Putnam
Michigan
Tax Exempt
Income
Fund
ANNUAL REPORT
May 31, 1996
[LOGO:BOSTON * LONDON * TOKYO
Fund highlights
* "The stock and bond markets will always experience periods of unease
for one reason or another. Currently, it is the growing fear of
inflation that is spooking fixed-income investors. Yet, through up or
down markets, we believe an investment in Putnam Michigan Tax Exempt
Income Fund is a prudent choice for many Michigan residents seeking
attractive income and tax relief. Through good credit selection, sound
asset allocation decisions, and the help of Putnam's comprehensive
research capabilities, we believe we have been able to identify solid
long-term prospects for the fund."
-- Howard Manning, Fund Manager
* "[I]n the months ahead, municipal bond funds may begin to provide
investors fewer bumps and better returns, many bond analysts say...
Investors are becoming skittish about the sky-high returns on equity
funds and are beginning to seek some less-risky tax-free income..."
-- The New York Times, April 7, 1996
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
17 Financial statements
From the Chairman
(copyright) Karsh, Ottawa
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
Dear Shareholder:
One of the fascinating things about market watching is that you can
never tell what's going to trigger a defining event. Often what seems
like a defining event one moment is history the next. Who would have
guessed, for example, that a flat-tax proposal would swirl out of the
presidential primary election campaign to douse the municipal bond
market, only to blow away just as the rest of the bond market was
stumbling on statistics suggesting that inflation might flare up?
These were some of the challenges facing Fund Manager Howard Manning
during Putnam Michigan Tax Exempt Income Fund's fiscal year, which
closed on May 31, 1996. Howard handled them with his usual aplomb as the
results on the following pages reveal.
Besides having the luxury of leaving the day-to-day details to Howard,
shareholders with a long-term investment perspective have the added
advantage of being able to let such events run their course without
undue concern.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Manager
Howard K. Manning
For most of Putnam Michigan Tax Exempt Income Fund's fiscal year, fixed-
income markets enjoyed one of the strongest advances in recent memory.
But signs of stronger-than-expected economic growth early in calendar
1996 put an abrupt end to what had appeared to be an ideal environment
for bond investing. As investors' fear of inflation grew with each Labor
Department report, bond prices declined and yields rose across the
board.
Although the resulting volatility has certainly dampened your fund's
performance, we were able to avoid significant losses by paying careful
attention to bond structure and emphasizing issuers that stand to
benefit from a stronger economy. Your fund's class A shares closed
fiscal 1996 with a total return of 3.76% at net asset value and -1.18%
at public offering price. Full performance details for other time
periods and for class B and class M shares can be found on pages 8-9 of
this report.
* STRATEGY TURNS DEFENSIVE AS MARKET TURNS DOWN
Your fund was well positioned to take full advantage of bond prices as
they appreciated throughout calendar 1995. We kept the portfolio's
average duration long -- longer, in fact, than that of many competing
funds. Duration, as you may know, is a measure of the portfolio's
sensitivity to interest rate changes. Typically a bond fund with longer
duration offers greater appreciation potential when rates are declining
than a fund with shorter duration. We achieved this longer duration by
focusing on long-term discount-coupon bonds (those selling below par
value) that were not likely to be called away in the declining-rate
environment. While in place, this strategy enabled your fund to perform
quite well.
By February, we sensed that given the growing evidence of robust
economic activity, bond prices were reflecting unrealistic levels of
optimism. To reduce the fund's sensitivity to potential interest rate
fluctuations, we decided to reconfigure the portfolio's composition and
take a more defensive approach to the market. Accordingly, we shortened
the portfolio's average duration from roughly 9 to 7 years by
aggressively eliminating many longer-maturity discount coupon bonds and
redeploying assets into noncallable intermediate-term bonds. The
scarcity of bonds in the Michigan municipal market makes the noncallable
aspect of these bonds particularly important to us, even though
investing in noncallable bonds is usually a lower priority in rising-
rate environments. Because the market characterisics of these bonds are
simply too compelling to ignore, we have offset their slightly long
durations by employing the use of financial futures -- contracts based
on an underlying debt instrument, such as Treasury bonds. We often
employ the use of financial futures when we need to reduce duration but
do not want to deplete the portfolio of attractive holdings exhibiting
longer-than-desired durations for current market conditions. By period's
end, the bulk of the portfolio's net assets were invested in bonds with
effective maturities ranging from 10 to 20 years.
