PUTNAM
MICHIGAN
TAX EXEMPT
INCOME FUND II
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art work]
ANNUAL REPORT
May 31, 1995
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PERFORMANCE HIGHLIGHTS
O "Money the city (Detroit) has saved through cost-cutting measures will
eliminate the fiscal 1994 $53 million carryover deficit and result in a
budget surplus at the end of the current fiscal year."
-- The Bond Buyer, June 1, 1995
------------------------------------------------------------------------
FISCAL 1995 RESULTS AT A GLANCE
------------------------------------------------------------------------
CLASS A CLASS B
TOTAL RETURN: NAV POP NAV CDSC
------------------------------------------------------------------------
12 months ended
May 31, 1995
(change in value during
period plus reinvested
distributions) 7.45% 2.38% 6.72% 1.72%
CLASS A CLASS B CLASS M(1)
SHARE VALUE: NAV POP NAV NAV POP
------------------------------------------------------------------------
5/31/94 $8.90 $9.34 $8.90 -- --
4/17/95 -- -- -- $8.88 $9.18
5/31/95 9.01 9.46 9.00 9.00 9.30
DISTRIBUTIONS: NO. INCOME TOTAL
------------------------------------------------------------------------
Class A 12 $0.518305 $0.518305
Class B 12 0.468340 0.468340
Class M(1) 2 0.059678 0.059678
CLASS A CLASS B
CURRENT RETURN: NAV POP NAV
------------------------------------------------------------------------
End of period
Current dividend rate(3) 5.56% 5.29% 4.99%
Taxable equivalent(4) 9.63 9.16 8.64
Current 30-day
SEC yield(5) 5.54 5.27 4.88
Taxable equivalent(4) 9.59 9.13 8.45
------------------------------------------------------------------------
Performance data represent past results and are no indication of future
results. For performance over longer periods, see pages 9 and 10. POP
assumes 4.75% maximum sales charge for class A shares and 3.25% for class
M shares. CDSC assumes 5% maximum contingent deferred sales charge.
(1)Class M shares became effective 4/3/95; performance is not shown
because of the brevity of the reporting period. (2)Capital gains are
taxable for federal and, in most cases, state tax purposes. For some
investors, investment income may also be subject to the federal
alternative minimum tax. Investment income may be subject to state and
local taxes. (3)Income portion of most recent distribution, annualized
and divided by NAV or POP at end of period. (4)Assumes maximum combined
state and federal tax rates of 42.26%. Results for investors subject to
lower tax rates would not be as advantageous. (5)Based only on investment
income, calculated using SEC guidelines.
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FROM THE CHAIRMAN
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Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
Putnam Michigan Tax Exempt Income Fund II's manager, Howard Manning, couldn't be
more pleased with the municipal bond market's impressive comeback from the
sustained decline of 1994. Mindful of the uncertainties still hovering in the
background, however, he has begun taking steps aimed at preserving some of the
fund's gains achieved during the final months of the fiscal year ended May 31,
1995.
At the same time, Howard is optimistic about prospects for fiscal 1996. The
recovery in the tax-exempt bond market, while substantial, has lagged that of
other fixed-income markets, leading him to believe the rally may have some
staying power.
Municipal bond investors already have shaken off the jitters ignited by a
flat-tax proposal recently thrown into the legislative hopper. In its purest
form, a flat tax would eliminate the federal income tax advantage of municipal
bonds. We do not believe Congress would enact any such restrictive provision.
Howard provides more discussion of these and other issues in the report that
follows.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
July 19, 1995
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REPORT FROM THE FUND MANAGER
HOWARD MANNING
At the close of Putnam Michigan Tax Exempt Income Fund II's fiscal year on
May 31, 1995, it appeared the Federal Reserve Board bouncer had temporarily
thrown the U.S. Treasury market out of the 1995 bond-market party. Evidence
suggested at the time, however, that the municipal bond market had the
potential to celebrate long into the night. Now, the Fed's lowering of a key
interest rate has not only reignited fixed-income markets, it has served to
reinforce our optimism about the municipal bond market.
Putnam Michigan Tax Exempt Income Fund II has prospered along with the
market. Calendar year-to-date, the fund's class A shares have returned 9.47%
at net asset value (NAV). And, in a dramatic reversal from the negative
return at the fiscal year's halfway point, the fund's class A shares posted a
7.45% return at NAV for the one-year period ended May 31, 1995.
o BONDS COAST TO STRONG FIRST-QUARTER FINISH
The second half of fiscal 1995 encompassed one of the bond market's most
impressive rallies in recent memory. Investors were already beginning to
anticipate the end of the Fed's interest-rate tightening cycle and there were
early signs that the economy would proceed to grow at a slow but steady pace
with inflation remaining low.
The municipal bond market showed its resilience when market players began
buying despite concerns about investors' confidence following the
announcement of the Orange County, California, bankruptcy in December. In
fact, for the first quarter of calendar 1995, municipal bond prices rallied,
with a resulting decline in yields of nearly a full percentage point. (Bond
yields move in the opposite direction of their prices.) This, however, was
where municipal bonds and other fixed-income securities went their separate
ways.
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o FLAT-TAX CONCERNS CREATE OPPORTUNITY
In late April, investors' fears of the effects of the current flat-tax
proposal now being considered by Congress jarred the municipal bond market
out of its dramatic recovery. A flat tax, which is one of many tax-reform
proposals being considered now by congressional committees, would deprive
municipal bonds of their exclusivity as a tax-exempt investment.
