Putnam
Michigan
Tax Exempt
Income Fund
ANNUAL REPORT
May 31, 1997
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Fund highlights
* Returns for Putnam Michigan Tax Exempt Income Fund's class A shares
have consistently outperformed its Lipper category average. For periods
ended June 30, 1997, Lipper Analytical Services ranked the fund's class A
shares 5 out of 46 Michigan tax-exempt funds for one year, 11 out of 33
for 3 years and 4 out of 14 for five years. Class B shares ranked 18 out
of 46 for one year and 26 out of 33 for three years. Class M shares ranked
8 out of 46 for one year and were not tracked for longer periods.*
* "Depending on your tax bracket, municipal bonds may offer juicier
after-tax yields than Treasuries of comparable maturities."
-- Money, May 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
16 Financial statements
*Lipper Analytical Services, an independent research organization, ranks
funds according to total return performance. Rankings vary over time and
do not reflect the effects of sales charges. Past performance is not
indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Michigan Tax Exempt Income Fund began fiscal 1997 on a hopeful, yet
cautious note in June 1996 after a somewhat tumultuous year for the municipal
bond market. The hope was well warranted, as the market rallied in the fall.
The caution was also well placed, for the rally ended abruptly in late winter,
cut short by investor worries that inflation and interest rates would both
rise in the wake of an economy still growing too fast.
From the vantage point of the fiscal year's close on May 31, 1997, we can see
that the volatility, while somewhat nerve-racking for many investors, was
unusually low by historical standards. By spring, even the Federal Reserve
Board's increase in the federal funds rate in late March, the source of
considerable earlier anxiety, caused little stir.
It is in these contexts that Fund Manager Leslie Burke discusses your fund's
performance for the year just past and her view of its prospects for the year
ahead. Her report begins on the following page.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 16, 1997
Report from the Fund Manager
Leslie J. Burke
A keen eye for opportunity and value, combined with a defensive investment
posture powered Putnam Michigan Tax Exempt Income Fund's strong performance
over the past year. For the 12 months ended May 31, 1997, your fund's class A
shares produced a total return of 8.67% at net asset value (3.52% at public
offering price). This placed the fund slightly ahead of its competitive
benchmark, the Lehman Brothers Municipal Bond Index, which returned 8.29% over
the same period. Full performance details on class B and class M shares and
for other time periods can be found on page 8 of this report.
* MUNICIPAL BONDS DELIVER STRONG PERFORMANCE
The tax-exempt sector surpassed the expectations of many investors during the
past 12 months. When the period began, municipal bond prices were recovering
from concerns about the flat tax; and were still "cheap" compared to taxable
alternatives. It was widely expected that increased supply and reduced demand
would limit price appreciation in the coming months.
However, as the year progressed, conditions grew increasingly favorable. A
combination of slower economic growth and low inflation provided a background
conducive to fixed-income investments, and election-year uncertainties were
resolved. Demand increased and municipal bond prices rose, outperforming
comparable U.S. Treasuries.
Then, toward the end of 1996, the economy began to show signs of strength,
which caused investor concerns about future inflation. These concerns were
validated by the Federal Reserve Board in March 1997, when it increased the
federal funds rate -- the rate at which banks lend to each other overnight.
As interest rates rose -- and the prices of fixed-income securities fell --
municipal bonds held their value better than their counterparts in the U.S.
government securities sector. Their credit-driven characteristics helped to
insulate tax-exempt bonds from changes in interest rates, while also providing
investors with pockets of value and opportunity.
*DEFENSIVE FRAMEWORK FOCUSES ON INCOME
We continued to structure the portfolio defensively, a strategy that we
believe enhanced total return. We reduced price volatility and emphasized
income, in part by selling bonds with maturities in the 25- to 30-year range
and reinvesting assets in bonds with 15- to 20-year maturities. Another key
aspect to this strategy was to concentrate on high coupon bonds and high
yields.
