Putnam Michigan Tax Exempt Income Fund II
Annual Report
May 31, 1994
[ARTWORK]
Boston * London * Tokyo
<PAGE>
Performance highlights
Performance should always be considered in light of a fund's
investment strategy. Putnam Michigan Tax Exempt Income Fund
II is designed for investors seeking a high level of current
income free from federal and state income tax consistent
with preservation of capital.
FISCAL 1994 RESULTS AT A GLANCE
<TABLE>
<S> <C> <C> <C> <C>
Class A Class B
Total return: NAV POP NAV CDSC
12 months ended 5/31/94
(change in value during period
plus reinvested
distributions) 2.03% -2.78% -0.68% -
5.40%
Life of Class B
Current return: NAV POP NAV
(end of period:)
Current dividend rate(1) 5.83% 5.56%
5.24%
Taxable equivalent(2) 10.12 9.65
9.09
Current 30-day
SEC yield(3) 5.72 5.44
5.03
Taxable equivalent(2) 9.93 9.44
8.73
Share value: NAV POP NAV
5/31/93 $9.30 $9.76
7/15/93 (inception of
Class B shares) -- --
$9.43
5/31/94 8.90 9.34 8.90
<S> <C> <C> <C> <C> <C>
Capital In excess
Distributions: No. Income gains(4) of gains
Total
Class A 13 $0.518641 $0.025 $0.054
$0.597641
Class B 11 0.396684 -- 0.079
0.475684
</TABLE>
Performance data represent past results and will differ for
each class of shares. Class B share performance since
inception on 7/15/93. For performance over longer periods,
see pages 8 and 9. POP assumes 4.75% maximum sales charge.
CDSC assumes 5% maximum contingent deferred sales charge.
(1) Income portion of most recent distribution, annualized
and
divided by NAV or POP at end of period.
(2) Assumes maximum combined 42.38% federal and state tax
rate. Results for investors subject to lower tax rates would
not be as
advantageous. For some investors, investment income may also
be subject to the federal Alternative Minimum Tax.
(3) Based only on investment income, calculated using SEC
guidelines.
4Capital gains are taxable.
<PAGE>
From the Chairman
[PHOTOGRAPH OF GEORGE PUTNAM]
(c) Karsh, Ottawa
Dear Shareholder:
The Federal Reserve Board's primary concern remains fighting
not only inflation but the fear of inflation. It is
addressing this issue by gradually raising the short-term
interest rates under its control to slow the economy's
growth to what it regards as a sustainable pace.
The combination of the Fed's continuing policy and the
response by individuals and businesses to last year's tax
increase could produce more of a slowdown in business than
many observers now expect.
As this slowing becomes more obvious, the Fed will come
under growing pressure from politicians to ease up. The Fed
is not likely to yield. But the very fact that investors
think it might could cause some more volatility in the bond
markets in the months ahead.
Meanwhile, you can take comfort in the tax shelter provided
for the income generated by your Putnam tax-exempt fund
shares.
In the following report, Fund Manager Howard Manning
explains how he is positioning your fund's portfolio to
respond to 1994's unfolding events.
Respectfully yours,
[George Putnam Signature]
George Putnam
Chairman of the Trustees
July 20, 1994
<PAGE>
Report from the fund manager
Howard K. Manning
A familiar citation from Dickens -- being both the "best"
and
"the worst of times" -- is an apt description of the
turbulent atmosphere in the fixed-income markets over the
past 12 months. In the relative free fall that began on
February 4, 1994, precipitated by the first in a series of
interest rate increases, Putnam Michigan Tax Exempt Income
Fund II withstood the market pressures comparatively well.
While affected to some degree by the declines, your fund
finished fiscal 1994 with total returns of 2.03% for class A
shares based on results at net asset value. During a period
that saw the bond market move from peak to trough, this
performance surpassed better than half the competition.
Moreover, with a current dividend rate of 5.83% for class A
shares, the fund continues to offer tax-weary Michigan
investors a substantial tax-free income advantage.
STRATEGY HIGHLIGHTS: MANAGING DURATION AND CALL EXPOSURE
One of the key tactics we employed in anticipation of the
market's downturn was to utilize various hedging strategies
to shorten the fund's duration. Duration is a mathematical
formula that indicates how much bond prices will move up or
down with each percentage-point shift in interest rates.
Like maturity, with which it is often confused, duration is
measured in years. The shorter the duration, the less
volatility you can expect from the portfolio. In a rising
interest rate environment, keeping the portfolio's average
duration relatively short can be instrumental in protecting
its value.
Another significant part of our approach centered on in-
depth research and credit analysis of opportunities in the
marketplace. Intensive scrutiny of bond issuers' credit
quality, funding sources, and future prospects guided the
fund's investment process.
A third factor contributing to the fund's solid relative
performance was the portfolio's high degree of call
protection. A bond's provisions may allow the issuer to call
it in at or after a specified date prior to maturity. This
redemption is often done when prevailing interest rates are
lower than they were when the bond was issued and can force
an investor to reinvest at the current lower rates.
Consequently, exposure to callable bonds always has some
potential to affect a fund's income stream.
We strive to reduce the fund's call risk as an ongoing part
of our strategy. We do this by purchasing both noncallable
bonds and bonds with first call dates that extend beyond the
year 2000. Even with this year's rise in interest rates,
reinvestment risk remains substantial, since many of the
bonds now being called were issued in the far higher rate
environment of the 1980s. However, our strategy has been
effective in minimizing call risk thus far.
[Bar Chart]
Top Five Industry Sectors
Health Care 24.6%
Housing 13.1%
Water and Sewage 9.6%
Utilities 5.7%
Transportation 4.1%
Reflects percentage of net assets as of 5/31/94. Portfolio holdings
will vary in future.
PORTFOLIO REMAINS WELL-DIVERSIFIED, HEALTH CARE FOCUS
CONTINUES
The securities of hospitals and health maintenance
organizations (HMOs) continue to be a dominant theme, making
up nearly 25% of the fund's assets. Our specialized
expertise in this area, combined with rigorous credit
research, has resulted in attractive acquisitions throughout
the state. Our strategy here has been to diversify holdings
geographically by purchasing bonds issued by the strongest
providers in the various health care markets around the
state. For example, this has led us to purchase securities
issued by the Detroit Medical Center and bonds from St.