In our opinion, the market reacted to the perceived effects of the flat-tax
rhetoric and not to any hard facts. By May, investors were starting to look
beyond the flat tax to the likelihood of a more broad-based income tax
revision in the distant future. In fact, a report in The Wall Street Journal
(May 5, 1995) suggested that the short-term downturn in the market was not
grounded in reality and it had actually created more possibilities than it
quashed: "(Tax-law changes) are far off in the future -- 1997 at the earliest
-- and that overhauling the current tax system is a far more difficult task
than many investors now believe. As a result . . . there's a buying
opportunity in municipals."
What kind of value has this created? Analysts evaluate municipal bonds in
relation to taxable Treasury bonds with similar maturities. By this
reasoning, municipal bonds are as undervalued as they were when the bond
market began to turn in November 1994, albeit
[GRAPHIC OMITTED: line chart:
YIELD RATIO: MUNICIPAL BOND YIELDS AS A PERCENTAGE OF U.S. TREASURY BONDS
Legend reads: It is usually considered a buying signal when municipal bonds
yield between 78% and 82% of Treasuries.
X-axis reads (left to right) 11/94 through 5/95 in monthly increments.
Y-axis reads (top to bottom) 85% through 75 in 1% decrements.
Plot points (bi-weekly) from November 30, 1994 through May 31, 1995 are:
84.2, 84, 82.5, 82.2, 80.7, 79.2, 78.9, 79.2, 79.9, 78.5, 80.5, 82.9 & 84.9.
Caption reads: Chart shows the yield of an average 30-year general obligation
bond versus the yield of an average 30-year U.S. Treasury bond plotted
biweekly. Treasury bonds are backed by the full faith and credit of the U.S.
government. Source: Bloomberg.]
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at much lower yields. On November 30, 1994, the average 30-year AAA-general
obligation municipal bond was yielding 84.2% of the average 30-year Treasury
bond. Similarly, on May 31, 1995, that ratio stood at 84.9% (see chart on
page 5). In fact, many types of revenue bonds are yielding more than 90% of
comparable Treasuries. In other words, the municipal bond market's failure to
participate in the full extent of the appreciation in other fixed-income
securities, leaves the potential that it could make up this ground. Of
course, there can be no guarantees of this result.
o SUPPLY/DEMAND DYNAMICS STILL ATTRACTIVE
The supply and demand imbalance we discussed last year has contributed to the
recent strength of municipal bonds. Independent analysts expect issuance of
new municipal bonds to shrink to $125 billion this year from $150 billion
last year and $300 billion in 1993. According to The Bond Buyer, an industry
periodical, the volume of new issues year-to-date is at the lowest level
since 1990.
The summer months are also a traditional time for bonds to mature or be
called in. This summer, about $96 billion is expected to flood the market as
many municipal bonds come due or are called by issuers. Should falling
interest rates persist, additional refunding could push more cash into the
market.
o THE POTENTIAL OF MICHIGAN: DETROIT ON UPSWING
Recent economic data confirms our positive outlook on Michigan. In fact, the
state's unemployment rate is among the lowest in the nation. Although the
auto industry will always make the state's economy somewhat cyclical in
nature, we believe Michigan's economic base is at its broadest and most
dynamic point in recent years. We are also encouraged by the state's
government, which continues to emphasize sound fiscal policy.
While the state's economic condition is reassuring, the turnaround Detroit is
staging is particularly impressive. Detroit's economic prospects have
improved markedly from the gloomy economic landscape that has characterized
the city over the past 10 years. Its unemployment rate has fallen
dramatically from the double-digit levels that crippled the city in the past.
The improving economic
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[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS showing:
Utilities 27.4%, Health-care 18.2%, and Housing 15.5%. Footnote reads:
*Based on net assets on 5/31/95. Holdings may vary over time.]
picture is raising business confidence, and more businesses are locating
within the city. Additionally, the city government has become more fiscally
prudent. These factors may help the tax base that supports Detroit's general
obligation debt. We have positioned 4.5% of the fund's portfolio (up from
nothing) in bonds that derive their value from Detroit's fiscal condition. An
additional 7.7% of the portfolio is invested in insured Detroit paper.
o VALUE IN STATE'S HOSPITAL BONDS
Shareholders may notice a slight reduction in the fund's concentration of
health-care bonds from a little over 22% at the end of the semiannual period
to roughly 18.2% now. We would like to emphasize that this is not a departure
from our belief in the potential of Michigan's hospitals or nursing homes but
rather a consolidation of the fund's position in a thin market.
Michigan's health-care municipal bonds lost a great deal of value in last
year's bear market. In our opinion, state hospital bonds underperformed
because of an overreaction to negative general market conditions rather than
a shift in fundamental credit outlook. Therefore, we hope to continue to reap
substantial yield and total return benefits from what we consider a very
undervalued sector.
o A PROMISING FUTURE
The environment of rising interest rates that characterized the first half of
the fund's fiscal year has changed dramatically. While falling long-term
interest rates are beneficial to bonds, this does not mean a bond portfolio
can be set on automatic pilot. Among other
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things, we will seek to enhance the portfolio's level of call protection as
refunding becomes more desirable to municipalities in a lower interest-rate
climate.
Although the direction of the broader bond market for the remainder of
calendar 1995 is anybody's guess, we believe the municipal bond market, and
particularly Michigan, will continue to hold promise for investors seeking
tax-free income. However, as we observe the many signs that our optimism
about Michigan and the municipal bond market as a whole is not unfounded, we
will stand ready to deal with any unexpected changes affecting the fund's
portfolio.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 5/31/95, there is no guarantee the fund will continue to hold
these securities in the future.
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PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's performance.
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions back into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might have grown each
year over varying periods.
Performance should always be considered in light of a fund's investment
strategy. Putnam 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.
TOTAL RETURN FOR PERIODS ENDED 5/31/95
LEHMAN BROS.