To lend stability and liquidity to the portfolio, we've stepped up our
purchase of higher-yielding municipals, such as premium-coupon bonds --
those selling at prices above par value. The prices of premium-coupon
bonds tend to be less sensitive to interest-rate fluctuations than
discount-coupon bonds. Futhermore, many of the premium-coupon bonds we
selected are rated BBB, providing the portfolio with a high level of
income, as well.
Your fund's present structure, we believe, offers a better balance of
income and market risk and should help minimize the impact of further
market volatility -- yet it allows us the flexibility to maneuver
quickly should the market begin to rise.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS*]
Hospitals/Health care 23.1%
Water/Sewer 21.7%
Education 7.7%
Housing 7.6%
Footnote reads:
*Based on net assets as of 5/31/96. Holdings will vary over time.
* STRONGER STATE ECONOMY INFLUENCES BOND SELECTION
Michigan is currently benefiting from a robust economy and our increased
emphasis on bonds that stood to benefit from the state's growth
prospects has served the fund well. State and local general obligation
bonds (GOs), uninsured hospital and nursing home bonds, and industrial
revenue bonds were key contributors to the fund's performance over the
period.
Detroit, in particular, is making quite a name for itself as the
comeback kid. Relying on the strength of Putnam's research, we made our
first large-scale foray into the Detroit market during fiscal 1996. Our
early analysis of the region's turnaround has led to the successful
investment in several Detroit GO bonds and uninsured securities from
various issuers in the metropolitan area. In fact, Detroit GOs have been
among the best-performing bonds within the portfolio.
The fund tapped into the renewed vitality of Michigan's auto industry
during the year through its purchase of an A-rated pollution control
revenue bond backed by General Motors. Since its purchase, the bond has
produced an attractive total return.
Several of the fund's hospital bonds were chosen for their ability to
benefit from changing market dynamics. Industry consolidation and the
low supply level of uninsured bonds have created a positive investment
environment for the health-care sector.
Bonds in the BBB-rated range of the quality spectrum hold special
interest for us; their higher coupons cause them to react more slowly to
fluctuations in interest rates, thereby keeping in line with our
defensive investment strategy. These bonds also offer extremely
attractive value in terms of income and appreciation potential.
Many of the fund's uninsured hospital holdings have a high probability
of being prerefunded because of the issuer's improved creditworthiness.
Should prerefunding occur, credit upgrades will likely ensue and prices
will rise. The solid performance of the fund's Dickinson County
Hospital, Detroit-Macomb Hospital Corporation, and Sinai Hospital
holdings is evidence of Putnam's ability to identify solid long-term
prospects in a credit-sensitive part of the market. While these holdings
and others discussed in this report were viewed favorably on May 31,
1996, all are subject to review and adjustment in accordance with the
fund's investment strategy and may well vary in the future.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW*]
A 13.5%
Aa 6.5%
Aaa 46.1%
B 2.0%
Ba 6.5%
Baa 25.4%
Footnote reads:
*As a percentage of market value as of 5/31/96. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions, unless noted otherwise and may include unrated securites
judged by Putnam Management to be of comparable quality. Portfolio
holdings will vary over time.
* OUTLOOK: SIMULTANEOUSLY GUARDED AND OPTIMISTIC
A steadily growing economy presents a challenging environment for bond
investors and one that clearly requires a cautious strategy. We expect
to maintain a defensive course for the near term, staying broadly
diversified across the credit sectors while focusing on bonds we believe
exhibit the most favorable coupon, maturity, and quality structure for
the current climate.
