Putnam
Minnesota
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Because of their limited attractiveness to non-U.S. investors, municipal
bonds did not experience the turbulence endured by taxable bonds,
especially U.S. Treasury issues, in the wake of global investors' flight
to quality last fall. For U.S. investors, however, municipals have
provided unusually handsome current income both in real terms, thanks to
low inflation, and relative to after-tax returns on taxable securities,
especially for higher-bracket taxpayers.
Putnam Minnesota Tax Exempt Income Fund's management has been focusing on
generating maximum current income without undue risk to principal,
primarily through careful selection of portfolio holdings and strategies
aimed at risk reduction. Management is also cautiously seeking out bonds
with longer maturities and is currently focusing on noncallable bonds,
both moves designed to lock in attractive current returns.
I am pleased to announce the appointment of David E. Hamlin as the new
manager of your fund. Before joining Putnam in 1998, he was with Vanguard
Group, Provident Institutional Management Corp., and Provident Bank. He
has 17 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 21, 1999
Report from the Fund Manager
David E. Hamlin
As interest rates moved up during the fiscal year, our emphasis on
higher-yielding issues and intensive securities research served Putnam
Minnesota Tax Exempt Income Fund well. As your fund's fiscal year began,
municipal bond issuers were scrambling to complete their financing in
anticipation of an increase in interest rates. Although the municipal
market continued to be more resistant to rising rates than the taxable
markets, rates on long-term (30-year) bonds edged up during the past 12
months. By the end of the fiscal year, May 31, 1999, these overall trends
in interest rates and Minnesota's strong economy had contributed to a 25%
decrease in the supply of issues year to date, as many traditional
borrowers were strong enough financially not to need new financing.
On the demand side, meanwhile, investor interest in municipal bonds was on
the upswing as your fund's fiscal year drew to a close, drawn by the
yields available on tax-free bonds and the stability of municipals
relative to other capital markets. And since June and July are big coupon
months, demand is likely to undergo a seasonal uptick as investors look
for opportunities to reinvest their dividends. This supply/demand ratio
should create a favorable environment for your fund.
Total return for 12 months ended 5/31/99
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- -------------------------------------------------------
3.38% -1.55% 2.70% -2.22% 2.96% -0.41%
- -------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* MINNESOTA'S NEW GOVERNOR POSES QUESTIONS FOR FINANCIAL ANALYSTS
Minnesota has accumulated a substantial budget surplus and earned a top
bond rating because it has long been one of the more stable,
conservatively managed states in the country. However, newly elected
Governor Ventura's campaign platform emphasized cutting tax rates and
returning surplus funds to the people. Over the near term, these policies
may benefit consumers and stimulate the state economy, but constant levels
of spending along with cutting taxes could be harmful in the long run.
Currently analysts seem to be taking a wait-and-see attitude.
[GRAPHIC OMITTED: horizontal bar chart PORTFOLIO OVERVIEW]
PORTFOLIO OVERVIEW*
Health care/
hospitals 26.0%
Utilities 11.2%
Housing 10.5%
Education 4.5%
Transportation 2.6%
Footnote reads:
*Based on net assets as of 5/31/99. Holdings will vary over time.
Given the current uncertainty, the portfolio's mix in terms of duration,
credit quality, and income is more critical than usual. Although the fund
remains fully invested, we continue to maintain the portfolio in an
overall neutral duration. Our goal is to keep the fund as flexible as
possible, allowing it to benefit from the increase in demand for municipal
bonds that we expect this summer but limiting its sensitivity to
fluctuations in interest rates.
* FUND IS STRUCTURED FOR AN UNCERTAIN MARKET
When we talk about structuring your fund's portfolio, we mean we are
examining characteristics of each individual bond issue, considering how
the fund may perform in different market scenarios. For example, we've
concentrated on bonds that are selling either at a premium or at a
discount to par value. Bonds that trade near par value (100) will
underperform the market regardless of whether interest rates rise or fall,
and so we have emphasized issues that should either protect the fund if
the market goes down or give it more potential on the upside.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa/AAA -- 49.2%
Baa/BBB -- 9.5%
Ba/BB -- 11.1%
A -- 10.4%
Aa/AA -- 19.8%
Footnote reads:
* As a percentage of market value as of 5/31/99. A bond rated BBB/Baa or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
Monitoring a bond's proximity to par is an ongoing responsibility -- not
simply something we take into account when we are making initial
investments for your fund. For example, we recently sold some Minneapolis
airport bonds with an attractive 5% coupon because they had climbed toward
par value and we had purchased them at approximately 95. We used the
proceeds to buy some other Minneapolis airport credits with a different
coupon because we believe they offer better performance potential.