CLASS A CLASS B MUNICIPAL
NAV POP NAV CDSC BOND INDEX CPI
- -------------------------------------------------------------------------------
1 year 7.45% 2.38% 6.72% 1.72% 9.11% 3.19%
- -------------------------------------------------------------------------------
5 years 46.86 39.88 51.33 17.80
Annual average 7.99 6.94 8.64 3.33
- -------------------------------------------------------------------------------
Life of class A 51.52 44.37 58.18 21.18
Annual average 7.69 6.76 8.52 3.48
- -------------------------------------------------------------------------------
Life of class B -- -- 5.99 2.18 9.97 5.40
Annual average -- -- 3.14 1.15 5.18 2.84
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TOTAL RETURN FOR PERIODS ENDED 6/30/95
(Most recent calendar quarter)
CLASS A CLASS B
NAV POP NAV CDSC
- -------------------------------------------------------------------------------
1 year 6.30% 1.25% 5.61% 0.61%
- -------------------------------------------------------------------------------
5 years 43.48 36.68 -- --
Annual average 7.49 6.45 -- --
- -------------------------------------------------------------------------------
Life of class A 49.27 42.23 -- --
Annual average 7.49 6.39 -- --
- -------------------------------------------------------------------------------
Life of class B -- -- 4.28 0.53
Annual average -- -- 2.16 0.27
- -------------------------------------------------------------------------------
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 1993. The fund began
operations on 10/23/89 offering shares now known as class A shares. Effective
7/15/93, the fund began offering class B shares. Class M shares become effective
4/3/95; performance is not shown due to the brevity of the reporting period.
Performance data represent past results will differ for each share class, and is
not indicative of future 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.
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[GRAPHIC OMITTED: line chart GROWTH OF A $10,000 INVESTMENT
X-axis reads (left to right) 10/23/89; then 5/31/90 through 5/31/95 in yearly
increments.
Y-axis reads (top to bottom) 20000 through 0 in 5000 decrements.
Legend reads: Cumulative total return of a $10,000 investment since 10/23/89
A black line represents "Fund's class A shares at POP" total of $14,437
(see plot points below: "Fund")
A white line represents "Lehman Bros. Municipal Bond Index" total of $15,818
(see plot points below: "Lehman")
A grey line represents "Consumer Price Index" total of $12,218
(see plot points below: "CPI")
Date "Fund" "Lehman" "CPI"
10/23/89 9525 10000 10000
5/31/90 9831 10453 10287
5/31/91 10630 11506 10796
5/31/92 11720 12636 11123
5/31/93 13171 14148 11481
5/31/94 13438 14497 11744
5/31/95 14437 15818 12218
Caption reads: Past performance is no assurance of future results. A $10,000
investment in the fund's class B shares at inception on 7/15/93 would have
been valued at $10,599 on 5/31/95 ($10,218 with a redemption at the end of the
period).]
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial shares charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
CLASS M SHARES have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 4.75% sales charge for class A shares and 3.25% for class M
shares.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index does not take into account brokerage commissions or other
costs, may include bonds different from those in the fund, and may pose
different risks than the fund.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
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PUTNAM FAMILY OF FUNDS
<TABLE>
<C> <C>
PUTNAM GROWTH FUNDS PUTNAM TAX-FREE INCOME FUNDS
Asia Pacific Growth Fund Intermediate Tax Exempt Fund
Capital Appreciation Fund (1) Municipal Income Fund
Diversified Equity Trust Tax Exempt Income Fund
Europe Growth Fund Tax-Free High Yield Fund
Global Growth Fund Tax-Free Insured Fund
Health Sciences Trust
STATE TAX-FREE INCOME FUNDS (2)
Investors Fund
Arizona, California, Florida, Massachusetts,
Natural Resources Trust Michigan, Minnesota, New Jersey, New York,
Ohio, and Pennsylvania
New Opportunities Fund
OTC Emerging Growth Fund LIFESTAGES(SM) FUNDS
Overseas Growth Fund Putnam Asset Allocation Funds -- three
investment portfolios that spread your money
Vista Fund across a variety of stocks, bonds, and money
market investments to help maximize your return
Voyager Fund and reduce your risk.
The three portfolios:
PUTNAM GROWTH AND INCOME FUNDS
Putnam Asset Allocation: Balanced Portfolio
Balanced Retirement Fund
Putnam Asset Allocation: Conservative Portfolio
Convertible Income-Growth Trust
Putnam Asset Allocation: Growth Portfolio
Equity Income Fund
The George Putnam Fund of Boston MOST CONSERVATIVE INVESTMENTS (3)
The Putnam Fund for Growth and Income PUTNAM MONEY MARKET FUNDS:
Growth and Income Fund II California Tax Exempt Money Market Fund
Utilities Growth and Income Fund Money Market Fund
New York Tax Exempt Money Market Fund
PUTNAM INCOME FUNDS
Tax Exempt Money Market Fund
Adjustable Rate U.S. Government Fund
American Government Income Fund CDS AND SAVINGS ACCOUNTS (4)
Diversified Income Trust (1) Temporarily closed to new investors.
(2) Not available in all states.
Federal Income Trust (3) Relative to above.
(4) Not offered by Putnam Investments.
Global Governmental Income Trust Certificates of deposit offer a fixed rate
of return and may be insured, up to certain
High Yield Advantage Fund limits, by federal/state agencies. Savings
accounts may also be insured up to certain
High Yield Trust limits.
Income Fund Please call your financial advisor or Putnam
at 1-800-225-1581 to obtain a prospectus for
Intermediate U.S. Government Income Fund any Putnam fund. It contains more complete
information, including charges and expenses.
Preferred Income Fund Please read it carefully before you invest
or send money.