Despite recent volatility in fixed-income markets, we still see value in
the municipal bond market. The fundamentals remain appealing: supply is
tight, yet demand from nontraditional buyers in the new-issue market,
including banks and insurance companies, and retail investors in the
secondary market should help provide price support. At the same time,
Michigan's growing commercial and industrial development needs set the
stage for sound infrastructure financing. Given the Michigan market's
underlying strength, investors may wish to consider recent price
declines as an attractive buying opportunity that can help bolster the
double tax-free return potential of their investments should the market
recover from its slump.
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 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
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 5/31/96
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 3.76% -1.18% 3.05% -1.86% 3.53% 0.19%
- ------------------------------------------------------------------------
5 years 40.92 34.30 -- -- -- --
Annual average 7.10 6.08 -- -- -- --
- ------------------------------------------------------------------------
Life of class 57.21 49.80 9.22 6.41 6.59 3.08
Annual average 7.08 6.30 3.11 2.18 5.83 2.73
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
1 year 4.57% 2.89%
- ------------------------------------------------------------------------
5 years 41.06 15.49
Annual average 7.12 2.92
- ------------------------------------------------------------------------
Life of class A 62.31 24.68
Annual average 7.64 3.39
- ------------------------------------------------------------------------
Life of class B 12.69 8.45
Annual average 4.31 2.86
- ------------------------------------------------------------------------
Life of class M 7.91 3.09
Annual average 7.25 2.73
- ------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 6.06% 1.04% 5.49% 0.49% 5.84% 2.37%
- -----------------------------------------------------------------------
5 years 42.68 35.94 -- -- -- --
Annual average 7.37 6.33 -- -- -- --
- -----------------------------------------------------------------------
Life of class 58.74 51.26 10.26 7.43 7.62 4.07
Annual average 7.15 6.38 3.36 2.45 6.25 3.35
- -----------------------------------------------------------------------
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 applicable
contingent deferred sales charge, declining from 5% to 1% in the sixth
year, and eliminated thereafter.
[GRAPHIC OMITTED worm chart GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 10/23/89
Starting value (insert ending total)
$9,525 Fund's class A shares at POP $14,980
$10,000 Lehman Bros. Municipal Bond Index $16,231
$10,000 Consumer Price Index $12,468
(plot points for 10-year total return mountain chart)
Lehman Bros.
Date/year Fund at POP Muni Bond Index CPI
- -------------------------------------------------------
10/23/89 $9,525 $10,000 $10,000
5/31/90 9,831 10,453 10,287
5/31/91 10,630 11,506 10,796
5/31/92 11,720 12,636 11,123
5/31/93 13,171 14,148 11,481
5/31/94 13,438 14,497 11,744
5/31/95 14,438 15,522 12,118
5/31/96 14,980 16,231 12,468
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 $10,922 on 5/31/96 ($10,641 with a redemption at the end of
the period). A $10,000 investment in the fund's class M shares at
inception on 4/17/95 would have been valued at $10,659 at net asset
value on 5/31/96 ($10,308 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/96
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------
Income $0.493860 $0.431584 $0.464212
- ------------------------------------------------------------------------
Total $0.493860 $0.431584 $0.464212
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
5/31/95 $9.01 $9.46 $9.00 $9.00 $9.30
- ------------------------------------------------------------------------
5/31/96 8.85 9.29 8.84 8.85 9.15
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate1 5.46% 5.21% 4.76% 5.10% 4.93%
- ------------------------------------------------------------------------
Taxable equivalent2 9.46 9.02 8.24 8.83 8.54
- ------------------------------------------------------------------------
Current 30-day SEC yield3 5.30 5.04 4.64 5.00 4.83
- ------------------------------------------------------------------------
Taxable equivalent2 9.18 8.73 8.04 8.66 8.37
- ------------------------------------------------------------------------
Footnote reads:
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Assumes maximum 42.26% combined federal and state tax rate. Results
for investors subject to lower tax rates would not be as advantageous.
3Based only on investment income, calculated using SEC guidelines.