In our opinion, one of the year's best opportunities stemmed from bonds issued
by the Commonwealth of Puerto Rico and its authorities. Since Puerto Rico debt
is exempt from state, local, and city taxes, it offers the fund an attractive
alternative to Michigan bonds, which were in thin supply. Puerto Rico
officials accelerated their calendar for new bond issuance by bringing a
supply of new bonds to market over a consecutive three-month period that
historically was spread over a longer time span. The bulge in supply drove the
yields on Puerto Rico bonds higher and provided investors with a greater
selection of bonds with the coupon, maturity, and call features that we
sought.
* HEALTH CARE CONTINUES TO PROVIDE A WEALTH OF OPPORTUNITY
Health-care and health-care-related bonds continued to play a dominant role in
your fund's investment strategy. Opportunity in this sector remains
credit-driven, often involving lower-rated issues that we expect to obtain
improved ratings. This enables the fund to capture considerable yield and the
potential for capital appreciation. Several of the fund's holdings merged with
larger health-care providers over the past 12 months. We expect the new
entities to be stronger credits and that the mergers could result in increased
trading and balance sheet liquidity. In Detroit, Sinai Hospital, which
represents over 3% of the fund, has announced that it is merging with the much
larger Detroit Medical Center. In addition to our believing that there is a
strong possibility of a credit upgrade from the merger alone, we expect that
bond insurance could become available to Sinai Hospital or that the bonds
could be prerefunded over time. In a prerefunding, the issuer floats a second
bond to pay off an earlier one at its first call date. Proceeds from the new
issue are invested in top-quality instruments, such as U.S. Treasuries, which
are pledged to pay off the older debt. Because of the safety of principal
represented by the pledged securities, a prerefunding improves the credit
quality -- and often boosts the prices -- of the older bonds.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 22.3%
Water and sewerage 14.5%
Education 12.6%
Utilities 10.3%
Transportation 7.1%
Footnote reads:
*Based on net assets as of 5/31/97. Holdings will vary over time.
* OUTLOOK: CAUTIOUS ON RATES BUT POSITIVE ON CREDIT-DRIVEN OPPORTUNITY
We head into the fund's new fiscal year cautious about the direction of
interest rates, but optimistic about the total return opportunities we believe
undervalued securities can offer.
The strong performance logged by municipal bonds over the past year has made
us cautious about their current valuation versus taxable alternatives. The
tax-exempt sector began the year quite "cheap" in terms of relative value
compared to the benchmark U.S. Treasuries, yet provided considerably less
relative value by most measures at the end of the fiscal period. This could
result in a period of adjustment for municipal bond prices while these two
market sectors ease back into their more normal historical relationships.
However, we believe that there are still many credit-driven situations that
are undervalued and that can provide solid total returns.
We are also monitoring economic activity. Economic growth appears to have
slowed dramatically during the second quarter, a phenomenon we believe is
largely attributable to the fall-off in personal income late in 1996.
Typically, changes in personal income will not affect economic activity for
several months. We think the economy could strengthen later in 1997, however.
Consumer confidence is at record highs. Consistent job creation has resulted
in the lowest unemployment rate in nearly 25 years. The consumer appears to
feel very comfortable spending money; since consumer spending accounts for two
thirds of economic activity, we believe stronger growth could lie ahead.
Historically, that has raised concerns about future inflation and led to
higher interest rates. Price volatility, which has been abnormally low over
the past 12 months, could also increase.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa 52.3%
Aa 2.6%
A 7.0%
Baa 25.5%
Ba 5.4%
B and under 3.5%
VMIGI 3.7%
Footnote reads:
Based on percentage of market value as of 5/31/97. A bond rated Baa or higher
is considered investment grade. All ratings reflect Moody's descriptions
unless noted otherwise; percentages may include unrated bonds considered by
Putnam Management to be of comparable quality. Ratings will vary over time.