Joseph's Hospital in Tawas Bay.
With the elimination of the property tax as the funding
source for school district bonds, many of these bonds have
declined in value. Fortunately, the fund has not owned and
does not currently own any of the affected securities.
Any school district bonds in the portfolio are backed by the
municipalities' unlimited taxing power. Furthermore, nearly
all of these securities are insured. This means that if tax
revenues are insufficient to support the bond issue, the
bond insurer guarantees the interest payments and the full
repayment of principal. Therefore, all insured bonds carry a
AAA credit rating -- the highest available.
We are closely following developments in Detroit. The recent
affirmation of the city's credit rating at BBB- indicates
that a measure of stability has been attained. However,
major fiscal problems still exist. We are hopeful that the
initiatives undertaken by the Archer administration and the
city's leaders will result in further progress and
stability. Given this climate of positive change, we will
carefully examine the city's planned general obligation (GO)
debt issuance later this year. If the bonds meet our
stringent value and risk/return criteria, the fund may
participate in a Detroit issue for the first time.
Two other sectors may provide attractive opportunities for
the fund. With the resurgence of the auto industry and its
beneficial impact on Flint's economy, we are evaluating that
city's GOs and other securities. Following the axiom that
adversity creates opportunity, we are monitoring
developments affecting the state's electric utilities. With
several companies having been placed on credit watch by
Standard and Poor's," the fund may have the opportunity to
purchase discounted securities with excellent return
potential and manageable risks.
TOP 10 HOLDINGS
<TABLE>
<S> <C>
<C>
% of Net
Value
Assets
Delta Cnty., Econ. Dev. Corp. Env. Inpt.
VRDN (Escambia Paper), Ser. C, 2.9s 2/13/2 34,800,000
3.31%
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Environmental Research Project),
8.125s 10/1/14 4,290,000
3.08%
Detroit Wtr. Supply Syst. FGIC, 10.083, 7/1/22 4,112,500
2.85%
Monroe Cnty., Poll. Control Rev. Bonds
(Detroit Edison), Ser. 1-B, 6.55s, 8/1/24 4,086,000
2.92%
MI State Hosp. Fin. Auth. Rev. Bonds
(Port Huron Hosp.), Ser. A 7.626s, 7/1/15 3,965,625
2.85%
Jackson Cnty., Hosp Fin Auth Rev Bonds (W.A.
Foote Mem. Hosp.), Ser. A, FGIC, 4.75s, 6/1/15 3,627,500
2.53%
MI State Hsg. Dev. Auth. Rev. Bonds
(Home Impt. Program), Ser. B, 7.65s, 12/1/12 3,481,800
2.50%
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
(Arbor Model & Tooling Project), 10.25s, 9/15/19 3,285,563
2.38%
Kalamazoo Hosp. Fin. Auth. Hosp. Fac.
Residual Interest Bonds, FGIC, 6.808s, 6/1/11 3,005,625
2.16%
Dickinson Cnty. Econ. Dev. Corp. Solid Waste
Disp. Rev. Bonds (Champion Intl.), 6.55s, 3/1/07 2,955,000
2.12%
</TABLE>
Reflects percentage of net assets as of 5/31/94. Portfolio
holdings will vary in future.
MUNICIPAL BONDS OUTPERFORMING TREASURIES
The municipal bond market is beginning to move independently
from the Treasury market, as evidenced by the year-to-date
performance of municipal bonds. Through the balance of the
year, market volatility could be an ongoing factor, thus
vigilance remains our watchword. Depending on the pace of
economic growth, further increases in short-term interest
rates by the Federal Reserve Board cannot be ruled out. We
will continue to manage the fund's duration to mitigate to
the greatest possible extent the effects of any storminess
on the interest rate front.
The supply of municipal securities is down dramatically from
1993, both within the state and across the country. If this
reduced supply is met with increasing demand, your fund's
fiscal 1995 performance could well prove more rewarding than
that of fiscal 1994.
<PAGE>
Performance summary
This section provides, at a glance, information about your
fund's performance. Total return shows how the value of the
fund's shares changed over time, assuming you held the
shares through the entire period and reinvested all
distributions back into the fund. We show total return in
two ways: On a cumulative long-term basis (see the chart on
the facing page) and how the fund might have grown each
year, on average, over varying periods (see the tables
below). For comparative purposes, we show how the fund
performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDING 5/31/94
<TABLE>
<S> <C> <C> <C> <C> <C>
<C>
Lehman Bros.
Class A Class B Municipal
NAV POP NAV CDSC Bond Index CPI
1 year 2.03% -2.78% -- -- 2.47% 2.29%
3 years 26.41 20.47 -- 25.99 8.78
Annual average 8.12 6.40 -- 8.01 2.84
Life of class A 41.02 34.37 -- 44.97 17.44
Annual average 7.74 6.62 -- 8.39 3.55
Life of class B
since inception
on 7/15/93 -- -- -0.68% -5.40% 0.78 2.15
</TABLE>
TOTAL RETURN FOR PERIODS ENDING 6/30/94
(most recent calendar quarter)
<TABLE>
<S> <C> <C> <C> <C>
Class A Class B
NAV POP NAV CDSC
1 year -0.45% -5.18% -- --
3 years 25.86 19.90 -- --
Annual average 7.97 6.24 -- --
Life of class A 40.02 33.42 -- --
Annual average 7.44 6.34 -- --
Life of class B -- -- -1.51% -6.19%
</TABLE>
Performance data represent past results. Investment returns
and principal value will fluctuate so an investor's shares,
when sold, may be worth more or less than their original
cost. Fund performance data do not take into account any
adjustment for taxes payable on reinvested distributions or,
for class A shares, distribution fees prior to
implementation of the class A distribution plan in 1990.
Effective July 15, 1993, the fund began offering class B
shares. Performance for each share class will differ.
<PAGE>
[Line Graph]
Growth of a $10,000 investment
Cumulative total return of a $10,000
investment since 10/23/89
Fund's Class A shares at POP
Lehman Bros. Municipal Bond Index
Consumer Price Index
Plot Points:
Lehman Bros.
date/yearFund at POP MuniBond Index CPI
10/23/89 9525 10000 1000
5/31/90 9831 10453 10287
5/31/91 10630 10506 10796
5/31/92 11720 12636 11123
5/31/93 13171 14148 11481
5/31/94 13438 14497 11744
Past performance is no assurance of future results. A
$10,000 investment in the fund's class b shares at inception
(July 15, 1993) would have been valued at $9,968 by May 31,
1994 ($9,458 with a redemption at the end of the period).