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.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in
the fund, and may pose different risks than the fund. It is not possible
to invest directly in an index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the fiscal year ended May 31, 1996
To the Trustees and Shareholders of
Putnam Michigan Tax Exempt Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Michigan Tax Exempt Income Fund, formerly known as the Putnam
Michigan Tax Exempt Fund II, including the portfolio of investments
owned, as of May 31, 1996, and the related statement of operations for
the year then ended, the statements 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, 1996, by correspondence
with the custodian. 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 as of May
31, 1996, 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 12, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1996
Key to Abbreviations
AMBAC --AMBAC Indemnity 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 Rate Bonds
MBIA --Municipal Bond Investors Assurance Corporation
VRDN --Variable Rate Demand Notes
Municipal Bonds and Notes (93.6%) *
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C> <C>
Michigan (84.5%)
- ------------------------------------------------------------------------------------------------------------------------
$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 2,182,500
1,000,000 Cornell Township, Econ. Dev. Corp. VRDN (Escabana Paper Co.), 3.6s, 11/1/16 A 1,000,000
3,445,000 Dearborn Sew. Disposal Syst. Rev. Bonds, Ser. A, MBIA, 5 1/8s, 4/1/14 Aaa 3,152,175
Detroit G.O. Bonds
4,875,000 Ser. A, 6.8s, 4/1/15 BBB 5,106,563
2,475,000 Ser. B, 7s, 4/1/04 BBB 2,632,781
1,500,000 Detroit Sch. Dist. G.O. Bonds, Ser. A, AMBAC, 6 1/2s, 5/1/11 Aaa 1,606,875
3,000,000 Detroit Swr. Disp. Rev. Bonds (Wtr. Supply System), MBIA, 5s, 7/1/25 Aaa 2,583,750
Detroit Wtr. Supply Syst. Rev. Bonds, MBIA
1,750,000 7 7/8s, 7/1/19 Aaa 1,907,500
3,380,000 Ser. A, 5.4s, 7/1/11 Aaa 3,295,500
3,305,000 Ser. A, 5.4s, 7/1/10 Aaa 3,255,425
8,500,000 Detroit Wtr. Supply Syst. Rev. IFB, FGIC, 8.714s, 7/1/22 Aaa 9,795,000
1,170,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev. Bonds, Ser. A, 9.5s, 5/1/21 BBB/P 1,415,700
2,000,000 Dickinson Cnty., Hosp. Rev. Bonds (Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB 2,172,500
3,600,000 Flat Rock Cmnty. Sch. Dist. Rev. Bonds, Ser. 95, MBIA, 5 3/8s, 5/1/25 Aaa 3,267,000
Flint, Hosp. Bldg. Auth. Rev. Bonds (Hurley Med. Ctr)
2,000,000 7.8s, 7/1/14 Baa 2,125,000
630,000 Ser. A, 6s, 7/1/06 Baa 597,713
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam. Rev. Bonds, Ser. A, FNMA Coll.,
7 5/8s, 9/1/23 AAA 1,077,500
3,000,000 Greater Detroit Res. Rcvy. Auth. Rev. Bonds, Ser. A, AMBAC, 6 1/4s, 12/13/06 Aaa 3,176,250
3,500,000 Kalamazoo, Hosp. Fin. Auth. Hosp. Fac. Rev. IFB, FGIC, 6.519s, 6/1/11 Aaa 3,075,625
3,840,000 MI Muni. Board Auth. State Revolving Rev. Bonds, 6 1/2s, 10/1/17 Aa 4,051,200
2,500,000 MI Stragetic Fund Poll. Control Rev. Bonds (General Motors Corp.), 6.2s, 9/1/20 A 2,487,500
2,500,000 MI State Stragetic Fund Solid Waste Disp. Rev. Bonds (SD Warren Co., Project),
Ser. C, 7 3/8s, 1/15/22 BB/P 2,525,000
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,905,000 (Arbor Model & Tooling Project), 10 1/4s, 9/15/19 B/P 3,144,663
