May 31,1998
(as a percentage of net assets):
MBIA 16.0%
- ---------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1998
Unrealized
Total Market Aggregate Face Expiration Appreciation/
Value Value Date (Depreciation)
- ---------------------------------------------------------------------------------
Municipal Bond Index
(long) $ 4,590,313 $ 4,502,000 Jun-98 $ 88,313
U.S. Treasury Notes
(short) 12,293,594 12,152,656 Jun-98 (140,938)
- ---------------------------------------------------------------------------------
$ (52,625)
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1998
<S> <C>
Assets
- -------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $134,855,213) (Note 1) $144,085,626
- -------------------------------------------------------------------------------------------------
Cash 939,447
- -------------------------------------------------------------------------------------------------
Interest and other receivables 2,337,819
- -------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 456,260
- -------------------------------------------------------------------------------------------------
Total assets 147,819,152
Liabilities
- -------------------------------------------------------------------------------------------------
Payable for variation margin 18,313
- -------------------------------------------------------------------------------------------------
Distributions payable to shareholders 259,045
- -------------------------------------------------------------------------------------------------
Payable for securities purchased 500,000
- -------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 271,718
- -------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 221,610
- -------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 30,040
- -------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,517
- -------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,017
- -------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 66,526
- -------------------------------------------------------------------------------------------------
Other accrued expenses 45,037
- -------------------------------------------------------------------------------------------------
Total liabilities 1,420,823
- -------------------------------------------------------------------------------------------------
Net assets $146,398,329
Represented by
- -------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $140,578,486
- -------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 5,569
- -------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (3,363,514)
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,177,788
- -------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $146,398,329
Computation of net asset value and offering price
- -------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($100,806,003 divided by 10,965,356 shares) $9.19
- -------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.19)* $9.65
- -------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($44,100,128 divided by 4,812,654 shares) + $9.16
- -------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,492,198 divided by 162,409 shares) $9.19
- -------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.19)** $9.50
- -------------------------------------------------------------------------------------------------
* 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.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1998
<S> <C>
Tax exempt interest income: $ 8,359,615
- -------------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 856,443
- -------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 202,234
- -------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,109
- -------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,180
- -------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 203,841
- -------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 336,512
- -------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,684
- -------------------------------------------------------------------------------------------------
Reports to shareholders 17,812
- -------------------------------------------------------------------------------------------------
Registration fees 1,374
- -------------------------------------------------------------------------------------------------
Auditing 28,495
- -------------------------------------------------------------------------------------------------
Legal 17,161
- -------------------------------------------------------------------------------------------------
Postage 12,012
- -------------------------------------------------------------------------------------------------
Other 7,635
- -------------------------------------------------------------------------------------------------
Total expenses 1,705,492
- -------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (72,782)
- -------------------------------------------------------------------------------------------------
Net expenses 1,632,710
- -------------------------------------------------------------------------------------------------
Net investment income 6,726,905
- -------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (237,680)
- -------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,040,223)
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures contracts during the year 5,048,065
- -------------------------------------------------------------------------------------------------
Net gain on investments 3,770,162
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $10,497,067
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- -------------------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------------------
Net investment income $ 6,726,905 $ 6,770,788
- -------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,277,903) 460,729
- -------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,048,065 2,249,425
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 10,497,067 9,480,942
- -------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (5,020,689) (5,182,778)
- -------------------------------------------------------------------------------------------------------------------
Class B (1,688,604) (1,529,534)
- -------------------------------------------------------------------------------------------------------------------
Class M (71,593) (49,476)
- -------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 7,935,353 4,855,431
- -------------------------------------------------------------------------------------------------------------------
Total increase in net assets 11,651,534 7,574,585
Net assets
- -------------------------------------------------------------------------------------------------------------------
Beginning of year 134,746,795 127,172,210
- -------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $5,569 and $59,550, respectively) $146,398,329 $134,746,795
- -------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.95 $8.76 $8.95 $8.79 $9.06
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45 .47 .47 .51 .51
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 .19 (.19) .15 (.27)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .69 .66 .28 .66 .24
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.47) (.47) (.50) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.47) (.47) (.50) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.19 $8.95 $8.76 $8.95 $8.79
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.90 7.73 3.16 7.90 2.57
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $100,806 $98,307 $96,110 $98,418 $95,587
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.01 1.03 1.01 .99 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.89 5.32 5.26 5.85 5.60
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 10.67 50.80 109.85 58.18 28.19
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes amounts paid through
expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 15, 1993+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.92 $8.73 $8.92 $8.77 $9.18
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .39 .41 .41 .45 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 .19 (.19) .15 (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .63 .60 .22 .60 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.39) (.41) (.41) (.45) (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.39) (.41) (.41) (.45) (.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.16 $8.92 $8.73 $8.92 $8.77
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.20 7.04 2.49 7.17 (.32)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $44,100 $35,333 $30,149 $19,698 $8,873
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.66 1.68 1.67 1.63 1.47*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.22 4.67 4.57 5.15 4.23*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 10.67 50.80 109.85 58.18 28.19
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes amounts paid through
expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share April 3, 1995+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.94 $8.76 $8.95 $8.77
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .42 .45 .43 .08
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .26 .18 (.18) .17
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .68 .63 .25 .25
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.45) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.45) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.19 $8.94 $8.76 $8.95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.70 7.29 2.82 2.89*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,492 $1,106 $913 $1
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.31 1.33 1.32 .21*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.64 5.01 4.72 .93*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 10.67 50.80 109.85 58.18
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes amounts paid through
expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
</TABLE>
Notes to financial statements
May 31, 1998
Note 1
Significant accounting policies
Putnam Minnesota Tax Exempt Income Fund (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 A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares within approximately six to 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 M shares are sold with a
maximum front-end sales charge of 3.25% and pay an ongoing distribution fee
that is lower than class B shares and higher than class A 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. Actual
results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and various
relationships between securities in determining value.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
D) 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 May 31, 1998, the fund had
no borrowings against the line of credit.