TERMS AND DEFINITIONS
Class A fund shares may be subject to an initial sales
charge.
Class B fund shares may be subject to a sales charge on
redemption.
Net asset value (NAV) is the value of all fund assets, minus
liabilities, divided by the number of outstanding shares. It
does not include any initial or contingent deferred sales
charges.
Public offering price (POP) is the price of a fund share
plus the maximum sales charge levied at the time of
purchase. POP data shown here assume the maximum 4.75% sales
charge.
Contingent deferred sales charge (CDSC) is applied on
redemption of fund shares. 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.
Lehman Brothers Municipal Bond Index is an unmanaged list of
long-term fixed-rate investment-grade tax-exempt bonds
representative of the municipal bond market. The index does
not take into account brokerage commissions or other costs,
may include bonds different from those in the fund, and may
pose different risks than the fund.
Consumer Price Index is a commonly used measure of
inflation. It does not represent an investment return.
<PAGE>
Life cycle investing
As we move through life, our investment needs change. As
these needs change, so does the way we allocate our assets.
Here are some basic rules for setting up and maintaining an
investment program and some examples of how assets might be
allocated.
DETERMINE YOUR INVESTMENT OBJECTIVES.
Objectives may include a new home, college education
expenses, or retirement.
EVALUATE YOUR RISK TOLERANCE.
Generally, risk tolerance is higher for younger investors
with longer timelines and lower for older investors who may
depend on their investment for current income.
ALLOCATE YOUR INVESTABLE SAVINGS.
Your investment advisor will help you determine how much of
your investable dollars should be allocated to each
investment category.
CHOOSE THE APPROPRIATE PUTNAM FUNDS.
Using Putnam's free exchange privilege, you can adjust your
own Putnam portfolio of funds within the same class of
shares as your financial needs change -- without a service
fee.*
Look at the facing page for some ways you can allocate your
assets, then turn the page to see how the Putnam Fund
Selector(tm) can help you make your choices.
* Putnam reserves the right to change or terminate the
exchange privilege. In some cases, a sales charge may apply.
See prospectus for details.
[Four Pie Charts Appear]
Seeking Maximum Growth
Risk tolerance:
Generally investors with a higher risk tolerance (often in
their 20s and early 30s)
30%--40% Growth and income
40%--50% Growth
5%--20% Income or tax-free income
Seeking Growth and Some Income
Risk tolerance:
Generally investors with a high to moderate risk tolerance
(often in their late 30s and early 40s)
40%--50% Growth and income
30%--40% Growth
10%--30% Income or tax-free income
Seeking Income and Some Growth with Protection Against
Inflation
Risk tolerance:
Generally investors with a moderate risk tolerance (often in
their late 40s and early 50s)
30%--40% Growth and income
10%--20% Growth
10%--60% Income or tax-free income
Seeking High Current Income and Protection Against Inflation
Risk tolerance:
Generally investors with a moderate to low risk tolerance
(often ove 60 and retired)
20%--30% Growth and income
5%--10% Growth
40%--70% Income or tax-free income
<PAGE>
The Putnam Fund Selector(tm)
The Putnam Fund Selector shows the many opportunities
for investors within every investment strategy. All
investors should first accumulate a base of conservative,
cash-
equivalent investments. Then, with the help of your
investment advisor, diversify your portfolio by investing in
the Putnam Family of Funds.
[Pyramid Graphic appears here]
<PAGE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Health Sciences Trust
Investors Fund
Natural Resources Fund
New Opportunities Fund
OTC Emerging Growth Fund
Overseas Growth Fund
Vista Fund
Voyager Fund
PUTNAM GROWTH AND INCOME FUNDS
Convertible Income-Growth Trust
Dividend Growth Fund
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Managed Income Trust
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
Adjustable Rate U.S. Government Fund
American Government Income Fund
Balanced Government Fund
Corporate Asset Trust
Diversified Income Trust
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE INCOME FUNDS
Intermediate Tax Exempt Fund
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-exempt income funds*
Arizona, California, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio and Pennsylvania
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios
that spread your money across a variety of stocks, bonds,
and money market investments to help maximize your return
and reduce your risk.
The three portfolios:
Putnam Asset Allocation: Balanced Portfolio
Putnam Asset Allocation: Conservative Portfolio
Putnam Asset Allocation: Growth Portfolio
MOST CONSERVATIVE INVESTMENTS+
Putnam money market funds:
Daily Dividend Trust
Tax Exempt Money Market Fund
CDs and savings accounts++
* Not available in all states.
+ Relative to above.
++ Not offered by Putnam Investments. Certificates of deposit offer a fixed
rate of return and may be insured, up to certain limits, by federal/state
agencies. Savings accounts may also be insured up to certain limits.
Please call your financial advisor or Putnam to obtain a prospectus for
any Putnam fund. It contains more complete information, including charges
and expenses. Read it carefully before you invest or send money.
<PAGE>
Report of Independent Accountants
for the fiscal year ended May 31, 1994
To the Trustees and Shareholders of
Putnam Michigan Tax Exempt Income Fund II
We have audited the accompanying statement of assets and
liabilities of Putnam Michigan Tax Exempt Income Fund II,
including the portfolio of investments owned, as of May 31,
1994, and the related statement of operations for the year
then ended, the statement of changes in net assets for each
of the two years in the period then ended and the "Financial
Highlights" for each of the four years in the period then
ended and for the period October 23, 1989 (commencement of
operations) to May 31, 1990 for class A shares and for the
period July 15, 1993 (commencement of operations) to May 31,
1994 for class B shares. These financial statements and
"Financial Highlights" are the responsibility of the Fund's
management. Our responsibility is to express an opinion on
these financial statements and "Financial Highlights' based
on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements and "Financial
Highlights" are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of
May 31, 1994, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and "Financial
Highlights" referred to above present fairly, in all
material respects, the financial position of Putnam Michigan
Tax Exempt Income Fund II as of May 31, 1994, the results of
its operations for the year then ended, the changes in its
net assets for each of the two years in the period then
ended and the "Financial Highlights" for each of the four
years in the period then ended and for the period October
23, 1989 (commencement of operations) to May 31, 1990 for
class A shares and for the period July 15, 1993
(commencement of operations) to May 31, 1994 for class B
shares, in conformity with generally accepted accounting
principles.