3,915,000 (Env. Research Project), 8 1/8s, 10/1/14 A/P 4,340,756
3,000,000 (Ford Motor Co. Project), Ser. A, 7.1s, 2/1/06 A 3,405,000
1,500,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 1,736,250
MI State Hosp. Fin. Auth. Rev. Bonds
2,000,000 (Detroit-Macomb Hosp. Corp.), Ser. A, 7.4s, 6/1/13 BB 1,985,000
920,000 (Garden City Hosp.), 8 1/2s, 9/1/17 BBB 963,700
460,000 (Garden City Project), 8 1/2s, 9/1/17 Aaa 543,950
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 Baa 1,465,750
1,000,000 (Presbyterian Villages), 6 1/2s, 1/1/25 BBB/P 941,250
2,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB/P 1,900,000
3,000,000 (Henry Ford Hlth. Ctr.), Ser. A, 5 1/4s, 11/15/20 Aa 2,685,000
2,000,000 (St. John's Hosp. & Med. Ctr.), Ser. A, AMBAC, 5 1/4s, 5/15/26 Aaa 1,775,000
2,000,000 (Sinai Hosp.), 6 5/8s, 1/1/16 Baa 1,950,000
1,615,000 (St. John's Hosp. & Med. Ctr.), Ser. A, AMBAC, 6s, 5/15/08 Aaa 1,691,713
1,710,000 (St. John's Hosp. & Med. Ctr.), Ser. A, AMBAC, 6s, 5/15/09 Aaa 1,780,538
4,500,000 (Sinai Hospital), 6.7s, 1/1/26 Baa 4,353,750
MI State Hsg. Dev. Auth.
1,000,000 Ltd. Oblig. Rev. Bonds, MBIA, 8 1/8s, 4/1/18 Aaa 1,053,560
3,000,000 Multi-Fam. Rev. Bonds, Ser. A, FGIC, 8 3/8s, 7/1/19 Aaa 3,166,530
1,600,000 Rental Hsg. Rev. Bonds, Ser. A, FSA, 7.55s, 4/1/23 Aaa 1,684,000
2,900,000 Rental Hsg. Rev. IFB, Ser. B, AMBAC, 4.8s, 10/1/12 Aaa 2,555,625
3,500,000 MI Muni. Bond Auth. Rev. Bonds (Pooled Projects), Ser. B, 5 5/8s, 10/1/19 Aa 3,338,125
195,000 MI State Hsg. Dev. Auth. Single Fam. Mtge. Rev. Bonds, Ser. A, 7.55s, 12/1/14 Aa 202,800
1,600,000 MI State Strategic Fund Rev. Bonds (Mercy Svcs. for Aging Project),
9.4s, 5/15/20 BBB/P 1,812,000
900,000 MI State Underground Storage Tank Financial AAA 900,000
Assurance Auth. VRDN, Ser. I, 4.0s, 12/1/04
2,000,000 Muskegon Pub. Schools Rev. Bonds, Ser. 95, FGIC, 5 1/4s, 5/1/18 Aaa 1,827,500
5,000,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa 4,462,500
1,780,000 Riverview Cmnty. Sch. Dist. Rev. Bonds, AMBAC, 5 1/4s, 5/1/21 Aaa 1,597,550
2,505,000 Tawas City Hosp. Fin. Auth. Rev. Bonds (St. Joseph's Hosp. Project),
Ser. A, 8 1/2s, 3/15/12 BB/P 2,583,281
Waterford, Econ. Dev. Corp. Rev. Bonds (Canterbury Hlth. Care)
1,500,000 8 3/8s, 7/1/23 BB/P 1,556,250
1,485,000 8s, 7/1/08 BB/P 1,529,550
2,000,000 Wayland, Uni. School Dist. Rev. Bonds, FGIC, 8s, 5/1/10 Aaa 2,482,500
3,600,000 Western MI Univ. Rev. Bonds, Ser. A, FGIC, 5s, 7/15/21 Aaa 3,136,500
3,000,000 Western Townships Util. Auth. Swr. Disp. Syst. Rev. Bonds, 8.2s, 1/1/18 BBB 3,266,250
1,575,000 Wyandotte Elec. Rev. Bonds, AMBAC, 7 7/8s, 10/1/17 Aaa 1,685,250
------------
142,261,148
Puerto Rico (9.1%)
- ------------------------------------------------------------------------------------------------------------------------
2,000,000 Cmnwlth. of PR Aqueduct & Swr. Auth. Rev. Bonds, MBIA, 6s, 7/1/07 Aaa 2,110,000
1,500,000 PR Elect. Pwr. Auth. Rev. Bonds, 5 1/2s, 7/1/25 A 1,372,500
2,835,000 Cmnwlth. of PR Hwy. & Trans. Auth. Rev. Bonds, Ser. Z, MBIA, 6 1/4s, 7/1/11 Aaa 3,029,904
7,255,000 Puerto Rico Elec. Pwr. Auth. Rev. Bonds, Ser. Z, 5 1/4s, 7/1/21 A 6,438,813
2,520,000 U. of Puerto Rico Rev. Bonds, Ser. M, MBIA, 5 1/4s, 6/1/25 Aaa 2,296,350
------------
15,247,567
- ------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes (cost $155,817,923)*** $157,508,715
- ------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $168,319,093.