* MICHIGAN OPPORTUNITIES REMAIN A BRIGHT SPOT
While strength in the national economy has raised caution flags regarding the
general direction of interest rates, it has benefited many credits in
Michigan, particularly those of Detroit. The nation's economic strength has
continued to fuel a full-fledged recovery of the state's largest city. Bonds
associated with the city of Detroit and its authorities have gained greater
liquidity and have enjoyed excellent price performance, relative to other
credits.
We look forward to more opportunities like these. In combination with the
fund's defensive posture, they should help insulate its investments from the
rising interest rates and price fluctuations associated with changing economic
conditions.
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 5/31/97, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
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.
TOTAL RETURN FOR PERIODS ENDED 5/31/97
Class A* Class B Class M
(inception date) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
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1 year 8.67% 3.52% 7.99% 2.99% 8.36% 4.81%
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5 years 38.90 32.29 34.22 32.22 36.63 32.17
Annual average 6.79 5.76 6.06 5.74 6.44 5.74
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Life of fund 70.84 62.78 61.47 61.47 65.83 60.49
Annual average 7.30 6.62 6.51 6.51 6.88 6.42
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97
Lehman Bros. Consumer
Municipal Bond Index Price Index
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1 year 8.29% 2.23%
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5 years 41.80 14.60
Annual average 7.24 2.76
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Life of fund 79.18 27.47
Annual average 8.00 3.25
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Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% for class A shares and 3.25% for class M shares.
One-, five-, and ten-year and life-of-fund returns for class B shares
reflect the applicable contingent deferred sales charges (CDSC), which is
5% in the first year, declines each year to 1% in the sixth year, and is
eliminated thereafter. Returns shown for class B and class M shares for
periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the initial sales
charge or CDSC, if any, currently applicable to each class and, in the
case of class B and class M shares, the higher operating costs applicable
to such shares. All returns assume reinvestment of distributions at NAV
and represent past performance; they do not guarantee future results.
Investment return and principal value will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
*Returns shown for class A shares have not been adjusted to reflect
payments under the class A distribution plan prior to its implementation.
[GRAPHIC OMITTED: horizontal bar chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT*
Cumulative total return of a $10,000 investment since 10/23/89
Fund's
Class A Lehman Bros. Consumer
shares Municipal Price
Date at POP Bond Index Index
- -------- ------- ----------- --------
10/23/89 9525 10000 10000
5/31/90 9831 10453 10287
5/31/91 10630 11506 10796
5/31/92 11720 12636 11123
5/31/93 13171 14148 11481
5/31/94 14438 14497 11744
5/31/95 14438 15822 12118
5/31/96 14981 16545 12468
5/31/97 16278 17918 12747
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have been
valued at $16,147 on 5/31/97 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $16,583 ($16,049 at public offering price). See first page of
performance section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/97
Class A Class B Class M
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Distributions (number) 12 12 12
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Income $0.480692 $0.423135 $0.455340
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Capital gains1 -- -- --
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Total $0.480692 $0.423135 $0.455340
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Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/96 $8.85 $9.29 $8.84 $8.85 $9.15
- ------------------------------------------------------------------------------
5/31/97 9.12 9.57 9.11 9.12 9.43
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 5.36% 5.11% 4.72% 5.07% 4.90%
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Taxable equivalent3 9.28 8.85 8.17 8.78 8.49
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Current 30-day SEC yield4 5.17 4.93 4.53 4.89 4.73
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Taxable equivalent3 8.95 8.54 7.85 8.47 8.19
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1Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3Assumes maximum 42.26% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/97
(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 8.21% 3.12% 7.57% 2.57% 7.93% 4.41%
- ------------------------------------------------------------------------------
5 years 37.74 31.24 33.06 31.06 35.48 31.11
Annual average 6.61 5.59 5.88 5.56 6.26 5.57
- ------------------------------------------------------------------------------
Life of fund 72.23 64.11 62.76 62.76 67.17 61.78
Annual average 7.33 6.65 6.54 6.54 6.91 6.46
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Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 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.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
Report of independent accountants
For the fiscal year ended May 31, 1997
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, including the portfolio of investments owned,
as of May 31, 1997, and the related statement of operations for the year then
ended and 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, 1997, 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 providea 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, 1997, the results of its
operations for the year then ended and 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 10, 1997
Portfolio of investments owned
May 31, 1997
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
FGIC -- Financial Guaranty Insurance Company
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
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.1%) *
PRINICPAL AMOUNT RATINGS** VALUE
Michigan (86.1%)
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<S> <C> <C> <C>
$5,500,000 Battle Creek, Downtown Dev. Auth. Tax
Increment Rev. Bonds, 7.65s, 5/1/22 BBB $ 6,366,250
2,000,000 Battle Creek, Tax Increment Fin. Auth. Rev.