Coopers & Lybrand
Boston, Massachusetts
July 20, 1994
<PAGE>
Portfolio of investments owned
May 31, 1994
MUNICIPAL BONDS AND NOTES (99.3%)(a)
<TABLE>
<S> <C> <C> <C>
PRINCIPAL AMOUNT RATINGS(b)
VALUE
Guam (1.3%)
$1,850,000 Guam Arpt. Auth. Rev. Bonds,
Ser. B, 6.7s, 10/1/23 BBB $1,861,563
Michigan (88.7%)
1,000,000 Arpt., Cmnty. School Dist.
Rev. Bonds, 6.6s, 5/1/22 AA 1,106,250
800,000 Central MI, U. Rev. Bonds,
Municipal Bond Insurance Assn.
(MBIA), 7.9s, 10/1/15 AAA 890,000
500,000 Cornell Twp., Econ. Dev. Corp.
Variable Rate Demand
Notes (VRDN)
(Mead-Escanaba Paper Co.),
3.85s, 11/1/16 A 500,000
4,600,000 Delta Cnty., Econ. Dev. Corp.
Env. Impt. VRDN (Escambia Paper),
Ser. C, 2.9s, 12/1/23 P-1 4,600,000
125,000 Detroit, Convention Fac. Rev. Bonds
(Cobo Hall Expansion
Project), 9s, 9/30/10 A 131,015
1,245,000 Detroit, Dev. Fin. Auth. Tax
Increment Rev. Bonds,
Ser. A, 9 1/2s, 5/1/21 BBB/P 1,537,575
Detroit, Wtr. Supply Syst.
Inverse Rate Floaters (I/F),
Financial Guarantee Insurance Co. (FGIC)
3,500,000 10.083s, 7/1/22 AAA 4,112,500
1,500,000 Rfdg. 10.083s, 7/1/22 AAA 1,526,250
Detroit, Wtr. Supply Syst. Rev. Bonds
1,750,000 MBIA, 7 5/8s, 7/1/19 AAA 1,970,935
1,000,000 FGIC, 6 1/4s, 7/1/12 AAA 1,005,000
3,000,000 Dickinson Cnty., Econ. Dev. Corp.
Solid Waste Disposal
Rev. Bonds (Champion Intl.),
6.55s, 3/1/07 BBB 2,955,000
2,000,000 Flint, Hosp. Bldg. Auth Rev.
Bonds (Hurley Med. Ctr.),
7.8s, 7/1/14 BBB 2,105,000
1,000,000 Grand Rapids, Hsg. Fin. Auth.
Multi-Fam. Rev. Bonds,
Ser. A, Federal National Mortgage
Assn. Coll., 7 5/8s, 9/1/23 AAA 1,088,750
720,000 Highland Park, Hosp. Fin. Auth.
Fac. Rev. Bonds
(MI Hlth. Care Corp. Project),
Ser. A, 9 7/8s, 12/1/19 B 747,000
1,250,000 Huron Cnty., Econ. Dev. Corp.
Ltd. Oblig. Rev. Bonds
(Huron Mem. Hosp. Project), 5 7/8s,
12/1/08 BBB/P 1,140,625
1,000,000 Huron Valley, School Dist. General
Obligation (G.O.)
Bonds, FGIC, 6 1/8s, 5/1/20 AAA 1,001,250
4,250,000 Jackson Cnty., Hosp. Fin.
Auth. Rev. Bonds
(W.A. Foote Mem. Hosp.), Ser. A, FGIC,
4 3/4s, 6/1/15 AAA 3,527,500
1,845,000 Kalamazoo, City School Dist. Bldg. &
Site Rev. Bonds, zero %, 5/1/08 AA 795,656
3,500,000 Kalamazoo, Hosp. Fin. Auth. Hosp. Fac.
Residual Interest Bonds (RIBS),
FGIC, 6.808s, 6/1/11 AAA 3,005,625
200,000 Kent Cnty., Hosp. Fin. Auth. Fac. Rev.
Bonds Pine Rest
Christian Hosp. Assn.),
FGIC, 9s, 11/1/10 AAA 216,750
Kent Cnty., Rev. Bonds (Refuse Disposal Syst.)
615,000 8.4s, 11/1/10 AAA 675,731
100,000 8.3s, 11/1/07 AAA 112,375
2,500,000 Lincoln, Cons. School Dist.
Rev. Bonds, FGIC, 5.8s, 5/1/14 AAA 2,421,875
MI Muni. Bond Auth. Rev. Bonds
250,000 Group 9, 8 3/4s, 11/1/17 A 277,500
3,000,000 Ser. A, 6s, 12/1/13 AAA 2,951,250
1,780,000 Ser. C-A, zero %, 6/15/05 AAA 934,500
MI State Hosp. Fin. Auth. Rev. Bonds
500,000 (Daughter's Charity-Providence),
10s, 11/1/15 AA 545,000
100,000 (St. John's Hosp.), 9.2s, 12/1/10 A 109,000
1,000,000 (Brighton Hosp.),
Ser. A, 8 5/8s, 10/1/18 BB/P 1,012,500
1,380,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba 1,466,250
500,000 (Bay Med. Ctr.), Ser. A, 8 1/4s,
7/1/12 Baa 545,625
1,300,000 (Metropolitan Hosp.),
Ser. B, 8 1/8s, 7/1/1 BBB 1,504,750
3,750,000 (Port Huron Hosp.),
Ser. A, 7 5/8s, 7/1/15 BBB 3,965,625
500,000 (Detroit Med. Ctr.),
Ser. A, 7 1/2s, 8/15/11 A 538,750
1,250,000 (Detroit Med. Ctr.),
Ser. A, 6 1/4s, 8/15/13 A 1,217,188
2,000,000 (Pontiac Osteopathic),
Ser. A, 6s, 2/1/24 BBB 1,760,000
2,500,000 (Detroit Med. Ctr.),
Ser. B, 5 1/2s, 8/15/23 A 2,175,000
2,000,000 (Sisters of Mercy),
Ser. P, MBIA, 5 3/8s, 8/15/14 AAA 1,837,500
2,530,000 (Detroit-Macomb Hosp. Corp.),
Ser. A, 7.4s, 6/1/13 B 2,457,263
1,000,000 MI State Hsg. Dev. Auth.