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, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
At May 31, 1998, the fund had a capital loss carryover of approximately
$1,719,000 available to offset future capital gains, if any. The amount of the
carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- -------------
$723,000 May 31, 2003
832,000 May 31, 2004
164,000 May 31, 2006
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital
gain distributions, if any, are recorded on the ex-dividend date and paid at
least annually. The amount and character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences include temporary
and permanent differences of post October losses, dividends payable and
unrealized gains and losses on certain futures contracts. Reclassifications
are made to the fund's capital accounts to reflect income and gains available
for distribution (or available capital loss carryovers) under income tax
regulations. For the year ended May 31, 1998, the fund required no such
reclassifications.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and
original issue discount bonds are accreted according to the yield-to-maturity
basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.60% of the first $500 million of
average net assets, 0.50% of the next $500 million, 0.45% of the next $500
million, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355%
of the next $5 billion, 0.34% of the next $5 billion, and 0.33% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended May 31, 1998, fund expenses were reduced by $72,782 under
expense offset arrangements with PFTC. Investor servicing and custodian fees
reported in the Statement of operations exclude these credits. The fund could
have invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered into
such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $330 has
been allocated to the fund, and an additional fee for each Trustee's meeting
attended. Trustees who are not interested persons of Putnam Management and who
serve on committees of the Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of Trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
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 Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees currently limit payment by the fund to 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, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $17,156 and $161 from the sale of
class A and class M shares, respectively, and $67,726 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 shares that were
purchased without an initial sales charge as part of an investment of $1
million or more. For the year ended May 31, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $10,651 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $24,067,832 and
$14,668,392, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Capital shares
At May 31, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,312,937 $12,011,038
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 370,581 3,391,346
- ------------------------------------------------------------
1,683,518 15,402,384
Shares
repurchased (1,703,692) (15,576,477)
- ------------------------------------------------------------
Net decrease (20,174) $ (174,093)
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,283,188 $11,437,737
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 389,142 3,468,329
- ------------------------------------------------------------
1,672,330 14,906,066
Shares
repurchased (1,654,928) (14,754,582)
- ------------------------------------------------------------
Net increase 17,402 $ 151,484
- ------------------------------------------------------------
Year ended
May 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 1,212,364 $11,053,422
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 123,282 1,124,947
- ------------------------------------------------------------
1,335,646 12,178,369
Shares
repurchased (484,197) (4,416,317)
- ------------------------------------------------------------
Net increase 851,449 $ 7,762,052
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 790,026 $ 7,019,605
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 111,269 988,567
- ------------------------------------------------------------
901,295 8,008,172
Shares
repurchased (391,861) (3,478,216)
- ------------------------------------------------------------
Net increase 509,434 $4,529,956
- ------------------------------------------------------------
Year ended
May 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 81,529 $740,471
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 7,025 64,302
- ------------------------------------------------------------
88,554 804,773
Shares
repurchased (49,798) (457,379)
- ------------------------------------------------------------
Net increase 38,756 $347,394
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 21,421 $191,695
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,478 48,811
- ------------------------------------------------------------
26,899 240,506
Shares
repurchased (7,453) (66,515)
- ------------------------------------------------------------
Net increase 19,446 $173,991
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1999 will show the tax status of all
distributions paid to your account in calendar 1998.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DOUBLE DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DOUBLE DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement 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
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DOUBLE DAGGER]
High Yield Total Return Fund
High Yield Trust [DOUBLE DAGGER]
High Yield Trust II
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM 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
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:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
+ Formerly Putnam Federal Income Trust
[DOUBLE 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 neither insured
nor guaranteed by the U.S. government. These funds are
managed to maintain a price of $1.00 per share, although
there is no assurance that this price will be maintained
in the future.
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.
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President
Leslie J. Burke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Minnesota Tax
Exempt Income 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. For more information or to
request a prospectus, call toll free: 1-800-225-1581. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations 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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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AN049-43764 847/238/129 7/98
