PUTNAM
MICHIGAN
TAX EXEMPT
INCOME FUND
[GRAPHIC OMITTED:
art work]
SEMIANNUAL REPORT
November 30, 1995
[LOGO:
BOSTON - LONDON - TOKYO]
<PAGE>
FUND HIGHLIGHTS
o "ONE INVESTOR'S WORRY IS ANOTHER'S OPPORTUNITY. THAT'S THE MORAL OF THE
STORY OF THE MUNICIPAL BOND MARKET NOW, WHERE FEARS OF A FLAT TAX HAVE MADE
MUNIS EXTREMELY ATTRACTIVE."
-- FORTUNE, SEPTEMBER 8, 1995
o "THE UPHEAVAL IN THE MUNI MARKET HAS CREATED SOME GREAT DEALS FOR INVESTORS
WHO KNOW WHERE TO LOOK."
-- MONEY, NOVEMBER 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
17 Financial statements
<PAGE>
FROM THE CHAIRMAN
[GRAPHIC OMITTED:
Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
Tax-exempt bond investors will long remember 1995 as a year of highs and lows in
market results. The year began as the bond market was coming off one of its
worst periods in recent memory. Just as things began to look brighter for
tax-exempt bonds, talk in Washington about tax reform cast a wave of uncertainty
over investors.
By the time Putnam Michigan Tax Exempt Income Fund entered its new fiscal year
in June, investors had begun to regain their composure, realizing how remote
enactment of any tax-reform legislation was likely to be in an election year. As
the fund reached the fiscal year's midpoint on November 30, 1995, shareholders
could look back on a period of impressive recovery.
Furthermore, because of the earlier interruption over tax-reform proposals, Fund
Manager Howard Manning believes the rally will be sustained during the second
half of fiscal 1996. As we notified shareholders earlier, the roman numeral "II"
will be omitted from the name of your fund. Since there is only one fund, the
"II" designation is no longer necessary.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
January 17, 1996
<PAGE>
REPORT FROM THE FUND MANAGER
HOWARD MANNING
Although flat-tax concerns have dampened investor enthusiasm for municipals
since the past spring, your fund's successful securities selection has
produced attractive performance over the past six months. For the semiannual
period ended November 30, 1995, class A and class B shares returned 5.10%
and 4.64%, respectively, both at net asset value.
o STRONG RELATIVE PERFORMANCE: A MATTER OF PERSPECTIVE
After overcoming a brief stall in midsummer, the broad fixed-income market
continued its impressive run throughout the six months ended November 30,
1995. Increased investor confidence in the Federal Reserve Board's ability
to thwart inflation and effectively manage economic growth over the long
term fueled the gains of most fixed-income investments. Indeed, the rally
had gained such momentum by period's end that the current yield on the
benchmark 30-year Treasury bond seems to be fast approaching the
historically low level of 5.79% reached in October 1993.
On an absolute basis, municipal bonds participated in the rally's strength
in a highly respectable fashion. However, their performance relative to
taxable investments may appear somewhat lackluster. Investors' lingering
concerns about the perceived effects of the flat-tax proposal introduced in
April -- which, in its purest form, would deprive municipal bonds of their
beneficial tax treatment -- prevented your fund's investments from attaining
the full price appreciation potential presented by the favorable investment
environment.
o FOCUS ON BOND QUALITY, STRUCTURE
Throughout calendar 1995, the reduced quantity of new-issue municipals
coupled with scant secondary market supply and continued strong demand has
had a side effect: quality spreads among
<PAGE>
various bonds have contracted considerably. That is, there is little price
difference between top- and lower-quality bonds in the current market. As a
result, although we will still explore opportunities on the lower end of the
quality spectrum when justified by our research, in most instances we find
shareholders are not adequately compensated for assuming added credit risk.
Our strategy, therefore, has been to maintain a portfolio of high-quality,
price-sensitive bonds, reflecting an optimistic outlook for interest rates.
Credit quality alone, however, is not enough to assure attractive returns.
When considering securities for purchase, we pay particular attention to the
bond structure (coupon, maturity, call features) that we believe offers the
greatest opportunity for price appreciation. We limit exposure to par bonds
(bonds priced at or near face value) and concentrate our purchases on
discount bonds with reasonable levels of call protection. Discount bonds
tend to gain in price quickly as interest rates decline. Of course, they
also are apt to decline in price rapidly as interest rates rise. Prices of
par bonds, on the other hand, are inclined to rise less than prices of
discounts as interest rates decline. Since we currently believe that rates
are more likely to move downward than up, par bonds appear to be the less
desirable investments at present.
In late summer, we raised cash in anticipation of a projected $750 million
to $1 billion new bond issuance in Michigan slated for the
[GRAPHIC OMITTED: line chart: BOND YIELDS: MUNICIPAL BOND YIELDS AS A PERCENTAGE
OF TREASURY BOND YIELDS
Y-axis reads (top to bottom) 8% to 5% in one percent decrements
X-axis reads (left to right) 11/94 through 11/95 in one-month increments
A solid black line represents Municipal bond yields, ranging from 6.93%
to 5.56% (see plot points below: "Municipal")
A solid white line represents Treasury bond yields, ranging from 8.0% to 6.13%
(see plot points below: "Treasury")
Municipal Treasury
--------- --------
6.93% 8.00%
6.70 7.88
6.39 7.70
6.00 7.44
6.03 7.33
5.76 6.65
6.00 6.62
6.02 6.65
5.96 6.50
5.74 6.33
5.56 6.13
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. Unlike mutual
fund shares, Treasuries are backed by the full faith and credit of the U.S.
government. Source: Bloomberg.]