Bonds, 7.1s, 5/1/10 A 2,225,000
3,000,000 Cornell Township, Econ. Dev. Corp. VRDN
(Escabana Paper Co.), 3.95s, 11/1/16 VMIG1 3,000,000
Detroit, G.O. Bonds
2,475,000 Ser. B, 7s, 4/1/04 Baa 2,710,125
4,875,000 Ser. A, 6.8s, 4/1/15 Aaa 5,527,031
Detroit, City School Dist. G.O. Bonds,
Ser. A, AMBAC
1,500,000 6 1/2s, 5/1/11 Aaa 1,674,375
2,455,000 6 1/2s, 5/1/09 Aaa 2,743,463
1,160,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 9.5s, 5/1/21 BBB/P 1,418,100
Detroit, Wtr. Supply Syst. IFB, FGIC
7,000,000 8.562s, 7/1/22 (Prerefunded) Aaa 8,216,250
1,500,000 8.562s, 7/1/22 Aaa 1,623,750
Detroit, Wtr. Supply Syst. Rev. Bonds, MBIA
1,750,000 7 7/8s, 7/1/19 # Aaa 1,853,530
3,380,000 Second Lien, Ser. A, 5.4s, 7/1/11 Aaa 3,409,575
4,700,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB 5,175,875
Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr.)
2,000,000 7.8s, 7/1/14 Baa 2,150,000
630,000 Ser. A, 6s, 7/1/06 Baa 631,575
2,500,000 Grand Ledge, Pub. School Dist. G.O. Bonds,
MBIA, 5 3/8s, 5/1/24 Aaa 2,390,625
1,550,000 Grand Rapids, Cmnty. College G.O. Bonds,
MBIA, 5 3/8s, 5/1/19 Aaa 1,503,500
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam.
Rev. Bonds, Ser. A, FNMA Coll., 7 5/8s, 9/1/23 AAA 1,082,500
3,000,000 Greater Detroit, Res. Rcvy. Auth. Rev. Bonds,
Ser. A, AMBAC, 6 1/4s, 12/13/06 Aaa 3,277,500
2,280,000 Holland, Area Cmnty. Swimming Pool Auth.
G.O. Bonds, FGIC, 5 1/8s, 5/1/19 Aaa 2,143,200
3,500,000 Kalamazoo, Hosp. Fin. Auth. Fac. IFB, FGIC,
6.409s, 6/1/11 Aaa 3,307,500
3,840,000 MI Muni. Board Auth. State Revolving Rev.
Bonds, 6 1/2s, 10/1/17 Aa 4,286,400
8,000,000 MI State Bldg. Auth. Rev. Bonds, Ser. I, AMBAC,
6 1/2s, 10/1/07 Aaa 8,940,000
2,000,000 MI State Hosp. Fin. Auth. Adj. Rate Rev.