U.S. Government Income Trust
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS
For the Fiscal Year ended May 31, 1995
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, 1995, 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 periods
indicated therein. 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, 1995, 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, 1995, 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 periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 17, 1995
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PORTFOLIO OF INVESTMENTS OWNED
May 31, 1995
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<CAPTION>
MUNICIPAL BONDS AND NOTES (96.3%)*
PRINCIPAL AMOUNT RATINGS** VALUE
MICHIGAN (90.2%)
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<C> <S> <C> <C>
$1,000,000 Airport, Cmnty. School Dist. Rev. Bonds
6.6s, 5/1/22 AAA/P $ 1,135,000
4,000,000 Battle Creek, Downtown Dev. Auth.
Tax Increment Rev. Bonds
7.65s, 5/1/22 BBB 4,425,000
2,000,000 Battle Creek, Tax Incremental
Fin. Auth. Rev. Bonds
7.1s, 5/1/10 A 2,195,000
3,405,000 Detroit, G.O. Bonds
6.35s, 4/1/14 BBB 3,370,950
1,180,000 Detroit, Local Dev. Fin Auth
Tax Increment Rev. Bond
Ser. A, 9 1/2s, 5/1/21 BBB/P 1,469,100
5,000,000 Detroit, Swr. Disp.Rev. Bonds
FGIC, 5.7s, 7/1/23 AAA 4,937,500
Detroit, Wtr. Supply Sys. Rev. IFB
7,000,000 FGIC, 9.729s 7/1/22 AAA 8,583,750
1,500,000 FGIC, 9.729s 7/1/22 AAA 1,629,375
1,750,000 MBIA, 7 7/8s, 7/1/19 AAA 1,955,625
1,500,000 Dexter, Cmnty. School Rev. Bonds
AMBAC, 5.7s, 5/1/14 AAA 1,490,625
2,000,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB 2,092,500
2,000,000 Flint Hosp. Bldg. Auth Rev. Bonds
(Hurley Med. Ctr.), 7.8s, 7/1/14 Baa 2,122,500
1,000,000 Grand Rapids, Hsg. Fin. Auth.
Multi-Fam. Rev. Bonds
Ser. A, FNMA Coll. 7 5/8s, 9/1/23 AAA 1,096,250
Greater Detroit, Resource Recvy. Auth. Rev. Bonds
1,000,000 Ser. B, 9 1/4s, 12/13/08 BBB 1,045,000
1,000,000 Ser. C, 9 1/4s, 12/13/08 BBB 1,045,000
720,000 Highland Park, Hosp. Fin. Auth. Fac. Rev. Bonds
(MI Hlth. Care Corp. Project), Ser. A, 9 7/8s, 12/1/19 B 288,000
Kalamazoo, Hosp. Fin. Auth. Hosp. Fac. Rev. Bonds
5,500,000 (Borgess Med. Ctr.), Ser. A, FGIC, 5 1/4s 6/1/17 AAA 5,115,000
3,500,000 FGIC, 7.608s 6/1/11 AAA 3,228,750
615,000 Kent Cnty., Rev. Bonds
(Refuse Disposal System), 8.4s, 11/1/10 AAA 666,505
1,800,000 Kentwood Pub. Schools. Rev. Bonds
6.4, 5/1/12 Aa 1,887,750
3,000,000 Lansing, Building Auth. Rev. Bonds
5.6s, 6/1/19 AA 2,928,750
2,000,000 Livonia, Public Schools Dist. Rev. Bonds
FGIC, 5 1/8s, 5/1/22 AAA 1,810,000
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
MICHIGAN (continued)
- --------------------------------------------------------------------------------------------
$1,380,000 MI Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.), 8 1/2s, 9/1/17 BBB $ 1,464,525
MI Pub. Pwr. Agcy. Rev. Bonds
1,705,000 (Belle River Project), Ser. B, 5s 1/1/13 AA 1,587,780
7,125,000 (Belle River Project), MBIA, 5 1/4s, 1/1/18 AAA 6,617,344
5,000,000 MI State Comprehensive Trans. Rev. Bonds
Ser. A, 5 1/2s, 5/15/22 AA 4,768,750
500,000 MI State Hosp. Fin. Auth. Rev. Bonds
(Daughter's Charity-Providence Hosp.), 10s, 11/1/15 AA 521,875
MI State Hosp. Fin. Auth. Rev. Bonds
500,000 (Bay Med. Ctr.), Ser. A, 8 1/4s, 7/1/12 Baa 548,125
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 AAA/P 1,498,250
2,000,000 (Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 B 1,897,500
1,000,000 (MI Stste Hsg. Dev. Auth Ltd. Oblig. Rev. Bonds
(Mercy Bellbrook Project), MBIA, 8 1/8s 4/1/18 AAA 1,086,250
1,420,000 MI State Hsg. Dev. Auth. Ltd. Oblig. Rev. Bonds
MBIA, 5.4s 7/15/10 AAA 1,352,550
3,000,000 MI State Hsg. Dev. Auth. Multi-Fam. Rev. Bonds
Ser. A, FGIC, 8 3/8s 7/1/19 AAA 3,210,000
MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds
3,600,000 Ser. A, FSA, 7.55s, 4/1/23 AAA 3,811,500
2,000,000 Ser. A, 5 7/8s, 10/1/17 AAA 1,972,500
2,900,000 AMBAC, 4.63s, 10/1/12 AAA 2,628,125
2,000,000 MI State Hsg. Dev. Auth. Rev. Bonds
(Home Impt. Program), Ser B, 7.65s, 12/1/12 A 2,085,000
MI State Hsg. Dev. Auth. Single Fam. Mtge. Rev. Bonds
1,060,000 Ser. A, 7.7s, 12/1/16 AA 1,116,975
355,000 Ser. A, 7.55s 12/1/14 AA 373,638
1,250,000 Ser. B 6.95s, 12/1/20 AA 1,306,250
3,000,000 MI State Strategic Fund Solid Waste Disp. Rev.