<PAGE>
month of September. We viewed this temporary bubble of supply as an
opportunity to add securities to the fund at relatively low prices. Through
cash sales and swapping, we were able to take advantage of the supply
increase and channel nearly 20% of the fund's assets into attractively
valued new issues structured as discount bonds with favorable call
protection. This move proved well timed, as interest rates rallied farther
into the fourth quarter of calendar 1995, and our new purchases appreciated
handsomely.
o DETROIT ON THE REBOUND, SCHOOL DISTRICTS ADD DIVERSIFICATION
Michigan's economic landscape remains robust. Although its strong ties to
the country's major auto manufacturers will always leave the state somewhat
vulnerable to the ups and downs of such a cyclical industry, the area's
economic base is now much more diversified compared with prior years. State
finances remain in excellent condition due to the government's conservative
approach toward fiscal management, providing an attractive backdrop for
tax-free investing.
Unlike the market as a whole, the quantity of Michigan bonds remains
plentiful as municipalities, particularly the city of Detroit, seek to
access the municipal market in order to finance infrastructure needs. We
believe Detroit's future is currently the brightest it has been in decades.
New mayor Dennis Archer is taking steps to bring back commercial and
industrial development to the city, which should improve the area's
employment levels and its tax base. Your fund should continue to benefit
from improvement in the city's growth prospects through its investment in
both Detroit general obligation debt and insured securities for various
issuers in the Detroit region.
In order to better the geographic dispersion of bonds held in the portfolio
-- an important factor for your single-state fund -- we have added insured
local general obligations such as those issued by school districts across
the state. These holdings represent various regions, ranging from the Upper
Peninsula to Muskegon County in the western part of the state, and provide
the fund with exposure to the diverse areas of the Michigan economy.
<PAGE>
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS*
Water and sewerage 22.0%
Education 21.4%
Hospitals/Health care 18.8%
Footnote reads:
*Based on net assets as of 11/30/95. Holdings will vary over time.]
o FUNDAMENTALS ARE SOUND, VALUATIONS APPEALING
As we enter the second half of fiscal 1996, we expect conditions for
investing in fixed-income securities to remain hospitable. Subsiding
inflation, a benign interest rate environment, and decelerating economic
growth seem likely to continue.
Government, on both the state and national levels, is addressing for the
first time in history the issue of how to be more efficient. Such attention
to fiscal responsibility bodes well for the fundamental structure of the
municipal market. Going forward, we will continue to carefully monitor
market events as they unfold and position your fund to potentially benefit
from longer-term trends.
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 11/30/95, there is no guarantee the fund will
continue to hold these securities in the future.
<PAGE>
PERFORMANCE SUMMARY
PERFORMANCE SHOULD ALWAYS BE CONSIDERED IN LIGHT OF A FUND'S INVESTMENT
STRATEGY. PUTNAM MICHIGAN TAX EXEMPT INCOME FUND IS DESIGNED FOR INVESTORS
SEEKING A HIGH LEVEL OF CURRENT INCOME FREE FROM FEDERAL AND STATE INCOME TAX
CONSISTENT WITH PRESERVATION OF CAPITAL.
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 in the fund.
TOTAL RETURN FOR PERIODS ENDED 11/30/95
CLASS A CLASS B CLASS M
(10/23/89)* (7/15/93)* (4/17/95)*
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
6 months 5.10% 0.10% 4.64% -0.36% 4.94% 1.56%
- --------------------------------------------------------------------------------
1 year 17.91 12.34 17.09 12.09 -- --
- --------------------------------------------------------------------------------
5 years 49.12 42.04 -- -- -- --
Annual average 8.32 7.27 -- -- -- --
- --------------------------------------------------------------------------------
Life of class 59.24 51.73 10.92 7.99 8.05 4.49
Annual average 7.91 7.06 4.45 3.28 -- --
- --------------------------------------------------------------------------------
*Commencement of operations
COMPARATIVE RETURNS FOR PERIODS ENDED 11/30/95
LEHMAN BROS.
MUNICIPAL BOND CONSUMER
BOND INDEX PRICE INDEX
- --------------------------------------------------------------------------------
6 months 5.18% 0.92%
- --------------------------------------------------------------------------------
1 year 18.90 2.61
- --------------------------------------------------------------------------------
5 years 51.82 14.80
Annual average 8.71 2.80
- --------------------------------------------------------------------------------
Life of class A 66.37 22.29
Annual average 8.69 3.35
- --------------------------------------------------------------------------------
Life of class B 15.66 6.37
Annual average 6.30 2.63
- --------------------------------------------------------------------------------
Life of class M 8.66 1.45
- --------------------------------------------------------------------------------
Performance data represent past results, do not reflect future performance, and
will differ for each share class. They do not take into account any adjustment
for taxes payable on reinvested distributions. Investment returns and net asset
value will fluctuate so that an investor's shares, when sold, may be worth more
or less than their original cost. POP assumes 4.75% maximum sales charge for
class A shares and 3.25% for class M shares. CDSC for class B shares assumes 5%
maximum contingent deferred sales charge, declining from 5% to 1% in the sixth
year.