Ltd. Oblig. Rev. Bonds
(Mercy Bellbrook Project),
MBIA, 8 1/8s, 4/1/18 AAA 1,106,250
MI State Hsg. Dev. Auth.
Multi-Fam. Rev. Bonds, Ser. A, FGIC,
1,650,000 8 7/8s, 7/1/17 AAA 1,718,063
2,525,000 8 3/8s, 7/1/19 AAA 2,657,563
1,600,000 MI State Hsg. Dev. Auth.
Rental Hsg. Rev. Bonds,
Ser. A, 7.55s, 4/1/23 AAA 1,720,000
2,900,000 MI State Hsg. Dev. Auth.
Rental Hsg. I/F,
American Municipal Bond
Assurance Corp. (AMBAC),
6 3/4s, 10/1/12 AAA 2,497,625
3,360,000 MI State Hsg. Dev. Auth. Rev.
Bonds (Home Impt. Program),
Ser. B, 7.65s, 12/1/12 A 3,481,800
MI State Hsg. Dev. Auth.
Single Fam. Mtge. Rev. Bonds
1,060,000 Ser. A, 7.7s, 12/1/16 AA 1,116,975
965,000 Ser. A, 7.55s, 12/1/14 AA 1,015,663
100,000 Ser. A, 7.4s, 6/1/09 AA 104,875
415,000 Ser. A, 6 7/8s, 6/1/23 AA 423,819
1,000,000 MI State Job Dev. Auth. Poll.
Control Rev. Bonds
(Chrysler Corp. Project),
5.7s, 11/1/99 BBB/P 995,000
3,000,000 MI State Stragetic Fund Solid
Waste Disposal Rev. Bonds
(Genesee Pwr. Station Project),
7 1/2s, 1/1/21 BB/P 2,913,750
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,970,000 (Arbor Model & Tooling Project),
10 1/4s, 9/15/19 BB/P 3,285,563
1,600,000 (Mercy Svcs. for Aging Project),
9.4s, 5/15/20 BBB/P 1,714,000
4,000,000 (Environmental Research Project),
8 1/8s, 10/1/14 A/P 4,290,000
2,000,000 (Ford Motor Co. Project),
Ser. A, 7.1s, 2/1/06 A 2,212,500
1,500,000 (Detroit Edison Project),
Ser. BB, AMBAC, 7s, 5/1/21 AAA 1,648,125
1,000,000 (Detroit Edison Project),
Ser. CC, FGIC, 6.95s, 9/1/21 AAA 1,053,750
750,000 (Detroit Edison Project),
Ser. AA, FGIC, 6.95s, 5/1/11 AAA 817,500
3,000,000 (Clark Retirement Cmnty. Project),
6 1/4s, 6/1/13 A 2,895,000
2,350,000 (Consumers Pwr. Co. Project),
Ser. B, 5.8s, 6/15/10 AAA 2,279,500
500,000 MI Technological U. Rev. Bonds,
MBIA, 7 3/4s, 10/1/08 AAA 563,125
650,000 Midland, Wtr. Supply Syst. Rev.
Bonds, 7.2s, 4/1/10 A 702,000
Monroe Cnty., Poll. Control Rev.
Bonds (Detroit Edison Co.)
1,925,000 Ser. A, 10 1/2s, 12/1/16 BBB 2,129,531
4,000,000 Ser. I-B, 6.55s, 9/1/24 AAA 4,065,000
2,645,000 Tawas City, Hosp. Fin. Auth. Rev. Bonds
(St. Joseph's Hosp. Project),
Ser. A, 8 1/2s, 3/15/12 BB/P 2,807,006
Wayne Charter Cnty. Arpt. Rev.
Bonds (Detroit Met.), Ser. B, MBIA
1,500,000 6 1/8s, 12/1/24 AAA 1,456,875
500,000 6s, 12/1/14 AAA 486,250
500,000 Wayne Cnty., Bldg. Auth. Rev. Bonds,
Ser. A, 8s, 3/1/17 BBB $588,750
1,000,000 Wayne-Westland, Cmnty. Schools G.O. Bonds,
FGIC, 5 3/4s, 5/1/11 AAA 970,000
Webberville, Wtr. Supply & Wastewater
Treatment Rfdg. Rev. Bonds
1,000,000 6 1/2s, 11/1/18 BBB 995,000
1,000,000 6.3s, 11/1/11 BBB 995,000
2,300,000 Western MI U., Rfdg. Rev. Bonds,
Ser. A, FGIC, 5s, 7/15/21 AAA 1,929,125
Western Twnshps. Util. Auth. Swr.
Disposal Syst. Rev. Bonds
750,000 8.3s, 1/1/19 BBB 787,500
2,500,000 8.2s, 1/1/18 BBB 2,734,375
1,575,000 Wyandotte, Elec. Rev. Bonds,
AMBAC, 7 7/8s, 10/1/17 AAA 1,750,218
123,377,439
Puerto Rico (6.7%)
500,000 Cmnwlth. of Puerto Rico,
Aqueduct & Swr. Auth. Rev. Bonds,
Ser. A, 7 7/8s, 7/1/17 BBB 545,625
1,000,000 Cmnwlth. of Puerto Rico, Hwy. & Trans.
Auth. VRDN,
Ser. X, 2.55s, 7/1/99 VMIG1 1,000,000
Cmnwlth. of Puerto Rico, Pub. Impt. G.O. Bonds,
150,000 Ser. A, 7 3/4s, 7/1/13 AAA 169,313
200,000 7.7s, 7/1/20 AAA 231,500
1,400,000 6.8s, 7/1/21 AAA 1,564,500
1,200,000 Cmnwlth. of Puerto Rico,
Urban Renewal & Hsg. Corp.
Rev. Bonds, 7 7/8s, 10/1/04 BBB 1,341,000
1,000,000 Puerto Rico, Port Auth.
Special Fac. Rev. Bonds
(American Airlines),
Ser. A, 6.3s, 6/1/23 BB 911,250
Puerto Rico, Pub. Bldg. Auth.