"In May, $15 billion in bonds were sold, the slowest May since 1995. Meantime,
the supply shortage amid strong demand has helped keep munis firm while
Treasuries decline."
- -- Bloomberg News, June 1, 1999
At the end of the fiscal year, approximately half the portfolio was
invested in securities with a rating of AAA from Standard & Poor's.
However, many holdings offer another layer of quality assurance.
Prerefunded issues, which are secured by an escrow account of U.S.
government obligations, offer additional safety because the credit risk of
the original issuer has been replaced by the full faith and credit of the
U.S. government.
Insurance is another safety feature. For example, we recently invested in
some Minnesota Benedictine Health bonds, which were sold with insurance
that insulates bond owners from credit quality changes, thereby adding to
the price stability of the bonds. While these holdings, along with others
discussed in this report, were viewed favorably at the end of the period,
all are subject to ongoing review in accordance with the fund's investment
strategy and may vary in the future.
A closer look at municipal credit ratings
Rating agencies such as Moody's Investors Service and Standard & Poor's Corp.
assign ratings to municipal issuers based on an in-depth analysis of the
issuer's financial condition and management, economic and debt
characteristics, and the specific revenue sources securing the bond. The
highest ratings are Aaa (Moody's) and AAA (Standard & Poor's). Bonds rated in
the Baa/BBB category or higher (A and Aa/AA) are considered to be investment
grade. Securities in the Ba/BB group and below are considered to be below
investment grade or high yield. If you look at "The fund's portfolio" in the
back of this report, you will see ratings next to each issuer's name. The
quality pie chart on page 3 summarizes this listing to give you a general
sense of the portfolio's quality.
Sometimes smaller bonds are not rated because the cost of obtaining a
rating is not justifiable. Unrated bonds can still offer attractive investment
opportunities and may end up in your fund's portfolio; in such a case,
Putnam's analysts perform their own ratings and the bonds are identified in
the portfolio listing by a /P rating.
"The best opportunities for investors come from careful selection rather than
from the performance of any given sector. Bonds with above-average yields add
to your fund's income level, but they also require meticulous research."
- -- David Hamlin, manager,
Putnam Minnesota Tax Exempt Income Fund
The best opportunities for investors come from careful selection rather
than from the performance of any given sector. Bonds with above-average
yields add to your fund's income level, but they also require meticulous
research. Walker Methodist Senior Services is a good example of our focus
on yield. The issue came to market with a yield of 6% -- high for the
current Minnesota market. Our analysis indicates that Walker is a good
project and the fact that it is a very large issue makes it highly liquid,
which means we should have no trouble finding a market for the bonds if
needed.
* INFLATION IS LOW BUT STILL A CONCERN FOR LONG-TERM INVESTORS
Currently the consumer price index is moving toward an annualized core
inflation rate of approximately 2%. While 2% is up from essentially zero
in 1998, it is still half the 4% range that has come to be regarded as
average in the United States. What's more, some prices are continuing to
fall, counter to the overall trend. And even if inflation stays around 2%
through the next 6 to 12 months, a yield of 5% or 6% will still constitute
an attractive return, especially once the psychology of an advancing stock
market begins to shift. A steady income stream with relatively low price
volatility continues to look attractive, particularly if it is also free
from federal, state, and local income taxes.
While no one can predict when interest rates will peak, we believe this is
a good time to begin incrementally lengthening maturities in Putnam
Minnesota Tax Exempt Income Fund's portfolio, locking in today's rates.
However, we will move cautiously, continuing to emphasize low call risk
and in-depth analysis in search of the best long-term returns for
shareholders.