** The Moody's or Standard & Poors's ratings indicated are believed to be the most
recent rating available at May 31, 1996 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, 1996. 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 on a tax basis is $155,817,923, resulting in gross
unrealized appreciation and depreciation of $4,308,083 and $2,617,291,
respectively, or net unrealized appreciation of $1,690,792.
The rates shown on Inverse Floating Rate Bonds, (IFB), which are securities paying interest
rates that vary inversely to changes in market interest rates,
VRDNs are the current interest rates at May 31, 1996.
The fund had the following insurance concentration greater than 10% at May 31, 1996
(as a percentage of net assets):
MBIA 15.4%
FGIC 14.0
AMBAC 10.5
The fund had the following industry group concentrations greater than 10% at May 31, 1996
(as a percentage of net assets):
Healthcare 23.1%
Water/Sewer 21.7
<CAPTION>
- ---------------------------------------------------------------------------------
U.S. Treasury Bond Futures Outstanding at
May 31, 1996
Unrealized
Total Aggregate Face Expiration Appreciation
Value Value Date (Depreciation)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond
Future (Short) $5,376,563 $5,376,563 Sept. 96 --
- ---------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1996
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $155,817,923) (Note 1) $157,508,715
- ----------------------------------------------------------------------------------------------------------------
Cash 821,924
- ----------------------------------------------------------------------------------------------------------------
Interest receivable 2,742,987
- ----------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 324,515
- ----------------------------------------------------------------------------------------------------------------
Receivable for securities sold 7,809,018
- ----------------------------------------------------------------------------------------------------------------
Total assets 169,207,159
Liabilities
- ----------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 478,018
- ----------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 58,064
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 255,418
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 182
- ----------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,271
- ----------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 67,950
- ----------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 6,436
- ----------------------------------------------------------------------------------------------------------------
Other accrued expenses 20,727
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 888,066
- ----------------------------------------------------------------------------------------------------------------
Net assets $168,319,093
Represented by
- ----------------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $167,906,911
- ----------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 85,347
- ----------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (1,363,957)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,690,792
- ----------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $168,319,093
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares ($138,389,819 divided by 15,634,139 shares) $8.85
- ----------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.85)* $9.29
- ----------------------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares ($29,370,840 divided by 3,324,013 shares)+ $8.84
- ----------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares ($558,434 divided by 63,100 shares) $8.85
- ----------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.85)** $9.15
- ----------------------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000
or more and on group sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or
more and on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1996
<S> <C>
Tax exempt interest income $10,361,547
- -----------------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 990,338
- -----------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 212,118
- -----------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,794
- -----------------------------------------------------------------------------------------------------
Reports to shareholders 25,520
- -----------------------------------------------------------------------------------------------------
Auditing 27,221
- -----------------------------------------------------------------------------------------------------
Legal 14,802
- -----------------------------------------------------------------------------------------------------
Postage 19,104
- -----------------------------------------------------------------------------------------------------
Registration fees 6,185
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 278,111
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 220,327
- -----------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,551
- -----------------------------------------------------------------------------------------------------
Administrative services (Note 2) 7,790
- -----------------------------------------------------------------------------------------------------
Other expenses 3,570
- -----------------------------------------------------------------------------------------------------
Total Expenses 1,817,431
- -----------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (211,193)
- -----------------------------------------------------------------------------------------------------
Net expenses 1,606,238
- -----------------------------------------------------------------------------------------------------
Net investment income 8,755,309
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,555,572
- -----------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 197,866