<PAGE>
TOTAL RETURN FOR PERIODS ENDED 12/31/95
CLASS A CLASS B CLASS M
(10/23/89)* (7/15/93)* (4/17/95)*
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
1 year 16.01% 10.50% 15.22% 10.22% -- --
- --------------------------------------------------------------------------------
5 years 49.90 42.76 -- -- -- --
Annual average 8.43 7.38 -- -- -- --
- --------------------------------------------------------------------------------
Life of class 60.56 52.99 11.81 8.87 9.05% 5.45%
Annual average 7.95 7.11 4.64 3.51 -- --
- --------------------------------------------------------------------------------
*Commencement of operations
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/95
CLASS A CLASS B CLASS M
- --------------------------------------------------------------------------------
DISTRIBUTIONS (NUMBER) 6 6 6
- --------------------------------------------------------------------------------
Income $.2498 $.2201 $.2365
- --------------------------------------------------------------------------------
Total $.2498 $.2201 $.2365
- --------------------------------------------------------------------------------
SHARE VALUE: NAV POP NAV NAV POP
- --------------------------------------------------------------------------------
5/31/95 $9.01 $9.46 $9.00 $9.00 $9.30
- --------------------------------------------------------------------------------
11/30/95 9.21 9.67 9.19 9.20 9.51
CURRENT RETURN
- --------------------------------------------------------------------------------
End of period
- --------------------------------------------------------------------------------
Current dividend
rate(1) 5.10% 4.85% 4.44% 4.77% 4.62%
- --------------------------------------------------------------------------------
Taxable equivalent(2) 8.83 8.40 7.69 8.26 8.00
- --------------------------------------------------------------------------------
Current 30-day
SEC yield(3) 5.13 4.88 4.51 4.86 4.69
- --------------------------------------------------------------------------------
Taxable equivalent(2) 8.88 8.45 7.81 8.42 8.12
- --------------------------------------------------------------------------------
(1)Income portion of most recent distribution, annualized and divided by NAV or
POP at end of period. (2)Assumes maximum combined state and federal tax rates of
42.26%. Results for investors subject to lower tax rates would not be as
advantageous. (3)Based on investment income, calculated using SEC guidelines.
<PAGE>
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
CLASS M SHARES have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 4.75% sales charge for class A shares and 3.25% for class M
shares.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies.
LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index does not take into account brokerage commissions or other
costs, may include bonds different from those in the fund, and may pose
different risks than the fund. It is not possible to invest directly in an
index.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
<PAGE>
RELATIVE RISK/REWARD POTENTIAL OF PUTNAM FUNDS
These illustrations provide a simplified guide to the risk/reward potential for
funds within each category of the Putnam Family of Funds and are not intended as
investment advice. Your investment advisor can help you evaluate your risk
tolerance.
These rankings are relative only to Putnam funds and should not be compared to
other investments. There is no guarantee that one Putnam fund will be less
volatile than another, since each fund has its own investment risks. That's why
it is essential to read the fund's prospectus before investing.
PUTNAM GROWTH FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to
"Higher Risk/Higher Reward Potential" of the following:
Investors; Diversified Equity(1); Global Growth(1); Vista; Natural Resources;
Health Sciences; Voyager & Voyager II; Overseas Growth(1); Europe Growth(1);
New Opportunities(2); OTC Emerging Growth(2) & Int'l New Opportunities(1,2);
Asia Pacific Growth(1)]
PUTNAM GROWTH AND INCOME FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to
"Higher Risk/Higher Reward Potential" of the following:
Balanced Retirement; Utilities Growth and Income; George Putnam; Convertible
Income-Growth; Equity Income; Fund for Growth and Income; Putnam Growth and
Income Fund II]
(1) Foreign investments are subject to certain risks, such as currency
fluctuations and political developments, that are not present with domestic
investments.
(2) This fund invests all or a portion of its assets in small to medium-sized
companies, which increases the risk of price fluctuations.
(3) While U.S. government backing of individual securities does not insure your
principal, which will fluctuate, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal.
<PAGE>
PUTNAM INCOME FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to
"Higher Risk/Higher Reward Potential" of the following:
Money Market(4); Adjustable Rate U.S. Gov't.(3); Intermediate U.S. Gov't.(3);
U.S. Gov't. Income(3); American Gov't. Income(3); Federal Income(3);
Diversified Income(1,3,5); Income; Preferred Income; Global Gov't.(1,5);
High Yield(5); High Yield Advantage(5)]
PUTNAM TAX-FREE FUNDS(6)
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential to
"Higher Risk/Higher Reward Potential" of the following:
Tax Exempt Money Market(4); Intermediate Tax Exempt; Tax-Free Insured(7);
Tax Exempt Income; Single-state tax-free funds*; Municipal Income;
Tax-Free High Yield(5)]
* State tax-free funds available for Arizona, California, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, and
Pennsylvania. Not available in all states.
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments. The three
portfolios are:
o PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO
o PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO
o PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO
Please call your financial advisor -- or Putnam at 1-800-225-1581 -- to
obtain a prospectus for any Putnam fund. The prospectus contains more
complete information, including risk considerations, charges, and expenses.
Read it carefully before you invest or send money.
(4) The fund is managed to maintain a steady price of $1.00 per share, although
there is no assurance this price can be maintained in the future.
(5) The lower credit ratings of high-yield corporate and municipal bonds reflect
a greater possibility that adverse changes in the economy or their issuers
may affect their ability to pay principal and interest on the bonds.