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 5/31/99, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which should
always be considered in light of its investment strategy. Putnam Minnesota Tax
Exempt Income Fund is designed for investors seeking high current income free
from federal and state income taxes, consistent with capital preservation.
TOTAL RETURN FOR PERIODS ENDED 5/31/99
Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (4/3/95)
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------
1 year 3.38% -1.55% 2.70% -2.22% 2.96% -0.41%
- --------------------------------------------------------------------------
5 years 33.69 27.31 29.39 27.39 31.47 27.13
Annual average 5.98 4.95 5.29 4.96 5.62 4.92
- --------------------------------------------------------------------------
Life of fund 84.93 76.22 71.91 71.91 78.33 72.56
Annual average 6.61 6.08 5.81 5.81 6.21 5.85
- --------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/99
Lehman Bros. Municipal Consumer
Bond Index price index
- -------------------------------------------------------------
1 year 4.67% 2.09%
- -------------------------------------------------------------
5 years 41.51 12.68
Annual average 7.19 2.42
- -------------------------------------------------------------
Life of fund 105.16 32.32
Annual average 7.79 2.97
- -------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 1-, 5-, and 10-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.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 10/23/89
Fund's class A Lehman Bros. Consumer price
Date shares at POP Municipal Bond Index index
10/23/89 9,529 10,000 10,000
5/31/90 9,834 10,453 10,287
5/31/91 10,702 11,506 10,796
5/31/92 11,650 12,636 11,123
5/31/93 12,852 14,148 11,481
5/31/94 13,182 14,497 11,744
5/31/95 14,223 15,822 12,118
5/31/96 14,672 16,545 12,468
5/31/97 15,805 17,918 12,747
5/31/98 17,047 19,600 12,962
5/31/99 $17,622 $20,516 $13,232
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $17,191 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $17,833 ($17,256 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/99
Class A Class B Class M
- ----------------------------------------------------------------------------
Distributions (number) 12 12 12
- ----------------------------------------------------------------------------
Income $0.446636 $0.385536 $0.418886
- ----------------------------------------------------------------------------
Capital gains1 -- -- --
- ----------------------------------------------------------------------------
Total $0.446636 $0.385536 $0.418886
- ----------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ----------------------------------------------------------------------------
5/31/98 $9.19 $9.65 $9.16 $9.19 $9.50
- ----------------------------------------------------------------------------
5/31/99 9.05 9.50 9.02 9.04 9.34
- ----------------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------------
Current dividend rate2 4.85% 4.62% 4.19% 4.54% 4.39%
- ----------------------------------------------------------------------------
Taxable equivalent3 8.78 8.36 7.58 8.21 7.94
- ----------------------------------------------------------------------------
Current 30-day SEC yield4 4.05 3.85 3.39 3.50 3.39
- ----------------------------------------------------------------------------
Taxable equivalent3 7.33 6.97 6.13 6.33 6.13
- ----------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 44.73% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/99 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 1.25% -3.57% 0.73% -4.11% 0.97% -2.33%
- -----------------------------------------------------------------------
5 years 32.04 25.84 27.82 25.82 29.98 25.79
Annual average 5.72 4.70 5.03 4.70 5.38 4.70
- -----------------------------------------------------------------------
Life of fund 82.06 73.48 69.37 69.37 75.73 70.04
Annual average 6.39 5.86 5.59 5.59 6.00 5.64
- -----------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
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 4.75% maximum 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 class B CDSC declines from a 5% maximum during the
first year to 1% during the sixth year. After the sixth year, the CDSC no
longer applies.
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. Securities in the fund
do not match those in the indexes and performance of the fund will differ.
It is not possible to invest directly in an index.
