Putnam
Michigan
Tax Exempt
Income Fund
SEMIANNUAL REPORT
November 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The fund has emphasized bonds that we believe have attractive
performance characteristics and the potential for significant price
appreciation while seeking the sectors best equipped to capitalize
on the economy's strength."
-- Leslie J. Burke, manager,
Putnam Michigan Tax Exempt Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
16 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The global flight to the relative safety of bonds in the aftermath of the
Southeast Asian currency crisis in late October provided a dramatic and
positive finale to the first half of Putnam Michigan Tax Exempt Income Fund's
fiscal year. In the five months prior to that flare-up, the U.S. municipal
bond market had demonstrated solid, albeit tenuous, strength as many investors
cautiously set aside their lingering concerns about the economy, interest
rates, and renewed inflation.
Recognizing the fragility of the generally positive environment both prior to
and following the disruption in global markets, Fund Manager Leslie Burke had
pursued a slightly defensive policy in managing the fund. As the year
unfolded, however, she concluded that a somewhat more dynamic strategy was in
order and began adjusting the portfolio accordingly.
In the report that follows, Leslie provides the specifics of her strategic
shift as well as details about the fiscal year's first half. Then she offers
some insights into what she believes is in store for the rest of the period.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 21, 1998
Report from the Fund Manager
Leslie J. Burke
Positive dynamics within the national municipal bond market joined with sector
and credit opportunities at the local level to shape Putnam Michigan Tax
Exempt Income Fund's performance over the six months ended November 30, 1997.
Over this period, your fund's class A shares generated a total return of 4.95%
at net asset value (0.01% at public offering price). Performance details for
class B and class M shares, as well as results for other time periods, can be
found beginning on page 9.
* NATIONAL AND STATE ECONOMIES THRIVE AMID STEADY GROWTH, LOW INFLATION
As the nation's economy continued to exhibit steady growth and minimal price
pressures over this period, interest rates declined, pushing municipal bond
prices higher. The healthy economic environment in the United States, combined
with turmoil in the international equity and currency markets, drew
quality-seeking investors to the U.S. fixed-income market. This increased
demand for U.S. bonds drove the yield on the benchmark
30-year U.S. Treasury bond to just over 6%, a level of historical
significance. For the tax-exempt market, economic strength translated into
higher tax revenues and improved municipal balance sheets, strengthening state
and local governments from a credit standpoint. As cash flows increased, the
need to issue bonds declined. The lower bond supply also helped support
attractive price levels for tax-exempt debt.
Like their national counterpart, state and local economies throughout the
Midwest continued to bustle. In Michigan, strong demand for automobiles, light
trucks, and heavy machinery fueled steady job creation and a healthy real
estate market. The state's financial operations remained
strong, the result of increased tax revenues and ongoing efforts to control
expenditures.
* FOCUS ON STRUCTURE, SECTORS, AND CREDITS WITHIN DEFENSIVE FRAMEWORK
Our strategy in this atmosphere was to emphasize portfolio structure in
combination with careful sector and credit selection. We also positioned the
fund to take advantage of seasonal supply and demand patterns within the
municipal bond market. Recognizing the economy's strength and the historically
significant levels we have reached in interest rates, we considered it
important to minimize the fund's sensitivity with regard to interest rates
because of the possibility of eventual rate increases. We concentrated on
improving the portfolio's structure, adding bonds with attractive call
features, above-average coupons, and what we considered the best values in
terms of yield curve positioning.
We constantly monitor various yield relationships to try to determine which
securities offer the best relative value. Toward the end of the reporting
period, municipal bonds became very cheap relative to U.S. Treasuries.
Historically providing approximately 84% of the yield of U.S. Treasuries,
Aaa-rated municipal bond yields climbed to 87% of the U.S. Treasury yield. We
took that opportunity to maximize the fund's investment in tax-exempt bonds by
employing a hedging technique involving futures contracts. This enabled the
fund to take full advantage of these unusually attractive bond prices and
positioned it to benefit from what we expect to be favorable seasonal patterns
as the end of the calendar year approaches.
[GRAPHIC OMITTED: HORIZONTAL BAR CHART TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 22.5%
Education 14.9%
Water and sewerage 14.2%
Housing 12.9%
Transportation 6.4%
Footnote reads:
* Based on percentage of net assets as of 11/30/97. Holdings will vary over
time.
We concentrated investments generally on water and sewer bonds, local general
obligation bonds, and hospitals, although we also found opportunities outside
those sectors. School district and water and sewer bonds made up much of the
new issue supply, and we took advantage of this by swapping into bonds with
the performance characteristics we sought -- while continuing to focus on the
sectors we considered most promising.