(6) Income may be subject to state and local taxes. Capital gains, if any, are
taxable for federal and, in most cases, state purposes.
(7) Bond insurance does not guarantee principal or protect against changes in
market price.
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
November 30, 1995 (Unaudited)
KEY TO ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
FGIC -- Federal Guaranty Insurance Corporation
FNMA Coll -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Bonds
MBIA -- Municipal Bond Investors Assurance
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.7%)*
PRINCIPAL AMOUNT RATINGS** VALUE
MICHIGAN (94.8%)*
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C>
$ 1,425,000 Albion Pub. School Dist. G.O. Bonds,
5 1/8s, 5/1/18 AA $ 1,362,650
4,000,000 Anchor Bay School Dist. G.O. Bonds, FGIC,
5 1/4s, 5/1/14 AAA 3,900,000
5,500,000 Battle Creek, Downtown Dev. Auth. Tax Increment
Rev. Bonds, 7.65s, 5/1/22 BBB 6,270,000
2,000,000 Battle Creek, Tax Incremental Fin. Auth.
Rev. Bonds, 7.1s, 5/1/10 A 2,255,000
4,145,000 Chippewa Valley Schools G.O. Bonds, 5s, 5/1/21 AAA 3,875,575
1,975,000 Clintondale Cmnty. Schools G.O. Bonds,
5 1/4s, 5/1/15 AA 1,908,344
1,500,000 Comstock Park Pub. Schools Rev. Bonds
(Building & Site), FGIC, 5 1/4s, 5/1/23 AAA 1,445,625
3,445,000 Dearborn Sew. Disposal Syst. Rev. Bonds,
Ser. A, MBIA, 5 1/8s, 4/1/14 AAA 3,311,506
2,185,000 Detroit Convention Fac. Rev. Bonds (Cobol Hall
Expansion Project), FSA, 5 1/4s, 9/30/12 AAA 2,157,688
6,735,000 Detroit Sew. Disp. Rev. Bonds (Wtr. Supply
System), MBIA, 5s, 7/1/25 AAA 6,280,388
Detroit Wtr. Supply Syst. 2nd Lien Rev. Bonds
4,050,000 Ser. A, MBIA, 5 1/2s, 7/1/25 AAA 4,014,563
1,050,000 FGIC, 5s, 7/1/23 AAA 981,750
2,500,000 Detroit, G.O. Bonds, Ser. A, 6.8s, 4/1/15 BBB 2,628,125
1,180,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB/P 1,475,000
1,750,000 Detroit, Wtr. Supply Sys. Rev. Bonds,
MBIA, 7 7/8s, 7/1/19 AAA 1,944,688
8,500,000 Detroit, Wtr. Supply Sys. IFB, FGIC, 8.461s, 7/1/22 AAA 10,465,000
2,000,000 Dickinson Cnty., Hosp. Rev Bonds (Memorial
Hosp. Syst.), 8 1/8s, 11/1/24 Ba 2,197,500
2,500,000 Eaton Cnty. Wtr. Syst. Rev. Bonds (Delta TWP),
MBIA, 5 1/8s, 5/1/16 AAA 2,403,125
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
MICHIGAN (continued)
- ---------------------------------------------------------------------------------------
$ 1,750,000 Ewen-Trout Creek Consolidated School Dist.
Rev. Bonds, MBIA, 5 3/8s, 5/1/20 AAA $ 1,717,188
Flint Hosp. Bldg. Auth. Rev. Bonds
2,000,000 (Hurley Med. Ctr.), 7.8s, 7/1/14 Baa 2,180,000
630,000 (Hurley Med. Ctr.), Ser. A, 6s, 7/1/06 Baa 621,338
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam. Rev. Bonds,
Ser. A, FNMA Coll., 7 5/8s, 9/1/23 AAA 1,103,750
Greater Detroit, Resource Recvy. Auth. Rev. Bonds
1,000,000 Ser. B, 9 1/4s, 12/13/08 BBB 1,030,820
1,000,000 Ser. C, 9 1/4s, 12/13/08 BBB 1,030,820
5,500,000 Kalamazoo, Hosp. Fin. Auth. Hosp. Fac. Rev. Bonds
(Borgess Med. Ctr.), Ser. A, FGIC, 5 1/4s, 6/1/17 AAA 5,328,125
3,500,000 Kalamazoo, Hosp. Fin. Auth. Hosp. Fac. IFB, FGIC,
6.358s, 6/1/11 AAA 3,434,375
3,840,000 MI Muni. Board Auth. State Revolving Rev. Bonds,
6 1/2s, 10/1/17 AA 4,214,400
5,000,000 MI Pub. Pwr. Agcy. Rev. Bonds (Belle River Project),
MBIA, 5 1/4s, 1/1/18 AAA 4,843,750
MI State Hosp. Fin. Auth. Rev. Bonds
920,000 (Garden City Hosp.), 8 1/2s, 9/1/17 BBB 989,000
460,000 (Garden City Project), 8 1/2s, 9/1/17 BBB 561,200
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 BBB 1,499,875
1,000,000 (Genesys Hlth. Syst.), Ser. A, 7 1/2s, 10/1/27 Baa 1,055,000
2,000,000 (Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB 1,972,500
2,000,000 (Sinai Hospital), 6.7s, 1/1/26 Baa 1,995,000
1,000,000 (Presbyterian Villages), 6 1/2s, 1/1/25 BBB/P 982,500
1,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB/P 985,000
1,000,000 MI State Hsg. Dev. Auth. Ltd. Oblig. Rev. Bonds
(Mercy Bellbrook Project), MBIA, 8 1/8s, 4/1/18 AAA 1,072,500
3,000,000 MI State Hsg. Dev. Auth. Multi-Fam. Rev. Bonds,
Ser. A, FGIC, 8 3/8s, 7/1/19 AAA 3,217,500
MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds
1,600,000 Ser. A, FSA, 7.55s, 4/1/23 AAA 1,716,000
2,900,000 AMBAC, 4.58s, 10/1/12 AAA 2,704,250
195,000 MI State Hsg. Dev. Auth. Single Fam. Mtge.