- -----------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments and futures contracts during the year (4,781,877)
- -----------------------------------------------------------------------------------------------------
Net loss on investments (3,028,439)
- -----------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $5,726,870
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year Ended May 31
- -------------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- -------------------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------------------
Net investment income $8,755,309 $8,524,438
- -------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 1,753,438 (2,253,536)
- -------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (4,781,877) 4,230,455
- -------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,726,870 10,501,357
- -------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------------------------
From net investment income:
- -------------------------------------------------------------------------------------------------------------------
Class A (7,598,988) (7,601,592)
- -------------------------------------------------------------------------------------------------------------------
Class B (1,242,161) (798,353)
- -------------------------------------------------------------------------------------------------------------------
Class M (15,675) (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) 14,248,432 15,939,037
- -------------------------------------------------------------------------------------------------------------------
Total increase in net assets 11,118,478 18,028,744
- -------------------------------------------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------------------------------------------
Beginning of year 157,200,615 139,171,871
- -------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $85,347 and $96,048, respectively) $168,319,093 $157,200,615
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period For the period
April 17, 1995 July 15, 1993
(commencement (commencement
of operations) of operations)
Year ended May to May 31 Year ended May to May 31
-------------------------------------------------------------------------
1996 1995+ 1996 1995 1994
-------------------------------------------------------------------------
Class M Class B
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.00 $8.80 $9.00 $8.90 $9.43
- --------------------------------------------------------------------------------------------------------------------------
Investment operations
- --------------------------------------------------------------------------------------------------------------------------
Net investment income .47 .05 .43 .47 .41
- --------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
- --------------------------------------------------------------------------------------------------------------------------
on investments (.16) .21 (.16) .10 (.46)
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations .31 .26 .27 .57 (.05)
- --------------------------------------------------------------------------------------------------------------------------
Less distributions:
- --------------------------------------------------------------------------------------------------------------------------
From net investment income (.46) (.06) (.43) (.47) (.40)
- --------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
In excess of net gain on investments -- -- -- -- (.08)
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.06) (.43) (.47) (.48)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.85 $9.00 $8.84 $9.00 $8.90
- --------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 3.53 2.03 (c) 3.05 6.72 (.68)(c)
- --------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $558 $119 $29,371 $21,071 $10,251
- --------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(e) 1.28 .20 (c) 1.65 1.59 1.42 (c)
- --------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net
assets (%) 5.06 .84 (c) 4.74 5.31 4.25 (c)
- --------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 139.08 82.91 139.08 82.91 41.77
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (Continued)
(For a share outstanding throughout the period)
Year ended May 31
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------------------
Class A
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.01 $8.90 $9.30 $8.80 $8.51
- ------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------
Net investment income .49 .52 .52 .55 .56 (a)
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.16) .11 (.32) .52 .29
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .33 .63 .20 1.07 .85
- ------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------
From net investment income (.49) (.52) (.52) (.56) (.56)
- ------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.03) (.01) --
- ------------------------------------------------------------------------------------------------------------------------
In excess of net gain on investments -- -- (.05) -- --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (.49) (.52) (.60) (.57) (.56)
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.85 $9.01 $8.90 $9.30 $8.80
- ------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset
value (%)(b) 3.76 7.45 2.03 12.38 10.25
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $138,390 $136,010 $128,921 $113,074 $80,310
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(e) 1.00 .95 .99 1.04 .95 (a)
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%) 5.42 6.03 5.58 6.04 6.28 (a)
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 139.08 82.91 41.77 15.89 71.68 (d)
- ------------------------------------------------------------------------------------------------------------------------
+ Per share net investment income has been determined on the basis
of the weighted average number of shares outstanding during
during the period.