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as of
the last day of the reporting period. Holdings are organized by asset type
and industry sector, country, or state to show areas of concentration and
diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment income
or realized capital gains) over the current reporting period and the most
recent fiscal year-end. The distributions listed here may not match the
amounts listed in the Statement of Operations because the distributions are
determined on a tax basis and may be paid in a different period from the one
in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
Report of independent accountants
For the fiscal year ended May 31, 1999
To the Trustees and Shareholders of
Putnam Minnesota Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio (except for bond ratings), and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial
position of Putnam Minnesota Tax Exempt Income Fund (the "fund") at May
31, 1999, 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,
1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 13, 1999
<TABLE>
<CAPTION>
The fund's portfolio
May 31, 1999
KEY TO ABBREVIATIONS
AMBAC -- AMBAC Indemnity Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
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 (98.9%) (a)
PRINCIPAL AMOUNT RATING(RAT) VALUE
<S> <C> <C> <C>
Minnesota (96.6%)
- --------------------------------------------------------------------------------------------------------------------------
Bemidji, Hosp. Fac. Rev. Bonds (First Mtge.-North
Country Hlth.Svcs.)
$ 1,200,000 5 5/8s, 9/1/21 A $ 1,234,500
1,760,000 5 5/8s, 9/1/15 A 1,815,000
500,000 Centennial, Indpt. G.O. Bonds (School Dist. No. 12),
Ser. A, FSA, 7.15s, 2/1/12 Aaa 512,690
1,910,000 Chaska, Indl. Dev. Rev. Bonds (Lifecore
Biomedical, Inc.), 10 1/4s, 9/1/20 BB/P 2,064,061
3,000,000 Cloquet, Poll. Control Rev. Bonds (Potlatch Corp.),
5.9s, 10/1/26 A- 3,127,500
1,000,000 Duluth, Gross Rev. Bonds (Duluth Entertainment),
7.6s, 12/1/11 Baa 1,117,500
Duluth, Econ. Dev. Auth. Hlthcare Fac. Rev. Bonds
1,000,000 (Duluth Clinic), AMBAC, 6.3s, 11/1/22 Aaa 1,095,000
1,250,000 (BSM Properties, Inc.), Ser. A, 5 7/8s, 12/1/28 BB/P 1,228,125
1,000,000 Hutchinson, Indpt. G.O. Bonds (School Dist.
No. 423), Ser. A, 5 3/4s, 2/1/13 Aa1 1,073,750
1,565,000 Intl. Falls, Env. Fac. Rev. Bonds (Boise Cascade Corp.),
7.2s, 10/1/24 Baa3 1,731,281
1,500,000 Intl. Falls, Poll. Ctr. Rev Bonds (Boise Cascade Corp.),
5.65s, 12/1/22 BB+ 1,471,875
Minneapolis Rev. Bonds (Walker Methodist Sr. Svcs.)
2,000,000 Ser. A, 6s, 11/15/28 BB-/P 2,012,500
1,300,000 Ser. C, 6s, 11/15/28 BB-/P 1,308,125
1,750,000 Minneapolis & St. Paul Comnty Arpt. Rev. Bonds,
Ser. A, AMBAC, 5s, 1/1/30 Aaa 1,686,563
Minneapolis & St. Paul, Hsg. & Redev. Auth. Hlthcare
Syst. Rev. Bonds
4,000,000 (Group Hlth. Plan Inc.), 6.9s, 10/15/22 A- 4,310,000
2,000,000 (HlthOne Obligated Group), Ser. A, MBIA,
6 3/4s, 8/15/14 Aaa 2,097,500
1,000,000 (Childrens Hlthcare), Ser. A, FSA, 5.7s, 8/15/16 Aaa 1,052,500
1,250,000 Minneapolis & St. Paul, Metropolitan Arpt. Cmnty.
Arpt. Rev. Bonds, Ser. B, AMBAC, 5 1/4s, 1/1/14 Aaa 1,264,063
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- 1,198,925
Minneapolis, G.O. Bonds (Sports Arena)
3,000,000 5.2s, 10/1/24 Aaa 3,015,000
1,500,000 5 1/8s, 10/1/20 Aaa 1,503,750
1,675,000 Minneapolis, Sales Tax G.O. Bonds, 6 1/4s, 4/1/12 Aaa 1,802,719
1,645,000 Minneapolis, Single Family Rev. Bonds (Phase V),
FNMA Coll. & GNMA Coll., 6 1/4s, 4/1/22 Aaa 1,725,194
3,050,000 Minneapolis, Special Sch. Dist. No. 1 G.O. Bonds,
5s, 2/1/12 Aa1 3,084,313
380,000 Minneapolis-St. Paul, Hsg. Fin. Board Single Fam.