Rfdg. Bonds
(Genesee Pwr. Station Project), 7 1/2s, 1/1/21 BB/P 3,033,750
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,940,000 (Arbor Model & Tooling Project), 10 1/4s, 9/15/19 BB/P 3,248,700
1,600,000 (Mercy Svcs. for Aging Project), 9.4s, 5/15/20 BBB/P 1,712,000
4,000,000 (Env. Research Project), 8 1/8s, 10/1/14 A/P 4,370,000
2,000,000 (Ford Motor Co. Project), Ser. A, 7.1s, 2/1/06 Aa 2,297,500
MI State Truck Line Rev. Bonds
1,000,000 FGIC, 5 5/8s 11/15/14 AAA 986,250
1,000,000 Ser. B, 5 1/2s 10/1/21 AA 955,000
1,500,000 MI Strategic Fund Ltd. Oblig. Rev. Bonds
(Detroit Edison Project), Ser. BB, AMBAC, 7s, 5/1/21 AAA 1,753,125
6,230,000 MI State Trunk Line Rev. Bonds
Ser. A, 5 1/2s, 10/1/21 AA 5,949,650
3,840,000 MI State Muni. Bond Auth. Rev. Bonds 6 1/2s, 10/1/17 AA 4,094,400
1,925,000 Monroe Cnty., Poll. Control Rev. Bonds
(Detroit Edison Co.), Ser. A, 10 1/2s, 12/1/16 Baa 2,035,688
2,810,000 Pontiac Hosp. Fin. Auth. Rev. Bonds 6s, 8/1/23 Baa 2,318,250
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
MICHIGAN (continued)
- --------------------------------------------------------------------------------------------
$1,935,000 Romulus, Cmnty. School G.O. Bonds
FGIC, 5 3/4s, 5/1/22 AAA $ 1,896,300
3,200,000 Royal Oak, Hosp. Fin. Auth. Hosp. Rev. Bonds
(William Beaumont Hosp.) Ser. G, 5 1/2s, 11/15/13 AA 3,096,000
2,580,000 Tawas City, Hosp. Fin. Auth. Rev. Bonds
(St. Joseph's Hosp. Project), Ser. A, 8 1/2s, 3/15/12 BB/P 2,715,450
2,000,000 Wayland, Uni. School Dist. Rev. Bonds
FGIC, 8s, 5/1/10 AAA 2,542,500
500,000 Wayne Cnty., Bldg. Auth. Rev. Bonds
Ser. A, 8s, 3/1/17 Baa 597,500
Western Townships Util. Auth. Swr. Disposal
Syst. Rev. Bonds
750,000 8.3s, 1/1/19 BBB 818,438
3,000,000 8.2s, 1/1/18 BBB 3,333,750
1,575,000 Wyandotte, Elec. Rev. Bonds
AMBAC, 7 7/8s, 10/1/17 AAA 1,728,563
------------
141,847,681
PUERTO RICO (6.1%)
- --------------------------------------------------------------------------------------------
1,200,000 Cmnwlth. of Puerto Rico, Urban Renewal & Hsg.
Corp. G.O. Bonds (Cmnwlth. Appropriation)
7 7/8s, 10/1/04 Baa 1,347,000
2,000,000 PR Cmnwlth. Hwy. & Trans. Auth. Hwy. Rev. Bonds
5 1/2s, 7/1/15 A 1,925,000
4,000,000 PR Cmnwlth. G. O. Bonds
AMBAC, 5 1/2s, 7/1/13 AAA 3,970,000
2,000,000 Puerto Rico, Pub. Bldg. Auth. Gtd. Ed. & Hlth. Fac.
Rev. Bonds Ser. L, 6 7/8s, 7/1/21 AAA 2,307,500
------------
9,549,500
------------
TOTAL INVESTMENTS (cost $144,924,512)*** $151,397,181
* Percentages indicated are based on net assets of $157,200,615, which
correspond to a net asset value per class A, B, and M share of $9.01,
$9.00, and $9.00, respectively.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at May 31, 1995 for the securities listed.
Ratings are generally ascribed to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they
undertake no obligation to do so, and the ratings indicated do not
necessarily represent what the agencies would ascribe to these securities
at May 31, 1995. Securities rated by Putnam are indicated by "/P" and are
not publicly rated. Ratings are not covered by the Report of Independent
Accountants.
*** The aggregate identified cost for federal income tax purposes is
$144,986,937, resulting in gross unrealized appreciation and depreciation
of $8,002,999 and $1,592,755, respectively, or net unrealized appreciation
of $6,410,244.
The rates shown on Variable Rate Demand Notes (VRDN) and Inverse Floating
Bonds (IFB) which are securities paying variable interest rates that can
vary inversely to changes in market interest rates, are the current
interest rates at May 31, 1995, which are subject to change based on the
terms of the security.