We targeted local general obligation bonds and school districts because of the
positive outlook we have for those sectors. Local credits are still benefiting
from Michigan's economically strong, fiscally sound environment. Our largest
local general obligation holding, City of Detroit bonds (4.6% of net assets as
of the end of the period), was upgraded again in early December by Standard &
Poor's, further reflecting the state's strong economy and its benefits at the
local level.
We like the state's health-care and hospital sector as well and have used it
to generate solid tax-exempt income for the fund. Earlier this year, Sinai
Hospital in Detroit announced that it would merge with the larger and
financially stronger Detroit Medical Center. A 3.9% position for the fund,
Sinai Hospital was upgraded from Baa to A during the reporting period, giving
a lift to the bonds' prices. We are optimistic that the prices of these bonds
will rise further should the Medical Center tender or refund these bonds,
which is not uncommon in such situations.
If the bonds are tendered, holders will be given the option to "put back" the
securities to the issuer at an above-market price. In a refunding, new bonds
are issued to pay off older debt. The proceeds from the sale of the new bonds
are then invested in top-quality securities, usually U.S. Treasury bonds,
which are pledged to replace the older debt. Because of the safety of
principal represented by these high-quality securities, the refunding improves
the older bonds' credit quality, often boosting their prices.
[GRAPHIC OMITTED: PIE CHART CREDIT QUALITY OVERVIEW]
A 11.2%
Aa 2.4%
Aaa 55.6%
B 3.4%
Ba 6.2%
Baa 21.2%
Footnote reads:
Based on percentage of market value as of 11/30/97. 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.
We also found opportunity in the Michigan State Strategic Fund Limited
Obligation Revenue Bonds for the Worthington Armstrong Venture. This
industrial company builds steel floor brackets for new construction, a
business whose record of solid profitability seems likely to continue in this
hardy building climate. The bonds provided the portfolio with three key
benefits: they were available at attractive prices, they were noncallable, and
they carried a 53/4% tax-free coupon payment.
* FAVORABLE SEASONAL DYNAMICS AHEAD
As we head into the final weeks of 1997, we anticipate seasonal factors to be
the near-term catalyst for strong total returns in the tax exempt market.
Typically, in mid December, supply begins to wane as issuers and investors
prepare for year's end; new issuance usually picks up again in mid-January.
However, this limited supply is expected to be met with substantial demand as
issuers make significant coupon payments to investors in early January.
Seeking investment for their cash, we expect investors to push the prices of
outstanding bonds higher. Looking further ahead, we are cautiously optimistic
toward the municipal bond market. We look for the economy to grow at the
moderate-to-strong pace we witnessed in 1997, an environment that strengthened
municipal balance sheets. We are actively monitoring price pressures, however.
Although they remain minimal, we are conscious that the robust wage growth and
continual increases in average hourly earnings can begin to foster higher
inflation.
We believe the portfolio is positioned to perform well in this anticipated
environment and are confident of our ability to uncover new undervalued
situations. The fund's hedging strategy has increased its ability to benefit
From the year-end supply/demand factors. Also, the portfolio is defensively
structured to reduce sensitivity to interest-rate changes but has significant
holdings in industrial development bonds and local general obligation bonds,
which should prove advantageous in a climate of steady economic growth.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 11/30/97, 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 11/30/97
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 4.95% 0.01% 4.61% -0.40% 4.79% 1.34%
- ------------------------------------------------------------------------------
1 year 6.69 1.61 6.02 1.02 6.39 2.93
- ------------------------------------------------------------------------------
5 years 38.26 31.67 33.63 31.63 36 31.64
Annual average 6.69 5.66 5.97 5.65 6.34 5.65
- ------------------------------------------------------------------------------
Life of fund 79.29 70.83 68.91 68.91 73.78 68.17
Annual average 7.47 6.83 6.69 6.69 7.06 6.63
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/97
Lehman
Brothers
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 5.40% 0.87%
- ------------------------------------------------------------------------------
1 year 7.18 1.83
- ------------------------------------------------------------------------------
5 years 42.06 13.73
Annual average 7.27 2.61
- ------------------------------------------------------------------------------
Life of fund 88.86 28.58
Annual average 8.18 3.16
- ------------------------------------------------------------------------------
Returns for class A and class M shares reflect the current maximum initial
sales charges of 4.75% and 3.25%, respectively. Class B share returns for
the 1-, 5-, and 10-year (where available) and life-of-fund periods reflect
the applicable contingent deferred sales charge (CDSC), which is 5% in the
first year, declines 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 expenses 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.