Bonds (Detroit-Macomb Hosp. Corp.),
Ser. A, 7.4s, 6/1/13 BB 2,015,000
MI State Hosp. Fin. Auth. Rev. Bonds
920,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba 991,300
460,000 (Garden City Hosp.), 8 1/2s, 9/1/17
(Prerefunded) AAA/P 537,050
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 AAA/P 1,433,250
1,350,000 (Detroit-Macomb Hosp. Corp), Ser. A, 7s,
6/1/15 BB 1,350,675
4,500,000 (Sinai Hosp.), 6.7s, 1/1/26 Baa 4,663,125
2,000,000 (Sinai Hosp.), 6 5/8s, 1/1/16 Baa 2,067,500
2,000,000 (Presbyterian Villages), 6 1/2s, 1/1/25 BBB/P 2,030,000
2,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB/P 2,030,000
2,500,000 MI State Hsg. Dev. Auth. Multi-Fam. Rev. Bonds,
Ser. A, FGIC, 8 3/8s, 7/1/19 Aaa 2,579,650
MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds
1,600,000 Ser. A, FSA, 7.55s, 4/1/23 Aaa 1,714,000
2,900,000 Ser. B, AMBAC, 6 3/4s, 10/1/12 Aaa 2,635,375
195,000 MI State Hsg. Dev. Auth. Single Fam. Mtge. Rev.
Bonds, Ser. A, 7.55s, 12/1/14 Aa 201,825
1,900,000 MI State Job Dev. Auth. VRDN, 4.1s, 12/1/14 VMIG1 1,900,000
2,500,000 MI State Stragetic Fund Solid Waste Disp. Rev.
Bonds (SD Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 2,653,125
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,870,000 (Arbor Model & Tooling), 10 1/4s, 9/15/19 B/P 3,036,259
3,600,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 BBB/P 4,072,500
3,825,000 (Env. Research), 8 1/8s, 10/1/14 A/P 4,174,031
3,150,000 (Ford Motor Co.), Ser. A, 7.1s, 2/1/06 A 3,606,750
1,500,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 1,788,750
5,000,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa 4,712,500
2,430,000 Tawas City Hosp. Fin. Auth. Rev. Bonds
(St. Joseph's Hosp.), Ser. A, 8 1/2s, 3/15/12 BB/P 2,508,295
3,375,000 Thornapple Kellogg, School Dist. G.O. Bonds,
FGIC, 5 3/8s, 5/1/22 Aaa 3,252,656
Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care)
1,500,000 8 3/8s, 7/1/23 B/P 1,561,875
1,485,000 8s, 7/1/08 B/P 1,536,975
2,000,000 Wayland, Uni. School Dist. Rev. Bonds,
FGIC, 8s, 5/1/10 Aaa 2,517,500
2,405,000 Wayne Cnty., Bldg. Auth. G.O. Bonds, Ser. A,
MBIA, 6s, 6/1/08 Aaa 2,570,344
2,000,000 Western MI Univ. Rev. Bonds, Ser. A, FGIC,
5s, 7/15/21 Aaa 1,807,500
6,000,000 Western Township, Util. Auth. Swr. Disp. Syst.
Rev. Bonds, 8.2s, 1/1/18 BBB 6,405,000
1,575,000 Wyandotte Elec. Rev. Bonds, AMBAC,
7 7/8s, 10/1/17 Aaa 1,626,707
3,200,000 Wyandotte, Elec. Rev. Bonds, MBIA, 6 1/4s, 10/1/17 Aaa 3,388,000
--------------
153,023,641
Puerto Rico (12.0%)
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1,500,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN,
3.55s, 12/1/15 VMIG1 1,500,000
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
2,000,000 Ser. Y, 6 1/4s, 7/1/13 A 2,172,500
2,835,000 Ser. Z, MBIA, 6 1/4s, 7/1/11 Aaa 3,143,306
2,250,000 Ser. Y, MBIA, 5 1/2s, 7/1/26 Aaa 2,227,500
PR Elec. Pwr. Auth. Rev. Bonds
3,000,000 Ser. X, MBIA, 6s, 7/1/15 Aaa 3,116,250
7,255,000 Ser. Z, MBIA, 5 1/4s, 7/1/21 Aaa 6,928,525
2,100,000 PR, Pub. Bldg. Auth. Fac. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 7/1/14 Aaa 2,323,125
--------------
$ 21,411,206
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Total Municipal Bonds and Notes
(cost $168,429,177) *** $ 174,434,847
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* Percentages indicated are based on net assets of $177,798,245.