Mtge. Rev. Bonds (Phase VI), Ser. A, GNMA Coll.,
8.3s, 8/1/21 AAA 383,800
7,480,000 Minnesota, Agricultural & Econ. Dev. Board
Rev. Bonds (Benedictine Hlth.), Ser. A, MBIA,
5 1/4s, 2/15/14 AAA 7,620,250
Minnesota, Muni. Pwr. Agcy. Elec. Syst.
Rev. Bonds FSA
1,500,000 5 3/8s, 1/1/14 Aaa 1,550,625
1,000,000 5 1/4s, 1/1/13 Aaa 1,027,500
2,715,000 Minnetonka, Indpt. Rev. Bonds (School Dist
No. 276), Ser. B, 5 3/4s, 2/1/22 Aa1 2,915,231
MN Agricultural & Econ. Dev. Board Rev. Bonds
750,000 (Small Bus. Dev. Loan Program), Ser. B-Lot
1, 7s, 8/1/16 BBB-/P 785,625
3,000,000 (Fairview Hosp), Ser. A, MBIA, 5 1/2s, 11/15/17 Aaa 3,093,750
MN Pub. Fac. Auth. Wtr. Poll. Control Rev. Bonds
1,500,000 Ser. A, 6.95s, 3/1/13 Aaa 1,608,750
3,000,000 Ser. A, 6 1/2s, 3/1/14 Aaa 3,258,750
2,245,000 Ser. B, 5s, 3/1/17 Aaa 2,233,775
3,000,000 MN State Duluth Arpt. Tax Increment G.O. Bonds,
Ser. 95A, 6 1/4s, 8/1/14 Aaa 3,228,750
1,000,000 MN State G.O. Bonds, 6s, 8/1/05 Aaa 1,096,250
MN State Higher Ed. Fac. Auth. Rev. Bonds
1,000,000 (U. St. Thomas), Ser. 3-C, 7 1/8s, 9/1/14 AAA/P 1,053,750
580,000 (U. St. Thomas), Ser. 4-P, 5.4s, 4/1/23 A2 578,550
1,000,000 (St. Johns U.), Ser. 4-L, 5.35s, 10/1/17 A3 995,000
MN State Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds
1,565,000 Ser. B-1, 6 3/4s, 1/1/26 AA+ 1,645,206
960,000 Ser. Q, 6.7s, 1/1/17 AA+ 1,018,800
5,000,000 Ser. E, 6.85s, 1/1/24 AA+ 5,256,250
1,500,000 MN State Hsg. Fin. Agcy. Dev. Rev. Bonds, Ser. A,
6.95s, 2/1/14 Aa2 1,578,750
1,000,000 Monticello Big Lake Cmnty. Hosp. Dist. Rev. Bonds
(Hlthcare Fac.), Ser. A, 5 3/4s, 12/1/19 BBB/P 985,000
Morris Hosp. Fac. Rev. Bonds (Stevens Cmnty.
Memorial Hosp.)
250,000 Ser. A, 8 1/4s, 5/1/10 AAA/P 263,478
500,000 Ser. B, 8 1/4s, 5/1/10 AAA/P 526,955
1,500,000 New Hope, Hsg. & Hlth. Rev. Bonds (Minnesota
Masonic Home North Ridge), 5 7/8s, 3/1/29 BB-/P 1,462,500
1,000,000 North Branch, MN Indpt. G.O. Bonds (School Dist.
No. 138), Ser. A, FGIC, 5 1/2s, 2/1/12 AAA 1,056,250
North St. Paul Maplewood Indpt Sch. Dist. No. 622
G.O. Bonds, Ser. A, MBIA, 7.1s, 2/1/19
2,000,000 7.1s, 2/1/19 AAA 2,285,000
3,000,000 6 7/8s, 2/1/15 AAA 3,393,750
500,000 North Suburban Hospital Dist. VRDN (Anoka &
Ramsey Cnty. Hosp., Hlth. Ctr.), 3.45s, 8/1/14 A-1+ 500,000
3,000,000 Northern MN Muni. Pwr. Agcy. Elec. Syst.