<PAGE>
The Fund had the following industry group concentrations greater than 10%
on May 31, 1995 (as a percentage of net assets):
Utilities 27.4%
Health-care 18.2
Housing 15.5
The Fund had the following insurance group concentrations greater than 10%
at May 31, 1995 (as a percentage of net assets):
FGIC 21.6%
KEY TO ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Federal Guaranty Insurance Corporation
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Bonds
MBIA -- Municipal Bond Investors Assurance
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1995
<TABLE>
ASSETS
- --------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (identified cost $144,924,512) (Note 1) $151,397,181
- --------------------------------------------------------------------------------------------
Interest and other receivables 6,533,121
- --------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 373,052
- --------------------------------------------------------------------------------------------
TOTAL ASSETS 158,303,354
LIABILITIES
- --------------------------------------------------------------------------------------------
Payables to sub-custodian (Note 2) 220,688
- --------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 69,877
- --------------------------------------------------------------------------------------------
Distributions payable to shareholders 490,854
- --------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 229,137
- --------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 160
- --------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 4,488
- --------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 6,340
- --------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 59,316
- --------------------------------------------------------------------------------------------
Other accrued expenses 21,879
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,102,739
- --------------------------------------------------------------------------------------------
NET ASSETS $157,200,615
REPRESENTED BY
- --------------------------------------------------------------------------------------------
Paid-in capital (Note 4) $153,658,479
- --------------------------------------------------------------------------------------------
Undistributed net investment income 96,048
- --------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and futures (3,026,581)
- --------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,472,669
- --------------------------------------------------------------------------------------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES OUTSTANDING $157,200,615
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- --------------------------------------------------------------------------------------------
Net asset value and redemption of class A shares
($136,010,412 divided by 15,089,622 shares) $9.01
-----
Offering price per share (100/95.25 of $9.01)* $9.46
- --------------------------------------------------------------------------------------------
Net asset value and redemption price of class B shares
($21,070,916 divided by 2,341,519 shares)+ $9.00
- --------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($119,287 divided by 13,253 shares)** $9.00
-----
Offering price per share (100/96.75 of $9.00) $9.30
- --------------------------------------------------------------------------------------------
* 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.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
Year ended May 31, 1995
TAX EXEMPT INTEREST INCOME $ 9,985,388
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 858,323
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 103,351
- -------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,118
- -------------------------------------------------------------------------------
Administrative services (Note 2) 11,362
- -------------------------------------------------------------------------------
Reports to shareholders 27,154
- -------------------------------------------------------------------------------
Auditing 24,029
- -------------------------------------------------------------------------------
Legal 18,300
- -------------------------------------------------------------------------------
Postage 12,143
- -------------------------------------------------------------------------------
Distribution fees -- class A (Note 2) 256,205
- -------------------------------------------------------------------------------
Distribution fees -- class B (Note 2) 127,403
- -------------------------------------------------------------------------------
Distribution fees -- class M (Note 2) 77
- -------------------------------------------------------------------------------
Registration fees 6,278
- -------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,281
- -------------------------------------------------------------------------------
Other expenses 3,926
- -------------------------------------------------------------------------------
TOTAL EXPENSES 1,460,950
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 8,524,438
- -------------------------------------------------------------------------------
Net realized loss on investments and put options (Notes 1 and 3) (1,627,890)
- -------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (575,802)
- -------------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (49,844)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 4,230,455
- -------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 1,976,919
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,501,357
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
- ----------------------------------------------------------------------------------------
OPERATIONS:
- ----------------------------------------------------------------------------------------
Net investment income $ 8,524,438 $ 7,254,308
- ----------------------------------------------------------------------------------------
Net realized gain (loss) on investments, futures
contracts and options (2,253,536) 300,897
- ----------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 4,230,455 (5,751,612)
- ----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 10,501,357 1,803,593
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- ----------------------------------------------------------------------------------------
From net investment income:
- ----------------------------------------------------------------------------------------
Class A (7,601,592) (6,991,204)
- ----------------------------------------------------------------------------------------
Class B (798,353) (225,780)
- ----------------------------------------------------------------------------------------
Class M (915) --
- ----------------------------------------------------------------------------------------
From net realized gain on investments:
- ----------------------------------------------------------------------------------------
Class A (9,763) (340,991)
- ----------------------------------------------------------------------------------------
Class B (1,025) --
- ----------------------------------------------------------------------------------------
Class M (2) --
- ----------------------------------------------------------------------------------------
In excess of net gain on investments:
- ----------------------------------------------------------------------------------------
Class A -- (729,509)
- ----------------------------------------------------------------------------------------
Class B -- (42,639)
- ----------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 15,939,037 32,624,378
- ----------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 18,028,744 26,097,848
NET ASSETS
- ----------------------------------------------------------------------------------------
Beginning of year 139,171,871 113,074,023
- ----------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income and distributions in excess of net investment
income of $96,048 and $52,244, respectively) $157,200,615 $139,171,871
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
FOR THE PERIOD FOR THE PERIOD
APRIL 17, 1995 JULY 15, 1993
(COMMENCEMENT OF (COMMENCEMENT OF
OPERATIONS) TO YEAR ENDED OPERATIONS) TO
MAY 31 MAY 31 MAY 31
- ------------------------------------------------------------------------------------------------------
1995<F1> 1995 1994
- ------------------------------------------------------------------------------------------------------
CLASS M CLASS B
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.80 $8.90 $9.43
- ------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------
Net investment income .05 .47 .41
- ------------------------------------------------------------------------------------------------------
Net realized/unrealized gain (loss)
on investments .21 .10 (.46)
- ------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .26 .57 (.05)
- ------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- ------------------------------------------------------------------------------------------------------
Net investment income (.06) (.47) (.40)
- ------------------------------------------------------------------------------------------------------
Net realized gain on investments -- -- --
- ------------------------------------------------------------------------------------------------------
In excess of net gain on investments -- -- (.08)
- ------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.06) (.47) (.48)
- ------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.00 $9.00 $8.90
- ------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE (%) <F3> 2.03<F4> 6.72 (.68)<F4>
- ------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $119 $21,071 $10,251
- ------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) .20<F4> 1.59 1.42<F4>
- ------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) .84<F4> 5.31 4.25<F4>
- ------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 82.91 82.91 41.77<F4>
- ------------------------------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS [continued]
(For a share outstanding throughout the year) [continued]
FOR THE PERIOD
OCTOBER 23, 1989
(COMMENCEMENT OF
OPERATIONS) TO
YEAR ENDED MAY 31 MAY 31
- -----------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.90 $9.30 $8.80 $8.51 $8.43 $8.50
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income .52 .52 .55 .56<F2> .58<F2> .33<F2>
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized/unrealized gain (loss)
on investments .11 (.32) .52 .29 .08 (.07)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .63 .20 1.07 .85 .66 .26
- -----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income (.52) (.52) (.56) (.56) (.58) (.33)
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- (.03) (.01) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
In excess of net gain on investments -- (.05) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.52) (.60) (.57) (.56) (.58) (.33)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.01 $8.90 $9.30 $8.80 $8.51 $8.43
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NET ASSET VALUE (%) <F3> 7.45 2.03 12.38 10.25 8.13 3.17<F4>
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $136,010 $128,921 $113,074 $80,310 $19,893 $9,280
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) .95 .99 1.04 .95<F2> .87<F2> .45<F2><F4>
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 6.03 5.58 6.04 6.28<F2> 6.78<F2> 3.84<F2><F4>
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 82.91 41.77 15.89 71.68<F4><F5> 16.21 6.46<F4>
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
<F2> 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, 1991 and the period ended May 31,
1990 reflect expense reductions of approximately $0.01, $0.05, and $0.05, respectively.