Gtd. Ed. & Hlth. Fac. Rev. Bonds
1,250,000 Ser. J, 7s, 7/1/19 A 1,370,313
2,000,000 Ser. L, 6 7/8s, 7/1/21 AAA 2,245,000
9,378,501
Virgin Islands (2.6%)
2,500,000 Virgin Islands, Pub. Fin. Auth. Rev. Bonds
(Matching Funds Loan Notes),
Ser. A, 7 1/4s, 10/1/18 BBB 2,628,125
900,000 Virgin Islands, Wtr. & Pwr.
Auth. Elec. Syst. Rev. Bonds,
Ser. A, 7.4s, 7/1/11 BBB 951,750
3,579,875
Total Investments (cost$135,955,164)(c) $138,197,378
</TABLE>
(a) Percentages indicated are based on net assets of
$139,171,871, which correspond to a net asset value for both
class A and class B shares of $8.90.
(b) The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at May 31,
1994 for the securities listed. Ratings are generally
ascribed to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings
indicated do not necessarily represent what the agencies
would ascribe to these securities at May 31, 1994.
Securities rated by Putnam are indicated by "/P' and are not
publicly rated. The ratings are not covered by the Report of
Independent Accountants.
(c) The aggregate identified cost for federal income tax
purposes is $135,955,164, resulting in gross unrealized
appreciation and depreciation of $5,439,173 and $3,196,959,
respectively, or net unrealized appreciation of $2,242,214.
The rates shown on Residual Interest Bonds (RIBS), which are
securities paying variable interest rates that vary
inversely to changes in market interest rates, Variable Rate
Demand Notes (VRDN), and Inverse Rate Floaters (I/F) are the
current interest rates at May 31,
1994, which are subject to change based on the terms of the
security.
The Fund had the following industry group concentrations
greater than 10% on May 31, 1994 (as a percentage of net
assets):
Health Care 24.6%
Housing 13.1
The Fund had the following insurance group concentrations
greater than 10% at May 31, 1994 (as a percentage of net
assets):
FGIC 18.7%
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Statement of assets and liabilities
May 31, 1994
<TABLE>
<S> <C> <C>
Assets
Investments in securities, at value
(identified cost $135,955,164) (Note 1) $138,197,378
Cash 447,542
Interest 2,727,071
Receivable for shares of the fund sold 195,829
Unamortized organization expenses (Note 1) 2,281
Total assets 141,570,101
Liabilities
Payable for securities purchased $1,625,847
Payable for shares of the fund repurchased 20,597
Distributions payable to shareholders 444,010
Payable for compensation of Manager (Note 2) 207,360
Payable for compensation of Trustees (Note 2) 139
Payable for administrative services (Note 2) 1,439
Payable for investor servicing and custodian
fees (Note 2) 28,734
Payable for distribution fees (Note 2) 49,682
Other accrued expenses 20,422
Total liabilities 2,398,230
Net assets $139,171,871
Represented by
Paid-in capital (Notes 4 and 5) $137,717,523
Distributions in excess of net investment income (52,244)
Accumulated net realized loss on investments (735,622)
Net unrealized appreciation of investments 2,242,214
Total--Representing net assets applicable
to capital shares outstanding $139,171,871
Computation of net asset value and offering price
Net asset value and redemption price of class A shares
($128,920,683 divided by 14,487,549 shares) $8.90
Offering price per share (100/95.25 of $8.90)* $9.34
Net asset value and offering price of class B shares
($10,251,188 divided by 1,152,226 shares)+ $8.90
</TABLE>
* On single retail sales of less than $25,000. On sales of
$25,000 or more and on group sales the offering price is
reduced.
+ 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.
<PAGE>
Statement of operations
Year ended May 31, 1994
<TABLE>
<S> <C> <C>
Tax exempt interest income $8,573,754
Expenses:
Compensation of Manager (Note 2) $782,934
Investor servicing and custodian fees (Note 2) 149,317
Compensation of Trustees (Note 2) 11,388
Administrative services (Note 2) 5,817
Reports to shareholders 17,230
Auditing 17,193
Legal 17,696
Postage 9,194
Distribution fees -- class A (Note 2) 250,872
Distribution fees -- class B (Note 2) 39,506
Registration fees 9,327
Amortization of organization expenses (Note 1) 4,563
Other expenses 4,409
Total expenses 1,319,446
Net investment income 7,254,308
Net realized gain on investments (Notes 1 and 3) 252,040
Net realized gain on futures contracts (Notes 1 and 3) 48,857
Net unrealized depreciation of investments during the year (5,751,612)
Net loss on investments (5,450,715)
Net increase in net assets resulting from operations $1,803,593
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Statement of changes in net assets
<TABLE>
<S> <C> <C>
Year ended May 31
1994 1993
Increase in net assets
Operations:
Net investment income $ 7,254,308 $5,775,819
Net realized gain on investments 252,040 604,579
Net realized gain on futures contracts 48,857 --
Net unrealized appreciation (depreciation)
of investments (5,751,612) 4,615,531
Net increase in net assets resulting
from operations 1,803,593 10,995,929
Distributions to shareholders from:
Net investment income:
class A (6,991,204) (5,823,671)
class B (225,780) --
Net realized gain on investments:
class A (340,991) (52,744)
class B -- --
In excess of net gain on investments:
class A (729,509)
class B (42,639)
Increase from capital share
transactions (Note 4) 32,624,378 27,644,801
Total increase in net assets 26,097,848 32,764,315
Net Assets:
Beginning of year 113,074,023 80,309,708
End of period (including distributions
in excess of net investment income of
$52,244 and $96,468, respectively) $139,171,871 $113,074,023
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
Financial Highlights*
(for a share outstanding throughout the period)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the period For the period
July 15, 1993 October 23, 1989
(commencement of (commencement of
operations) to operations) to
May 31 Year ended May 31 May 31
1994 1994 1993 1992 1991 1990
Class B Class A
Net asset value,
beginning of period $9.43 $9.30 $8.80 $8.51 $8.43 $8.50
Investment operations:
Net investment income .41 .52 .55 .56(a) .58(a) .33(a)
Net realized and unrealized gain
(loss) on investments(.46) (.32) .52 .29 .08 (.07)
Total from investment
operations (.05) .20 1.07 .85 .66 .26
Less distributions from:
Net investment income(.40) (.52) (.56) (.56) (.58) (.33)
Net realized gain on
investments -- (.03) (.01) -- -- --
In excess of net gain
on investments (.08) (.05) -- -- -- --
Total distributions (.48) (.60) (.57) (.56) (.58) (.33)
Net asset value,
end of period $8.90 $8.90 $9.30 $8.80 $8.51 $8.43
Total investment
return at
net asset value (%) (b)(.77)(c)2.0312.38 10.25 8.13 5.20(c)
Net assets, end of period
(in thousands) $10,251 $128,921 $113,074 $80,310 $19,893 $9,280
Ratio of expenses to
average net assets (%)1.61(c).99 1.04 .95(a) .87(a) .75(a)(c)
Ratio of net investment income to
average net assets (%)4.83(c)5.59 6.046.28(a) 6.78(a) 6.37(a)(c)
Portfolio turnover (%)41.77(d)41.7715.8971.68(e) 16.21 10.72(d)
</TABLE>
* Financial Highlights for periods ended through May 31,
1992 have been reclassified and data has been presented to
conform with requirements issued by the SEC in April, 1993.