Rev. Bonds, Ser. B, AMBAC, 4 3/4s, 1/1/20 Aaa 2,872,500
2,450,000 Northern MN Muni. Pwr. Agcy. Rev. Bonds, FSA,
5 1/2s, 1/1/07 Aaa 2,621,500
1,000,000 Northfield College Fac. Rev. Bonds
(St. Olaf College), 6.4s, 10/1/21 A3 1,071,250
Northfield, Hlthcare Fac. Rev. Bonds
(Retirement Ctr.), Ser. A
1,230,000 6s, 5/1/28 BB/P 1,231,538
690,000 5 3/4s, 5/1/16 BB/P 690,863
1,125,000 Olmsted Cnty., Hlthcare Fac. Rev. Bonds
(Olmsted Med. Ctr.), 5.55s, 7/1/19 BB+/P 1,094,063
1,160,000 Ramsey Cnty., G.O. Bonds, Ser. A, 5 3/8s, 2/1/16 Aaa 1,189,000
Rochester Hlthcare Fac. IFB (Mayo Foundation)
3,000,000 Ser. E, 8.364s, 11/15/12 AA+ 3,303,750
3,300,000 Ser. H, 8.32s, 11/15/15 (SEG) AA+ 3,757,875
4,000,000 Rochester Hlthcare Fac. Rev. Bonds
(Olmsted Med. Group), 7 1/2s, 7/1/19 BB+/P 4,625,000
2,440,000 Rochester, Indpt. Sch. G.O. Bonds (Dist. No. 535),
Ser. A, 5 1/4s, 2/1/15 Aaa 2,568,100
2,500,000 Sartell Poll. Control Rev. Bonds (Champion Intl.),
6.95s, 10/1/12 Baa1 2,684,375
2,500,000 SCA Multi-Fam. Mtge. Rev. Bonds (Burnsville),
Ser. A-9, FSA, 7.1s, 1/1/30 Aaa 2,753,125
Southern MN Muni. Pwr. Agcy. Syst. Rev. Bonds
1,240,000 Ser. B, 5s, 1/1/13 A+ 1,232,250
10,000,000 MBIA, zero %, 1/1/20 Aaa 3,412,500
2,400,000 St. Cloud, Hosp. Fac. Rev. Bonds, Ser. C, AMBAC,
6 3/4s, 7/1/11 Aaa 2,586,000
St. Paul, Hsg. & Hosp. Redev. Auth.
Rev. Bonds (Hltheast)
3,410,000 Ser. A, 6 5/8s, 11/1/17 Baa3 3,512,300
1,000,000 Ser. B, 5.85s, 11/1/17 Baa3 966,250
500,000 Ser. A, 5.7s, 11/1/15 Baa3 478,750
2,500,000 St. Paul, Hsg. & Redev. Auth. Rev. Bonds
(Regions Hosp.), 5.3s, 5/15/28 BBB+ 2,356,250
2,475,000 St. Paul, Indpt. COP (School Dist. No. 625), Ser. C,
5 1/4s, 2/1/16 AA 2,496,656
U. of MN Rev. Bonds, Ser. A
1,000,000 5 3/4s, 7/1/18 Aa2 1,085,000
3,000,000 5 1/2s, 7/1/08 Aa2 3,232,500
4,310,000 Western MN Muni. Pwr. Agcy. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 1/1/06 Aaa 4,789,484
--------------
150,545,608
Puerto Rico (2.3%)
- --------------------------------------------------------------------------------------------------------------------------
2,150,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 2,469,813
1,000,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds,
Ser. Y, MBIA, 6 1/4s, 7/1/13 AAA 1,152,500
--------------
3,622,313
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $147,276,683) (b) $ 154,167,921
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $155,842,186.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
May 31,1999 for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While
the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings do
not necessarily represent what the agencies would ascribe to these securities at May 31, 1999. 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 $147,276,683, resulting in gross unrealized appreciation and
depreciation of $7,503,538 and $612,300, respectively, or net unrealized appreciation of $6,891,238.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at May 31, 1999.