** The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available at May 31, 1997 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at May 31, 1997 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 $168,429,177,
resulting in gross unrealized appreciation and depreciation of
$6,772,280 and $766,610, respectively, or net unrealized appreciation
of $6,005,670.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at May 31,
1997.
The rates shown on IFBs, which are securities paying interest
rates that vary inversely to changes in the market interest rates, and
VRDN's are the current interest rates at May 31, 1997.
The fund had the following industry group concentrations greater
than 10% at May 31, 1997 (as a percentage of net assets):
Health care 22.3%
Water & Sewer 14.5
Education 12.6
Utilities 10.3
The fund had the following insurance concentrations greater than
10% at May 31, 1997 (as a percentage of net assets):
MBIA 17.2%
FGIC 14.3
AMBAC 14.1
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1997
Aggregate
Total Face Expiration Unrealized
Value Value Date Depreciation
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
U.S. Muni Index
Future (Short) $7,137,000 $6,942,937 Jun-97 $(194,063)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $168,429,177) (Note 1) $174,434,847
- ---------------------------------------------------------------------------------------------------
Cash 908,314
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 2,991,780
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 371,285
- ---------------------------------------------------------------------------------------------------
Total assets 178,706,226
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 19,063
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 470,412
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 35,053
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 264,200
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 20,895
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,610
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,156
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 72,168
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 19,424
- ---------------------------------------------------------------------------------------------------
Total liabilities 907,981
- ---------------------------------------------------------------------------------------------------
Net assets $177,798,245
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $172,161,667
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 91,952
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
(Note 1) (266,981)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,811,607
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $177,798,245
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($142,037,857 divided by 15,566,314 shares) $9.12
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.12)* $9.57
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($35,041,298 divided by 3,845,369 shares)+ $9.11
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($719,090 divided by 78,822 shares) $9.12
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.12)** $9.43
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales
the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent deferred sales
charge.
** 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.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31,1997
<S> <C>
Tax exempt interest income: $10,819,985
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 1,041,555
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 194,126
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 17,156
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,908
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 281,020
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 273,633
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 3,303
- --------------------------------------------------------------------------------------------------
Reports to shareholders 22,164
- --------------------------------------------------------------------------------------------------
Registration fees 5,307
- --------------------------------------------------------------------------------------------------
Auditing 27,213
- --------------------------------------------------------------------------------------------------
Legal 22,056
- --------------------------------------------------------------------------------------------------
Postage 21,977
- --------------------------------------------------------------------------------------------------
Other 20,102
- --------------------------------------------------------------------------------------------------
Total expenses 1,936,520
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (168,645)
- --------------------------------------------------------------------------------------------------
Net expenses 1,767,875
- --------------------------------------------------------------------------------------------------
Net investment income 9,052,110
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 545,897
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 554,936
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 4,120,815
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,221,648
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,273,758
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 9,052,110 $ 8,755,309
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,100,833 1,753,438
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 4,120,815 (4,781,877)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,273,758 5,726,870
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (7,517,724) (7,598,988)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,498,538) (1,242,161)
- ----------------------------------------------------------------------------------------------------------------------
Class M (33,100) (15,675)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 4,254,756 14,248,432
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 9,479,152 11,118,478
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 168,319,093 157,200,615
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $91,952 and $85,347, respectively) $177,798,245 $168,319,093
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.85 $9.01 $8.90 $9.30 $8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .48 .49 .52 .52 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .27 (.16) .11 (.32) .52
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .75 .33 .63 .20 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.48) (.49) (.52) (.52) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- (.03) (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- -- -- (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.49) (.52) (.60) (.57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.12 $8.85 $9.01 $8.90 $9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.67 3.76 7.45 2.03 12.38
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $142,038 $138,390 $136,010 $128,921 $113,074
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .99 1.00 .95 .99 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.33 5.42 6.03 5.58 6.04
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.30 139.08 82.91 41.77 15.89
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 15, 1993+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.84 $9.00 $8.90 $9.43
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .43 .47 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .26 (.16) .10 (.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .69 .27 .57 (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.42) (.43) (.47) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.42) (.43) (.47) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.11 $8.84 $9.00 $8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.99 3.05 6.72 (.68)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $35,041 $29,371 $21,071 $10,251
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.64 1.65 1.59 1.42*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.68 4.74 5.31 4.25*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.30 139.08 82.91 41.77
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share April 17, 1995+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.85 $9.00 $8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .46 .47 .05(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .27 (.16) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .73 .31 .26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.12 $8.85 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.36 3.53 2.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $719 $558 $119
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.29 1.28 .20*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.01 5.06 .84*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 55.30 139.08 82.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these
amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
</TABLE>
Notes to financial statements
May 31, 1997
Note 1
Significant accounting policies
Putnam Michigan Tax Exempt Income Fund (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks as high a level of current
income exempt from federal income tax and Michigan personal income tax as
Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager,
a wholly-owned subsidiary of Putnam Investments, Inc., believes is consistent
with preservation of capital by investing primarily in a 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 securities and various
relationships between securities in determining value.