Rev. Bonds, Ser. A, 7.55s, 12/1/14 AA 205,238
2,500,000 MI State Stragetic Fund Solid Waste Disp.
Rev. Bonds (S.D. Warren Co., Project),
Ser. C, 7 3/8s, 1/15/22 BB/P 2,606,250
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,905,000 (Arbor Model & Tooling Project), 10 1/4s, 9/15/19 BB/P 3,199,131
1,600,000 (Mercy Svcs. for Aging Project), 9.4s, 5/15/20 BBB/P 1,792,000
3,915,000 (Env. Research Project), 8 1/8s, 10/1/14 A/P 4,389,694
3,000,000 (Ford Motor Co. Project), Ser. A, 7.1s, 2/1/06 A 3,558,750
1,500,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 AAA 1,826,250
2,500,000 MI, Stragetic Fund Poll. Control Rev. Bonds
(General Motors Corp.), 6.2s, 9/1/20 A 2,584,375
2,500,000 Marquette Area Pub. Schs. Rev. Bonds, FGIC,
5 1/4s, 5/1/21 AAA 2,390,625
1,755,000 Mason Pub. Schools Dist. Rev. Bonds, FGIC,
5.4s, 5/1/21 AAA 1,704,544
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
MICHIGAN (continued)
- ---------------------------------------------------------------------------------------
Muskegon Pub. Schools Rev. Bonds
$ 2,000,000 Ser. 95, FGIC, 5 1/4s, 5/1/21 AAA $ 1,915,000
4,200,000 Ser. 95, FGIC, 5 1/4s, 5/1/18 AAA 4,058,250
2,205,000 Riverview Cmnty. School Dist. Rev. Bonds,
AMBAC, 5 1/4s, 5/1/14 AAA 2,155,388
2,360,000 Royal Oak Hosp. Fin. Auth. Hosp. Rev. Bonds
(William Beaumont Hosp.), Ser. G, MBIA,
5 1/4s, 11/15/19 AAA 2,262,650
1,000,000 St. Joseph Hosp. Fin. Auth. Hosp. Rev. Bonds
(Mercy Med. Ctr.), AMBAC, 5 1/4s, 1/1/16 AAA 958,080
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 2,692,127
3,500,000 Warren Consolidated School Dist. Rev. Bonds,
Ser. II, FGIC 5 1/4s, 5/1/21 AAA 3,373,125
Waterford, Econ. Dev. Corp. Rev. Bonds
1,500,000 (Centerbury Hlth. Care), 8 3/8s, 7/1/23 BB/P 1,576,875
1,485,000 (Canterbury Hlth. Care), 8s, 7/1/08 BB/P 1,533,263
2,000,000 Wayland, Uni. School Dist. Rev. Bonds,
FGIC, 8s, 5/1/10 AAA 2,595,000
1,500,000 Wayne Charter Cnty. Arpt. Sub. Lien Rev. Bonds
(Detroit Metro.), Ser. C, MBIA, 5 1/4s, 12/1/13 AAA 1,464,375
2,100,000 West Bloomfield, School Dist. Rev Bonds,
MBIA, 5 1/8s, 5/1/14 AAA 2,021,250
3,000,000 Western Townships Util. Auth. Swr. Disposal Syst.
Rev. Bonds, 8.2s, 1/1/18 BBB 3,333,750
1,575,000 Wyandotte, Elec. Rev. Bonds, AMBAC,
7 7/8s, 10/1/17 AAA 1,712,813
------------
159,040,221
PUERTO RICO (3.9%)
- ---------------------------------------------------------------------------------------
2,010,000 Comnwlth. of PR Hwy. & Trans. Auth.
Rev. Bonds, Ser. W, 5 1/4s, 7/1/20 A 1,891,913
3,755,000 PR Elec Pwr. Auth. Rev. Bonds, Ser. Z,
5 1/4s, 7/1/21 A 3,571,944
1,100,000 U. of PR Rev. Bonds, Ser. M, MBIA,
5 1/4s, 6/1/25 AAA 1,075,250
------------
6,539,107
------------
TOTAL INVESTMENTS (cost $156,841,292)*** $165,579,328
<PAGE>
<FN>
* Percentages indicated are based on net assets of $167,833,715.
*** The aggregate identified cost on a tax cost basis is $156,841,293, resulting in
gross unrealized appreciation and depreciation of $9,137,963 and $399,928,
respectively, or net unrealized appreciation of $8,738,035.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most
recent ratings available at November 30, 1995 for the securities listed. Ratings
are generally ascribed to securities at the time of issuance. While the agencies
may from time to time revise such ratings, they undertake no obligation to do so,
and the ratings do not necessarily represent what the agencies would ascribe to
these securities at November 30, 1995. Securities rated by Putnam are indicated by
"/P" and are not publicly rated.