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, 1999.
The fund had the following industry group concentrations greater than 10% at May 31, 1999 (as a percentage of net
assets):
Health care/hospitals 26.0%
Utilities 11.2
Housing 10.5
The fund had the following insurance concentration greater than 10% at May 31, 1999 (as a percentage of net
assets):
MBIA 11.9%
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1999
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- -------------------------------------------------------------------------------
Municipal Bond
Future (long) $3,132,187 $3,146,151 Sep-99 $(13,964)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $147,276,683) (Note 1) $154,167,921
- -----------------------------------------------------------------------------------------------
Cash 74,443
- -----------------------------------------------------------------------------------------------
Interest and other receivables 2,540,324
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 10,104
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 84,808
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 7,312
- -----------------------------------------------------------------------------------------------
Total assets 156,884,912
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 277,556
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 431,026
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 197,468
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 12,543
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,867
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,033
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 73,065
- -----------------------------------------------------------------------------------------------
Other accrued expenses 41,168
- -----------------------------------------------------------------------------------------------
Total liabilities 1,042,726
- -----------------------------------------------------------------------------------------------
Net assets $155,842,186
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $152,448,834
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (73,942)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (3,409,980)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,877,274
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $155,842,186
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($102,868,830 divided by 11,361,944 shares) $9.05
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.05)* $9.50
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($51,360,095 divided by 5,691,220 shares)+ $9.02
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,613,261 divided by 178,406 shares) $9.04
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.04)** $9.34
- -----------------------------------------------------------------------------------------------
* 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, 1999
<S> <C>
Tax exempt interest income: $8,673,484
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 913,319
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 220,989
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,642
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 206,453
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 404,546
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,254
- -----------------------------------------------------------------------------------------------
Reports to shareholders 14,224
- -----------------------------------------------------------------------------------------------
Registration fees 4,995
- -----------------------------------------------------------------------------------------------
Auditing 30,013
- -----------------------------------------------------------------------------------------------
Legal 5,411
- -----------------------------------------------------------------------------------------------
Postage 15,305
- -----------------------------------------------------------------------------------------------
Other 9,925
- -----------------------------------------------------------------------------------------------
Management fee waiver (Note 2) (127,265)
- -----------------------------------------------------------------------------------------------
Total expenses 1,712,811
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (52,718)
- -----------------------------------------------------------------------------------------------
Net expenses 1,660,093
- -----------------------------------------------------------------------------------------------
Net investment income 7,013,391
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 627,168
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (645,551)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (2,300,514)
- -----------------------------------------------------------------------------------------------
Net loss on investments (2,318,897)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $4,694,494
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------------
1999 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 7,013,391 $ 6,726,905
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments (18,383) (1,277,903)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (2,300,514) 5,048,065
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,694,494 10,497,067
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (5,044,666) (5,020,689)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,999,529) (1,688,604)
- ---------------------------------------------------------------------------------------------------------------
Class M (65,961) (71,593)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 11,859,519 7,935,353
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 9,443,857 11,651,534
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 146,398,329 134,746,795
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income and undistributed
net investment income of $73,942 and
$5,569, respectively) $155,842,186 $146,398,329
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.19 $8.95 $8.76 $8.95 $8.79
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45(a) .45 .47 .47 .51
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.14) .24 .19 (.19) .15
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .31 .69 .66 .28 .66
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.45) (.45) (.47) (.47) (.50)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.45) (.47) (.47) (.50)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.05 $9.19 $8.95 $8.76 $8.95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.38 7.90 7.73 3.16 7.90
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $102,869 $100,806 $98,307 $96,110 $98,418
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .92(a) 1.01 1.03 1.01 .99
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.81(a) 4.89 5.32 5.26 5.85
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.79 10.67 50.80 109.85 58.18
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) 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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.16 $8.92 $8.73 $8.92 $8.77
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38(a) .39 .41 .41 .45
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.13) .24 .19 (.19) .15
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .25 .63 .60 .22 .60