B) Security transactions and related investment income Security transactions
are accounted for on the trade date (date the order to buy or sell is
executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform.
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 income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains.
E) Distributions to shareholders Income dividends are recorded daily by the
fund and are distributed monthly. Capital gain distributions if any, are
recorded on the ex-dividend date and paid at least annually. The amount and
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences include treatment of realized and
unrealized gains and losses on certain futures contracts, market discount, and
capital loss carryover. 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, 1997, the fund reclassified $3,857 to increase undistributed net
investment income and $3,857 to increase accumulated net realized loss on
investments. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
F) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on original issue discount
bonds are accreted according to the effective yield method.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund. Such
fee is based on the following annual rates: 0.60% of the first $500 million of
average net assets, 0.50% of the next $500 million, 0.45% of the next $500
million, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355%
of the next $5 billion, 0.340% of the next $5 billion, and 0.330% thereafter.
Prior to September 20, 1996, any amount over $1.5 billion was based
on 0.40%.
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.
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, 1997, fund expenses were reduced by $168,645 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.
Trustees of the fund receive an annual Trustees fee of $390 and an additional
fee for each Trustee's meeting attended. Trustees who are not interested
persons of Putnam Management and who serve on committees of the Trustees
receive additional fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Plan") which allows the
Trustees to defer the receipt of all or a portion of Trustees Fees payable on
or after July 1, 1995. The deferred fees remain in the fund and are invested
in certain Putnam funds until distribution in accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing shares
of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds
Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund 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, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $19,220 and $353 from the sale of
class A and class M shares, respectively and $70,002 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, 1997, 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, 1997, purchases and sales of investment
securities other than short-term investments aggregated $97,484,158 and
$89,830,894, 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, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,554,057 $14,093,983
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 498,060 4,496,668
- ------------------------------------------------------------
2,052,117 18,590,651
Shares
repurchased (2,119,942) (19,185,096)
- ------------------------------------------------------------
Net decrease (67,825) $ (594,445)
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 886,312 $8,014,260
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 109,239 985,338
- ------------------------------------------------------------
995,551 8,999,598
Shares
repurchased (474,195) (4,289,246)
- ------------------------------------------------------------
Net increase 521,356 $ 4,710,352
- ------------------------------------------------------------
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, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 35,702 $320,107
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 2,074 18,728
- ------------------------------------------------------------
37,776 338,835
Shares
repurchased (22,054) (199,986)
- ------------------------------------------------------------
Net increase 15,722 $138,849
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.42% of dividends paid from net investemnt income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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
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
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Leslie J. Burke
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 Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
copy of Putnam's Quarterly Performance Summary. For more information, or to
request a prospectus, call toll free: 1-800-225-1581. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed or
endorsed by, any financial institution, are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other agency,
and involve risk, including the possible loss of principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
34412-846/237/126 7/97