(a) Reflects an expense limitation, and, during the period
ended May 31, 1990, an absorption of expenses incurred by
the fund. As a result, net investment income of the fund for
the years ended May 31, 1992, and 1991 and the period ended
May 31, 1990 reflect expense reductions of approximately
$0.01, $0.05, and $0.05, respectively.
(b) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(c) Annualized.
(d) Not annualized.
(e) Portfolio turnover excludes the impact of assets
received from the acquisition of Putnam Michigan Tax Exempt
Income Fund.
<PAGE>
Notes to Financial Statments
May 31, 1994
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management
investment company. The fund seeks as high a level of
current income exempt from federal income tax and Michigan
personal income tax as Putnam Management believes is
consistent with preservation of capital by investing
primarily in a portfolio of Michigan tax-exempt securities.
The fund offers both class A and class B shares. The fund
commenced its public offering of class B shares on July 15,
1993. Class A shares are sold with a maximum front-end sales
charge of 4.75%. Class B shares do not pay a front-end sales
charge, but pay a higher ongoing distribution fee than class
A shares, and may be subject to a contingent deferred sales
charge if those shares are redeemed within six years of
purchase. Expenses of the fund are borne pro-rata by the
holders of both classes of shares, except that each class
bears expenses unique to that class (including the
distribution fees applicable to such class)
and votes as a class only with respect to its own
distribution plan or other matters on which a class vote is
required by law or determined by the Trustees. Shares of
each class would receive their pro-rata share of the net
assets of the fund, if the fund were liquidated. In
addition, the Trustees declare separate dividends on each
class of shares.
The following is a summary of significant accounting
policies consistently followed by the fund in the
preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
A) Security valuation Tax-exempt bonds and notes are stated
on the basis of valuations provided by a pricing service,
approved by the Trustees, which uses information with
respect to transactions in bonds, quotations from bond
dealers, market transactions in comparable securities and
various relationships between securities in determining
value.
B) Security transactions and related investment income
Security transactions are accounted for on the trade date
(date the order to buy or sell is executed). Interest income
is recorded on the accrual basis.
C) Federal taxes It is the policy of the fund to distribute
all of its income within the prescribed time and otherwise
comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies. It is also the
intention of the fund to distribute an amount sufficient to
avoid imposition of any excise tax under Section 4982 of the
Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or
unrealized appreciation of securities held and excise tax on
income and capital gains.
D) Distributions to shareholders Income dividends are
recorded daily by the fund and are distributed monthly.
Capital gains distributions, if any, are recorded on the ex-
dividend date and paid annually, or as necessary to meet the
distribution requirements described above.
E) Amortization of bond premium and discount Any premium
resulting from the purchase of securities in excess of
maturity value is amortized on a yield-to-maturity basis.
Discount on zero-coupon bonds is accreted according to the
effective yield method.
F) Unamortized organization expenses Expenses incurred by
the fund in connection with its organization, its
registration with the Securities and Exchange Commission and
with various states, and the initial public offering of its
shares aggregated $13,688. These expenses are being
amortized over a five-year period based on projected net
assets of the fund.
Note 2
Management fee, administrative services, and other
transactions
Compensation of Putnam Investment Management, Inc., the
fund's Manager, a wholly-owned subsidiary of Putnam
Investments, Inc., for management and investment advisory
services is paid quarterly based on the average net assets
of the fund. Such fee is based on the following annual
rates: 0.6% of the first $500 million of average net assets,
0.5% of the next $500 million, 0.45% of the next $500
million and 0.4% of any amount over $1.5 billion, subject to
reduction in any year by the amount of certain brokerage
commissions and fees (less expenses) received by affiliates
of the manager of the fund's portfolio transactions.
The fund also reimburses the Manager for the compensation
and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund.
The aggregate amount of all such reimbursements is
determined annually by the Trustees. For the year ended May
31, 1994, the fund paid $5,817 for these services.
Trustees of the fund receive an annual Trustee's fee of $710
and an additional fee for each Trustees' meeting attended.
Trustees who are not interested persons of the Manager and
who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are
provided by Putnam Investor Services, a division of PFTC.
Fees paid for these investor servicing and custodial
functions for the year ended May 31, 1994 amounted to
$149,317.
Investor servicing and custodian fees reported in the
Statement of operations for the year ended May 31, 1994 have
been reduced by credits allowed by PFTC.
The fund has adopted a distribution plan with respect to its
class A shares (the "Class A Plan') pursuant to Rule 12b-1
under the Investment Company Act of 1940. The purpose of the
Class A Plan 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 class A shares. The Trustees have approved
payments by the fund to Putnam Mutual Funds Corp. at an
annual rate of 0.20% of the fund's average net assets
attributable to class A shares. For the year ended May 31,
1994, the fund paid $250,872 in distribution fees for
class A shares.
During the year ended May 31, 1994, Putnam Mutual Funds
Corp., acting as an underwriter, received net commissions of
$65,629 from the sale of class A shares of the fund.
A deferred sales charge of up to 1% is assessed on certain
redemptions of class A shares purchased as part of an
investment of $1 million or more. For the year ended May 31,
1994,Putnam Mutual Funds Corp., acting as an underwriter, did not
receive any sales charge on such redemptions.