The rates shown on 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 November 30, 1995, which are subject to
change based on the terms of the security.
The fund had the following insurance concentrations greater than 10% of net assets
at November 30, 1995:
FGIC 26.7%
MBIA 19.3
The fund had the following industry group concentrations greater than 10% of net
assets at November 30, 1995:
Water & Sewerage 22.0%
Education 21.4
Hospitals/Health Care 18.8
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995 (Unaudited)
ASSETS
- -------------------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value (identified cost $156,841,292) (Note 1) $165,579,328
- -------------------------------------------------------------------------------------------
Interest receivable 2,349,526
- -------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 256,228
- -------------------------------------------------------------------------------------------
Receivable for securities sold 4,431,725
- -------------------------------------------------------------------------------------------
TOTAL ASSETS 172,616,807
LIABILITIES
- -------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 944,214
- -------------------------------------------------------------------------------------------
Payable to securities purchased 2,938,852
- -------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 114,304
- -------------------------------------------------------------------------------------------
Distributions payable to shareholders 437,867
- -------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 243,850
- -------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 104
- -------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,363
- -------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 10,023
- -------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 64,565
- -------------------------------------------------------------------------------------------
Other accrued expenses 27,950
- -------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,783,092
- -------------------------------------------------------------------------------------------
NET ASSETS 167,833,715
REPRESENTED BY
- -------------------------------------------------------------------------------------------
Paid-in capital (Note 4) 160,754,558
- -------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 80,384
- -------------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions (Note 1) (1,739,263)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,738,036
- -------------------------------------------------------------------------------------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES OUTSTANDING $167,833,715
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- -------------------------------------------------------------------------------------------
Net asset value and redemption of class A shares
($141,285,128 divided by 15,348,318 shares) $9.21
- -------------------------------------------------------------------------------------------
Offering price per share (100/95.25 of $9.21)* $9.67
- -------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($26,287,056 divided by 2,860,850 shares)+ $9.19
- -------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($261,531 divided by 28,414 shares)** $9.20
- -------------------------------------------------------------------------------------------
Offering price per share (100/96.75 of $ 9.20) $9.51
- -------------------------------------------------------------------------------------------
<FN>
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group
sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six months ended November 30, 1995 (Unaudited)
<S> <C>
TAX EXEMPT INTEREST INCOME $5,150,635
- -------------------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 481,027
- -------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 104,266
- -------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,277
- -------------------------------------------------------------------------------------------
Administrative services (Note 2) 1,089
- -------------------------------------------------------------------------------------------
Reports to shareholders 11,840
- -------------------------------------------------------------------------------------------
Auditing 11,897
- -------------------------------------------------------------------------------------------
Legal 10,790
- -------------------------------------------------------------------------------------------
Postage 9,302
- -------------------------------------------------------------------------------------------
Distribution fees--class A (Note 2) 136,748
- -------------------------------------------------------------------------------------------
Distribution fees--class B (Note 2) 100,312
- -------------------------------------------------------------------------------------------
Distribution fees--class M (Note 2) 485
- -------------------------------------------------------------------------------------------
Registration fees 6,110
- -------------------------------------------------------------------------------------------
Other expenses 1,929
- -------------------------------------------------------------------------------------------
TOTAL EXPENSES 881,072
- -------------------------------------------------------------------------------------------
Expense reduction (Note 2) (102,619)
- -------------------------------------------------------------------------------------------
NET EXPENSES 778,453
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,372,182
- -------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,342,838
- -------------------------------------------------------------------------------------------
Net realized loss on future contracts (Notes 1 and 3) (55,520)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 2,265,367
- -------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENT TRANSACTIONS 3,552,685
- -------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,924,867
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
NOVEMBER 30* MAY 31
1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
- -------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------
Net investment income $ 4,372,182 $ 8,524,438
- -------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 1,287,318 (2,253,536)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,265,367 4,230,455
- -------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 7,924,867 10,501,357
- -------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
- -------------------------------------------------------------------------------------------
From net investment income:
- -------------------------------------------------------------------------------------------
class A (3,804,105) (7,601,592)
- -------------------------------------------------------------------------------------------
class B (578,531) (798,353)
- -------------------------------------------------------------------------------------------
class M (5,210) (915)
- -------------------------------------------------------------------------------------------
From net realized gain on investments:
- -------------------------------------------------------------------------------------------
class A -- (9,763)
- -------------------------------------------------------------------------------------------
class B -- (1,025)
- -------------------------------------------------------------------------------------------
class M -- (2)
- -------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 7,096,079 15,939,037
- -------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 10,633,100 18,028,744
NET ASSETS:
- -------------------------------------------------------------------------------------------
Beginning of period 157,200,615 139,171,871
- -------------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income of $80,384 and $96,048, respectively) $167,833,715 $157,200,615
- -------------------------------------------------------------------------------------------
*Unaudited.