(a) Reflects an expense limitation in effect during the period ended May 31,
1992. As a result of such limitation, expenese for the fund reflects
a reduction of $0.01 per share.
(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 known as Putnam Michigan Tax Exempt Income Fund II,
received from the acquisition of Putnam Michigan Tax Exempt Income Fund.
(e) The ratio of expenses to average net assets for the period ended May 31, 1996
includes amounts paid through expense offset arrangements.
Prior period ratios exclude these amounts. (See Note 2)
</TABLE>
Notes to financial statements
May 31, 1996
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 as
Putnam Investment Management, Inc. ("Putnam Managment"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc., 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 approximately eight years, do not
pay a front-end sales charge, but pay a higher ongoing distribution fee
than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class
M shares are sold with a maximum front-end sales charge of 3.25% and pay
an ongoing distribution fee that is lower than class B shares and higher
than class A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securites and
various relationships between securities in determining value.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
C) Federal taxes It is the policy of the fund to distribute all of its
income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
At May 31, 1996, the fund had a capital loss carryover of approximately
$1,182,000 available to offset future net capital gain, if any, which
will expire on May 31, 2003.
D) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed monthly. Capital gain distributions if any,
are recorded on the ex-dividend date and paid annually, or as necessary
to meet distribution requirements. 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 realized and unrealized losses on
certain futures contracts, utilization of a capital loss carryforward,
dividends payable, and market discount on May 31, 1996.
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,
1996, the fund reclassified $90,814 to increase undistributed net
investment income and $90,814 to increase accumulated net realized
losses on investments. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
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. Discounts on original issue bonds are accreted
according to the effective yield method.
F) 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 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.
Note 2
Management fee,
administrative services
and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million, 0.45% of the next $500 million, and 0.40% of any amount over
$1.5 billion subject, under current law, to reduction in any year by the
amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on 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.
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.
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 invested in
certain 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 year ended May 31, 1996, fund expenses were reduced by $211,193
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payments
by the fund at an annual rate of 0.20%, 0.85% and 0.50% of the average net
assets attributable to class A, class B and
class M shares respectively.
For the year ended May 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $35,487 and $1,078 from the sale
of class A and class M shares, respectively and $40,870 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended May 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received no monies on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $230,418,355 and
$221,087,807, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At May 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 1,790,658 $16,179,778
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 521,536 4,702,178
- ----------------------------------------------------
2,312,194 20,881,956
Shares
repurchased (1,767,677) (15,933,085)
- ----------------------------------------------------
Net increase 544,517 $4,948,871
- ----------------------------------------------------
Year ended
May 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 1,755,569 $15,333,898
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 529,968 4,609,346
- ----------------------------------------------------
2,285,537 19,943,244
Shares
repurchased (1,683,464) (14,513,352)
- ----------------------------------------------------
Net increase 602,073 $5,429,892
- ----------------------------------------------------
Year ended
May 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,169,338 $10,523,158
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 90,726 816,160
- ----------------------------------------------------
1,260,064 11,339,318
Shares
repurchased (277,570) (2,492,726)
- ----------------------------------------------------
Net increase 982,494 $8,846,592
- ----------------------------------------------------
Year ended
May 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 1,289,625 $11,251,833
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 61,826 536,960
- ----------------------------------------------------
1,351,451 11,788,793
Shares
repurchased (162,158) (1,397,198)
- ----------------------------------------------------
Net increase 1,189,293 $10,391,595
- ----------------------------------------------------
Year ended
May 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 51,346 $466,168
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,184 10,679
- ----------------------------------------------------
52,530 476,847
Shares
repurchased (2,683) (23,878)
- ----------------------------------------------------
Net increase 49,847 $452,969
- ----------------------------------------------------
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
- ----------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.7% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
vice president
Howard K. Manning
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
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
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- -------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -------------
25860-846/237/126 7/96