<F3> Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
<F4> Not annualized.
<F5> Portfolio turnover excludes the impact of assets received from the acquisition of Putnam Michigan Tax Exempt Income Fund.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The fund seeks as high a
level of current income exempt from federal income tax and 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 class A, class B and class M 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. The fund commenced its public offering of
class M shares on April 17, 1995. Class M shares are sold with a maximum front
end sales charge of 3.25% and pay ongoing distribution fees that are lower than
class B shares and higher than class A shares. Class M shares are not subject to
any contingent deferred sales charge when they are redeemed. 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 relation ships 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, as
amended. 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.
<PAGE>
At May 31, 1995, the fund had a capital loss carryover which will expire May 31,
2003, of approximately $2,320,000 which may be available to offset realized
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.
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 treatment of post October
losses, loss deferrals, dividends payable, 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, 1995, the fund reclassified
$24,714 to increase undistributed net investment income, $26,633 to increase
accumulated net realized loss on investments and futures and $1,919 to increase
paid-in capital.
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 OPTION ACCOUNTING PRINCIPLES The fund may, to the extent consistent with its
investment objective and policies, seek to increase its current returns by
writing covered call and put options on securities it owns or in which it may
invest. When a fund writes a call or put option, an amount equal to the premium
received by the fund is included in the fund's "Statement of assets and
liabilities" as an asset and an equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market value
of an option written. The current market value of an option is the last sale
price or, in the absence of a sale, the last offering price. If an option
expires on its stipulated expiration date, or if the fund enters into a closing
purchase transaction, the fund realizes a gain (or loss if the closing purchase
transaction exceeds the premium received when the option was written) without
regard to any unrealized gain or loss on the underlying security, and the
liability related to such option is extinguished. If a written call option is
exercised, the fund realizes a gain or loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received. If a written put option is exercised, the amount of the premium
originally received reduces the cost of the security that the fund purchases
upon exercise of the option.
The risk in writing a call option is that the fund relinquishes the opportunity
to profit if the market price of the underlying security increases and the
option is exercised. In writing a put option, the fund assumes the risk of
incurring a loss if the market price of the underlying security decreases and
the option is exercised. In addition, there is the risk the fund may not be able
to enter into a closing transaction because of an illiquid secondary market.
The fund may also, to the extent consistent with its investment objectives and
policies, buy put options to protect its portfolio holdings in an underlying
security against a decline in market value. The fund may buy call options to
hedge against an increase in the price of the securities that the fund
ultimately wants to buy. These funds may also buy and sell combinations of put
and call options on the same underlying security to earn additional income. The
<PAGE>
premium paid by a fund for the purchase of a put or call option is included in
the fund's "Statement of assets and liabilities" as an investment and is
subsequently "marked-to-market" to reflect the current market value of the
option. If an option the fund has purchased expires on the stipulated expiration
date, the fund realizes a loss in the amount of the cost of the option. If the
fund enters into a closing sale transaction, the fund realizes a gain or loss,
depending on whether proceeds from the closing sale transaction are greater or
less than the cost of the option. If the fund exercises a call option, the cost
of securities acquired by exercising the call is increased by the premium paid
to buy the call. If the fund exercises a put option, it realizes a gain or loss
from the sale of the underlying security and the proceeds from such sale are
decreased by the premium originally paid. The risk associated with purchasing
options is limited to the premium originally paid.
G FUTURES The fund may purchase and sell financial futures contracts to hedge
against changes in the values of tax-exempt municipal securities the fund owns
or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of a
particular index or a certain amount of a U.S. Government security at a set
price on a future date.
Upon entering into such a contract the fund is required to pledge to the broker
an amount of cash or securities equal to the minimum "initial margin"
requirements of the futures. Pursuant to the contract, the fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin" and are recorded by the fund as unrealized gains or losses.
When the contract is closed, the fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
The potential risk to the fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in value of the hedged instruments. In addition, there
is a risk that the fund may not be able to close out its futures positions due
to an illiquid secondary market.
H ORGANIZATION EXPENSES Expenses incurred by the fund in connection with the
offering of class A and B shares, 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 were 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.
<PAGE>
Trustees of the fund receive an annual Trustee's fee of $700 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.