</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
SIX APRIL 17, 1995 SIX
MONTHS (COMMENCEMENT MONTHS
ENDED OF OPERATIONS) TO ENDED YEAR ENDED
NOVEMBER 30+ MAY 31 NOVEMBER 30+ MAY 31
- --------------------------------------------------------------------------------------------------------------
1995 1995* 1995 1995
- --------------------------------------------------------------------------------------------------------------
CLASS M CLASS B
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.00 $8.80 $9.00 $8.90
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------------------
Net investment income .24 .05 .22 .47
- --------------------------------------------------------------------------------------------------------------
Net realized/unrealized gain (loss)
on investments .20 .21 .19 .10
- --------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .44 .26 .41 .57
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- --------------------------------------------------------------------------------------------------------------
Net investment income (.24) (.06) (.22) (.47)
- --------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- -- -- --
- --------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- -- -- --
- --------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.24) (.06) (.22) (.47)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.20 $9.00 $9.19 $9.00
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) 4.94 2.03(c) 4.64 6.72
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $262 $119 $26,287 $21,071
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (e) .65(c) .20(c) .83(c) 1.59
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 2.68(c) .84(c) 2.44(c) 5.31
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 71.08 82.91 71.08 82.91
- --------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year) [continued]
FOR THE PERIOD
JULY 15, 1993 SIX
(COMMENCEMENT MONTHS
OF OPERATIONS) TO ENDED
MAY 31 NOVEMBER 30+ YEAR ENDED MAY 31
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1995 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.43 $9.01 $8.90 $9.30 $8.80 $8.51 $8.43
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .41 .25 .52 .52 .55 .56(a) .58(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized/unrealized gain (loss)
on investments (.46) .20 .11 (.32) .52 .29 .08
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (.05) .45 .63 .20 1.07 .85 .66
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (.40) (.25) (.52) (.52) (.56) (.56) (.58)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- -- -- (.03) (.01) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments (.08) (.25) -- (.05) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.48) -- (.52) (.60) (.57) (.56) (.58)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.90 $9.21 $9.01 $8.90 $9.30 $8.80 $8.51
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) .68(c) 5.10 7.45 2.03 12.38 10.25 8.13
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $10,251 $141,285 $136,010 $128,921 $113,074 $80,310 $19,893
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (e) 1.42(c) 0.50(c) .95 .99 1.04 .95(a) .87(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 4.25(c) 2.78(c) 6.03 5.58 6.04 6.28(a) 6.78(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 41.77 71.08 82.91 41.77 15.89 71.68(d) 16.21
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
+ Unaudited.
* Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the
period.
(a) Reflects expense limitation. As a result of these limitations, net investment income of the fund for the years ended May 31,
1992 and 1991 reflect per share expense reductions of approximately $0.01 and $0.05, respectively.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Not annualized.
(d) Portfolio turnover excludes the impact of assets the fund, formerly Putnam Michigan Tax Exempt Income Fund II, received from the
acquisition of Putnam Michigan Tax Exempt Income Fund.
(e) The ratio of expense to average net assets for the period ended November 30, 1995 included amounts paid through expenses offset
arrangements. Prior period ratios exclude these amounts. (See Note 2.)
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
November 30, 1995 (Unaudited)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
Putnam Michigan Tax Exempt Income Fund, formerly Putnam Michigan Tax Exempt
Income Fund II, 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. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert to
class A shares after eight years, do not pay a front-end sales charge, but pay a
higher ongoing distribution fee than class A shares and are subject to a
contingent deferred sales charge, if those shares are redeemed within six years
of purchase. Class M shares are sold with a maximum front-end sales charge of
3.25% and pay an ongoing distribution fee that is lower than class B shares and
higher than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of shares,
except that each class bears expenses unique to that class (including the
distribution fees applicable to such class). Each class votes as a class only
with respect to its own distribution plan or other matters on which a class vote
is required by law or determined by the Trustees. Shares of each class would
receive their pro-rata share of the net assets of the fund, if the fund were
liquidated. In addition, the Trustees declare separate dividends on each class
of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A SECURITY VALUATION Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value.
B SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis.
C FUTURES AND OPTIONS CONTRACTS The fund may use futures and options contracts
to hedge against changes in the values of securities the fund owns or expects to
purchase. The fund may also write options on securities it owns or which it
invests to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying
<PAGE>
instruments, if there is an illiquid secondary market for the contracts, or if
the counterparty to the contract is unable to perform.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
D FEDERAL TAXES It is the policy of the fund to distribute all of its taxable
(for tax-exempt and municipal bond funds exclude "taxable") 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 on securities held and for excise tax on income and capital gains.
At May 31, 1995, the fund had a capital loss carryover of approximately
$2,320,000 available to offset future capital gains, if any.
E DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date. Capital gain
distributions, if any, are recorded on the ex-dividend date and paid annually.
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
F 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. Discounts on zero coupon bonds and original issue
discount bonds are accreted according to the effective yield method.
G PAYABLE TO SUBCUSTODIAN As part of the custodian contract between the
subcustodian bank and PFTC, the subcustodian bank has a lien on the securities
of the fund to the extent permitted by the funds investment restrictions to
cover any advances made by the subcustodian bank for the settlement of
securities purchased by the fund. At November 30, 1995, the payable to the
subcustodian bank represents the amount due for cash advance for the settlement
of a security purchased.
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 reimburses Putnam Management 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 Trustees fee of $710 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested persons
of Putnam Management and who serve on committees of the Trustees receive
additional fees for attendance at certain committee meetings.
During the period ended November 30, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of all
or a portion of Trustees Fees payable on or after July 1, 1995. The deferred
fees remain in the fund and are invested in the fund or in other Putnam funds
until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust
Company (PFTC), a wholly owned subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the period ended November 30, 1995 fund expenses were reduced by $102,619
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into such
arrangements.