The fund has adopted a separate distribution plan with
respect to its class B shares (the "Class B Plan") pursuant
to Rule 12b-1 of the Investment Company Act of 1940. The
purpose of the Class B Plan is to compensate Putnam Mutual
Funds Corp. for services provided and expenses incurred in
distributing class B shares. The Class B Plan provides for
payments by
the fund to Putnam Mutual Funds Corp. at an annual rate of
0.85% of the fund's average net assets attributable to class
B shares. For the period July 15, 1993 (commencement of
operations) to May 31, 1994, the fund paid Putnam Mutual
Funds Corp. distribution fees of $39,506 for class B shares.
Putnam Mutual Funds Corp. acting as an underwriter, also
receives the proceeds of the contingent deferred sales
charges levied on class B share redemptions within four
years of purchase. The charge is based on declining rates,
which begin at 5.0% of the net asset value of the redeemed
shares. Putnam Mutual Funds Corp. received $3,489 in
contingent deferred sales charges from such redemptions for
the period July 15, 1993 (commencement of operations) to May
31, 1994.
Note 3
Purchases and sales of securities
During the year ended May 31, 1994, purchases and sales of
investment securities other than short-term municipal
obligation aggregated $79,068,117 and $53,288,495
respectively. Purchases and sales of short-term municipal
obligations aggregated $35,200,000 and $32,900,000,
respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined
on the identified cost basis.
Transactions in futures contracts during the period are
summarized as follows:
<TABLE>
<S> <C> <C>
Sales of Futures Contracts
Number of Aggregate
Contracts Face Value
Contracts opened 70 $7,256,169
Contracts closed 70 (7,256,169)
Contracts open at
end of period -- --
</TABLE>
Note 4
Capital shares
At May 31, 1994, there was an unlimited number of shares of
beneficial interest authorized, divided into two classes,
class A and class B capital shares.
Transactions in capital shares were as follows:
<TABLE>
<S> <C> <C>
Year ended May 31
1994
Class A Shares Amount
Shares sold 3,156,753 $29,485,331
Shares issued in connection
with reinvestment of
distributions 521,068 4,858,006
Shares repurchased (1,345,853) (12,460,026)
Net increase 2,331,968 $21,883,311
Year ended May 31
1993
Class A Shares Amount
Shares sold 3,416,866 $31,166,932
Shares issued in
connection with
reinvestment of
distributions 380,095 3,459,746
Shares repurchased (767,938) (6,981,877)
Net increase 3,029,023 $27,644,801
July 15, 1993
(commencement of operations)
to May 31
1994
Class B Shares Amount
Shares sold 1,214,204 $11,315,559
Shares issued in
connection with
reinvestment of
distributions 19,000 174,967
Shares repurchased (80,978) (749,459)
Net increase 1,152,226 $10,741,067
</TABLE>
Note 5
Reclassification of Capital Account
Effective June 1, 1993, Putnam Michigan Tax Exempt Income
Fund II has adopted the provisions of Statement of Position
93-2 (SOP) "Determination, Disclosure and Financial
Statement Presentation of Income, Capital Gain and Return of
Capital Distributions by Investment Companies." The purpose
of this SOP is to report the accumulated net investment
income (loss) and accumulated net realized gain (loss)
accounts in such a manner as to approximate amounts
available for future distributions (or to offset future
realized capital gains) and to achieve uniformity in the
presentation of distributions by investment companies.
As a result of the SOP, the fund has reclassified $416,735
to increase accumulated net realized loss on investments,
$6,900 to decrease distributions in excess of net investment
income, and $409,835 to increase additional paid-in capital.
These adjustments represent the cumulative amounts necessary
to report these balances through May 31, 1993.
Permanent book and tax basis differences relating to
shareholder distributions will result in reclassification to
paid-in capital.
Tax Information
The fund has designated all dividends from net investment
income paid during the fiscal period as exempt-interest
dividends. Thus, 100% of the fund's income distributions are
exempt from federal income tax. For residents of Michigan,
100% of the fund's income distributions are also exempt from
Michigan state income tax.
During the fiscal year, the fund distributed $0.025 per
share from short term capital gains constituting "dividend
income" and $0.054 per share from long-term capital gains
constituting "capital gains" for federal income tax
purposes.
The Form 1099 you receive in January 1995 will show the tax
status of any taxable distributions paid to your account in
calendar 1994.
<PAGE>
Our commitment to quality service
CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested
Service Seal every year since the award's 1990 inception.
DALBAR, an independent research firm, ran more than 10,000
tests of 38 shareholder service components. In every
category, Putnam outperformed the industry standard.
HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as
$25 a month from a Putnam fund or from your checking or
savings account.*
SWITCH FUNDS EASILY.
You can move money from one account to another with the same
class of shares without a service charge. (This privilege is
subject to change or termination.)
ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any
business day at the then-current net asset value, which may
be more or less than their original cost.
For details about any of these or other services, contact
your financial advisor or call the toll-free number shown
below and speak with a helpful Putnam representative.
To make an additional investment in this or any other Putnam
fund, contact your financial advisor or call our toll-free
number: 1-800-225-1581.
* Regular investing, of course, does not guarantee a profit
or protect against a loss in a declining market. Investors
should consider their ability to continue purchasing shares
during periods of low price levels.
<PAGE>
Fund Information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand
TRUSTEES
George Putnam, Chairman
William Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Donald S. Perkins
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Howard K. Manning
Vice President
and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President
and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam
Michigan Tax Exempt Income Fund II. It may also be used as
sales literature when preceded or accompanied by the current
prospectus, which gives details of sales charges, investment
objectives and operating policies of the fund and the most
recent Putnam quarterly performance summary.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Boston, MA
Permit No. 53749
Putnam Investments
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
846/237-13001
<PAGE>
APPENDIX TO FORM N30D FILINGS TO DESCRIBE DIFFERENCES
BETWEEN PRINTED
AND EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Boldface and italic typefaces are displayed in normal
type.
(3) Headers (e.g. the names of the fund) and footers (e.g.
page
numbers and "The accompanying notes are an integral part of
these
financial statements") are omitted.
(4) Because the printed page breaks are not reflected,
certain tabular
and columnar headings and symbols are displayed differently
in this
filing.
(5) Bullet points and similar graphic signals are omitted.
(6) Page numbering is different.