Investor servicing and custodian fees reported in the Statement of operations
for the year ended May 31, 1995 have been reduced by credits allowed by PFTC.
These credits amount to $93,135 for the year ended May 31, 1995.
As part of the custodial contract between Putnam Fiduciary Trust Company and the
subcustodian bank, the subcustodian has a lien on the securities of the fund to
the extent permitted by the fund's investment restrictions to cover any advances
made by the subcustodian for the settlement of securities purchased by the fund.
At May 31, 1995, the payable to subcustodian represents the amount due for cash
advanced for the settlement of a security purchase.
The fund has adopted distribution plans (the "Plans") with respect to its class
A, B and M shares pursuant to Rule 12b-1 under the Investment Company Act of
1940. The purpose of the Plans is to compensate Putnam Mutual Funds Corp., a
wholly-owned subsidiary of Putnam Investments, Inc., for services provided and
expenses incurred by it in distributing shares of the fund. The Trustees have
approved payment by the fund at an annual rate of .20%, 0.85% and 0.50% of the
average net assets attributable to class A, B and M shares, respectively.
For the year ended May 31, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $15,212 from the sale of class A shares
and $17,696 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 purchased as part of an investment of $1 million or more. For
the period April 17, 1995 (commencement of operations) to May 31, 1995, Putnam
Mutual Funds Corp., acting as the underwriter, received no monies from the sale
of class M shares of the fund.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the year ended May 31, 1995, purchases and sales of investment securities
other than short-term municipal obligations aggregated $128,489,054 and
$111,979,063 respectively. Purchases and sales of short-term municipal
obligations aggregated $24,050,000 and $30,150,000, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
Written options transactions during the year are summarized as follows:
CONTRACT PREMIUM
AMOUNTS RECEIVED
- -------------------------------------------------
Outstanding at
beginning of year -- $ --
Options written 4,600,000 63,537
Options expired -- --
Options closed (4,600,000) (63,537)
- -------------------------------------------------
WRITTEN OPTIONS
OUTSTANDING AT
END OF YEAR -- $ --
- -------------------------------------------------
NOTE 4
CAPITAL SHARES
At May 31, 1995, there was an unlimited number of shares of beneficial interest
authorized, divided into three classes, class A, B and M capital shares.
Transactions in capital shares were as follows:
<PAGE>
YEAR ENDED MAY 31
1995 1994
- -------------------------------------------------------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 1,755,569 $15,333,898 3,156,753 $29,485,331
Shares issued in connection
with reinvestment of
distributions 529,968 4,609,346 521,068 4,858,006
- -------------------------------------------------------------------------------
2,285,537 19,943,244 3,677,821 34,343,337
Shares repurchased (1,683,464) (14,513,352) (1,345,853) (12,460,026)
- -------------------------------------------------------------------------------
NET INCREASE 602,073 $ 5,429,892 2,331,968 $21,883,311
- -------------------------------------------------------------------------------
JULY 15, 1993
(COMMENCEMENT OF
OPERATIONS) TO
YEAR ENDED MAY 31 MAY 31
1995 1994
- -------------------------------------------------------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 1,289,625 $11,251,833 1,214,204 $11,315,559
Shares issued in connection
with reinvestment of
distributions 61,826 536,960 19,000 174,967
- -------------------------------------------------------------------------------
1,351,451 11,788,793 1,233,204 11,490,526
Shares repurchased (162,158) (1,397,198) (80,978) (749,459)
- -------------------------------------------------------------------------------
NET INCREASE 1,189,293 $10,391,595 1,152,226 $10,741,067
- -------------------------------------------------------------------------------
FOR THE PERIOD
APRIL 17, 1995
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31
1995
- -------------------------------------
CLASS M SHARES AMOUNT
- -------------------------------------
Shares sold 13,191 $117,000
Shares issued in
connection with
reinvestment of
distributions 62 550
- -------------------------------------
13,253 117,550
Shares repurchased -- --
- -------------------------------------
Net increase 13,253 $117,550
- -------------------------------------
- -------------------------------------------------------------------------------
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.
The Form 1099 you receive in January 1996 will show the tax status of any
taxable distributions paid to your account in calendar 1995.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER OFFICERS
Putnam Investment
Management, Inc. George Putnam
One Post Office Square President
Boston, MA 02109
Charles E. Porter
MARKETING SERVICES Executive Vice President
Putnam Mutual Funds Corp.
One Post Office Square Patricia C. Flaherty
Boston, MA 02109 Senior Vice President
CUSTODIAN Lawrence J. Lasser
Putnam Fiduciary Trust Company Vice President
LEGAL COUNSEL Gordon H. Silver
Ropes & Gray Vice President
INDEPENDENT ACCOUNTANTS Gary N. Coburn
Coopers & Lybrand L.L.P. Vice President
TRUSTEES James E. Erickson
George Putnam, Chairman Vice President
William F. Pounds, Vice Chairman Howard Manning
Vice President and Fund Manager
Jameson Adkins Baxter
William N. Shiebler
Hans H. Estin Vice President
John A. Hill John R. Verani
Vice President
Elizabeth T. Kennan
Paul M. O'Neil
Lawrence J. Lasser Vice President
Robert E. Patterson John D. Hughes
Vice President and Treasurer
Donald S. Perkins
Beverly Marcus
George Putnam, III Clerk and Assistant Treasurer
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
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
copy of Putnam's Quarterly Performance Summary. For more information, or to
request a prospectus, call toll free: 1-800-225-1581.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OF, OR GUARANTEED OR ENDORSED BY, ANY
FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC), THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY, AND INVOLVE
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE>
[LOGO: PUTNAM INVESTMENTS] ------------
Bulk Rate
THE PUTNAM FUNDS U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
------------
18989-845/236