The fund has adopted distribution plans (the "Plans") with respect to its class
A, class B and class M shares pursuant to Rule 12b-1 under the Investment
Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual
Funds Corp., a wholly-owned subsidiary of Putnam Investments Inc., for services
provided and expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Mutual Funds Corp. at an annual
rate up to .35% and 1.00%, 1.00% of the average net assets attributable to class
A, class B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of .20%, .85% and .50% of the average net assets
attributable to class A, class B and class M shares respectively.
For the period ended November 30, 1995 Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $17,645 and $346 from the sale of class
A and class M shares, respectively and received $19,253 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of up
to 1% is assessed on certain redemptions of class A shares. For the period ended
November 30, 1995 Putnam Mutual Funds Corp., acting as underwriter received no
monies on class A redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the period ended November 30, 1995, purchases and sales of investment
securities other than short-term investments aggregated $122,507,581 and
$111,882,277, respectively. Purchases and sales of short-term municipal
obligations aggregated $26,350,200 and $26,424,440. In determining the net gain
or loss on securities sold, the cost of securities has been determined on the
identified cost basis.
<PAGE>
NOTE 4
CAPITAL SHARES
At November 30, 1995, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
SIX MONTHS ENDED NOVEMBER 30 YEAR ENDED MAY 31
1995 1995
- -------------------------------------------------------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 870,210 $7,788,371 1,755,569 $15,333,898
- -------------------------------------------------------------------------------
Reinvestment of
distributions 265,442 2,381,830 529,968 4,609,346
- -------------------------------------------------------------------------------
1,135,652 10,170,201 2,285,537 19,943,244
- -------------------------------------------------------------------------------
Shares repurchased (876,956) (7,851,709) (1,683,464) (14,513,352)
- -------------------------------------------------------------------------------
NET INCREASE 258,696 $2,318,492 602,073 $5,429,892
- -------------------------------------------------------------------------------
SIX MONTHS ENDED NOVEMBER 30 YEAR ENDED MAY 31
1995 1995
- -------------------------------------------------------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 615,221 $5,498,891 1,289,625 $11,251,833
- -------------------------------------------------------------------------------
Shares issued in connection
with reinvestment of
distributions 43,215 387,022 61,826 536,960
- -------------------------------------------------------------------------------
658,436 5,885,913 1,351,451 11,788,793
- -------------------------------------------------------------------------------
Shares repurchased (139,105) (1,244,615) (162,158) (1,397,198)
- -------------------------------------------------------------------------------
NET INCREASE 519,331 $4,641,298 1,189,293 $10,391,595
- -------------------------------------------------------------------------------
FOR THE PERIOD
APRIL 17, 1995
(COMMENCEMENT OF
OPERATIONS) TO
SIX MONTHS ENDED NOVEMBER 30 MAY 31
1995 1995
- -------------------------------------------------------------------------------
CLASS M SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 14,684 $132,009 13,191 $117,000
- -------------------------------------------------------------------------------
Shares issued in connection
with reinvestment of
distributions 477 4,280 62 550
- -------------------------------------------------------------------------------
15,161 136,289 13,253 117,550
- -------------------------------------------------------------------------------
Shares repurchased -- -- -- --
- -------------------------------------------------------------------------------
NET INCREASE 15,161 $136,289 13,253 $117,550
- -------------------------------------------------------------------------------
<PAGE>
OUR COMMITMENT TO QUALITY SERVICE
o CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for
the past six years. In 1995, over 146,000 tests of 56 shareholder service
components demonstrated that Putnam outperformed the industry standard in
every category.
o HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month from
a Putnam money market fund or from your checking or savings account.*
o SWITCH FUNDS EASILY
You can move money from one account to another within the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
o ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than the original
cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
*Regular investing, of course, does not guarantee a profit or protect
against a loss in a declining market.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER OFFICERS
Putnam Investment George Putnam
Management, Inc. President
One Post Office Square
Boston, MA 02109 Charles E. Porter
Executive Vice President
MARKETING SERVICES
Putnam Mutual Funds Corp. Patricia C. Flaherty
One Post Office Square Senior Vice President
Boston, MA 02109
Lawrence J. Lasser
CUSTODIAN Vice President
Putnam Fiduciary Trust Company
Gordon H. Silver
LEGAL COUNSEL Vice President
Ropes & Gray
Gary N. Coburn
TRUSTEES Vice President
George Putnam, Chairman
James E. Erickson
William F. Pounds, Vice Chairman Vice President
Jameson Adkins Baxter Howard Manning
Vice President and Fund Manager
Hans H. Estin
William N. Shiebler
John A. Hill Vice President
Elizabeth T. Kennan John R. Verani
Vice President
Lawrence J. Lasser
Paul M. O'Neil
Robert E. Patterson Vice President
Donald S. Perkins John D. Hughes
Senior Vice President and Treasurer
George Putnam, III
Beverly Marcus
Eli Shapiro Clerk and Assistant Treasurer
A.J.C. Smith
W. Nicholas Thorndike
This report is for the information of shareholders of Putnam Michigan Tax Exempt
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. For more information or to
request a prospectus, call toll-free: 1-800-225-1581.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION; ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY; AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE>
[LOGO: PUTNAM INVESTMENTS] ------------
Bulk Rate
THE PUTNAM FUNDS U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
------------
22191-846 1/96