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.39) (.39) (.41) (.41) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.39) (.39) (.41) (.41) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.02 $9.16 $8.92 $8.73 $8.92
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.70 7.20 7.04 2.49 7.17
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $51,360 $44,100 $35,333 $30,149 $19,698
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.57(a) 1.66 1.68 1.67 1.63
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.16(a) 4.22 4.67 4.57 5.15
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.79 10.67 50.80 109.85 58.18
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) 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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.19 $8.94 $8.76 $8.95 $8.77
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .41(a) .42 .45 .43 .08
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.14) .26 .18 (.18) .17
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .27 .68 .63 .25 .25
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.42) (.43) (.45) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.42) (.43) (.45) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.04 $9.19 $8.94 $8.76 $8.95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 2.96 7.70 7.29 2.82 2.89*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,613 $1,492 $1,106 $913 $1
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.22(a) 1.31 1.33 1.32 .21*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.51(a) 4.64 5.01 4.72 .93*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 12.79 10.67 50.80 109.85 58.18
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) 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, 1999
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
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc., believes
is consistent with preservation of capital by investing primarily in a
diversified portfolio of longer-term 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 after 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, 1999, 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, 1999, the fund had a capital loss carryover of approximately
$1,529,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- ------------
$533,000 May 31, 2003
832,000 May 31, 2004
164,000 May 31, 2006
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed monthly. 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 dividends payable, unrealized gains and losses on
certain futures contracts and market discount. 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, 1999, the fund reclassified
$17,254 to decrease distributions in excess of net investment income and
$10,829 to increase paid-in-capital, with an increase to accumulated net
realized losses of $28,083. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
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. Effective August 1, 1998, the Trustees approved a
managment fee waiver of 0.10% on each tier. On June 4, 1999, the Trustees
approved a management fee schedule to become effective on July 1, 1999,
based upon the lesser of (i) an annual rate of 0.50% of the average net
asset value of the Fund or (ii) the initial tiers mentioned above.
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, 1999, fund expenses were reduced by $52,718
under expense offset arrangements with PFTC and brokerage service
arrangements. Investor servicing and custodian fees reported in the
Statement of operations exclude these credits. The fund could have
invested a portion of the assets utilized in connection with the expense
offset arrangements in an income producing asset if it had not entered
into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $320 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 have approved 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, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $27,520 and $946 from the sale of
class A and class M shares, respectively, and $58,315 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. For the year ended May 31, 1999, Putnam Mutual Funds Corp., acting
as underwriter received $12,083 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 1999, purchases and sales of investment
securities other than short-term investments aggregated $31,871,298 and
$19,118,084, 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, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,710,452 $15,734,086
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 365,555 3,362,246
- -----------------------------------------------------------------------------
2,076,007 19,096,332
Shares
repurchased (1,679,419) (15,447,343)
- -----------------------------------------------------------------------------
Net increase 396,588 $ 3,648,989
- -----------------------------------------------------------------------------
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, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,465,405 $13,439,627
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 149,792 1,373,031
- -----------------------------------------------------------------------------
1,615,197 14,812,658
Shares
repurchased (736,631) (6,747,277)
- -----------------------------------------------------------------------------
Net increase 878,566 $ 8,065,381
- -----------------------------------------------------------------------------
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, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 42,013 $384,045
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,867 63,137
- -----------------------------------------------------------------------------
48,880 447,182
Shares
repurchased (32,883) (302,033)
- -----------------------------------------------------------------------------
Net increase 15,997 $145,149
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.68% 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 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds. Please
call your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus
for any Putnam fund. It contains more complete information, including charges
and expenses. Please read it carefully before you invest or send money.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. 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 [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
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
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
TAX-FREE INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK] **
California, New York
ASSET ALLOCATION FUNDS
Putnam Asset Allocation Funds-three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Putnam Diversified Income Trust II
[DBL. DAGGER] Closed to new investors. Some exceptions may apply. Contact
Putnam for details.
[SECTION MARK] Not available in all states.
** An investment in a money market fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the funds seek to preserve your investment at $1.00 per share, it
is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
Fund information
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
David E. Hamlin
Vice President and Fund Manager
Richard A. Monaghan
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' Web site: 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
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN049-53219 847/238/129 7/99