TOTAL RETURN FOR PERIODS ENDED 12/31/97
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 4.96% -0.05% 4.65% -0.35% 4.82% 1.39%
- ------------------------------------------------------------------------------
1 year 8.08 2.91 7.45 2.45 7.80 4.27
- ------------------------------------------------------------------------------
5 years 38.20 31.66 33.71 31.71 36.08 31.61
Annual average 6.68 5.66 5.98 5.66 6.36 5.65
- ------------------------------------------------------------------------------
Life of class 81.25 72.70 70.73 70.73 75.67 70.00
Annual average 7.53 6.90 6.75 6.75 7.12 6.69
- ------------------------------------------------------------------------------
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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/97
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.236709 $0.206040 $0.222630
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Total $0.236709 $0.206040 $0.222630
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/97 $9.12 $9.57 $9.11 $9.12 $9.43
- ------------------------------------------------------------------------------
11/30/97 9.33 9.8 9.32 9.33 9.64
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 5.01% 4.77% 4.35% 4.71% 4.56%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.29 7.9 7.2 7.8 7.55
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 4.79 4.56 4.2 4.55 4.4
- ------------------------------------------------------------------------------
Taxable equivalent3 7.93 7.55 6.95 7.53 7.28
- ------------------------------------------------------------------------------
1 Capital 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.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 39.6% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
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.
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Portfolio of investments owned
November 30, 1997 (Unaudited)
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
TAN -- Tax Anticipation Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.6%) *
PRINCIPAL AMOUNT RATING** VALUE
Michigan (90.7%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
4,000,000 Battle Creek, Downtown Dev. Auth. TAN, MBIA,
5s, 5/1/17 AAA $ 3,870,000
5,500,000 Battle Creek, Downtown Dev. Auth. Tax Increment
Rev. Bonds, 7.65s, 5/1/22 BBB+ 6,524,375
2,000,000 Battle Creek, Tax Incremental Fin Auth. Rev. Bonds,
7.1s, 5/1/10 A- 2,317,500
1,400,000 Clarkson, Cmnty. School, G.O. Bonds, MBIA,
6 1/4s, 5/1/07 Aaa 1,576,750
Detroit, G.O. Bonds
2,475,000 Ser. B, 7s, 4/1/04 Baa2 2,756,531
4,875,000 Ser. A, 6.8s, 4/1/15 Aaa 5,600,156
Detroit, City School Dist. G.O. Bonds, Ser. A,
AMBAC
1,500,000 6 1/2s, 5/1/11 Aaa 1,728,750
2,455,000 6 1/2s, 5/1/09 Aaa 2,823,250
1,160,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 9 1/2s, 5/1/21 BBB+/P 1,460,150
Detroit, Wtr. Supply Syst. IFB, FGIC
7,000,000 8.765s, 7/1/22 (Prerefunded) Aaa 8,461,250
1,500,000 8.765s, 7/1/22 Aaa 1,736,250
Detroit, Wtr. Supply Syst. Rev. Bonds, MBIA
1,750,000 7 7/8s, 7/1/19 # Aaa 1,825,565
3,000,000 Second Lien, Ser. A, 5 3/4s, 7/1/11 Aaa 3,258,750
4,700,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB- 5,440,250
1,400,000 Ecorse, Pub. School Dist. G.O. Bonds, FGIC,
6 1/2s, 5/1/08 Aaa 1,610,000
Flint, Hosp. Bldg. Auth. Rev. Bonds (Hurley Med. Ctr.)
2,000,000 7.8s, 7/1/14 Baa1 2,175,000
630,000 Ser. A, 6s, 7/1/06 Baa1 657,563
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam.
Rev. Bonds, Ser. A, FNMA Coll., 7 5/8s, 9/1/23 AAA 1,106,250
3,000,000 Greater Detroit, Res. Rcvy. Auth. Rev. Bonds,
Ser. A, AMBAC, 6 1/4s, 12/13/06 Aaa 3,345,000
2,280,000 Holland, Area Cmnty. Swimming Pool Auth.
G.O. Bonds, FGIC, 5 1/8s, 5/1/19 Aaa 2,245,800
3,580,000 Holt, Pub. Schools G.O. Bonds, MBIA, 5 1/8s, 5/1/21 Aaa 3,490,500
3,500,000 Kalamazoo, Hosp. Fin. Auth. Fac. IFB, FGIC,
6.525s, 6/1/11 Aaa 3,605,000
3,395,000 Lincoln Pk., School Dist. G.O. Bonds, FGIC,
5s, 5/1/20 Aaa 3,271,931
3,840,000 MI Muni. Board Auth. State Revolving
Rev. Bonds, 6 1/2s, 10/1/17 Aa 4,344,000
8,000,000 MI State Bldg. Auth. Rev. Bonds, Ser. I, AMBAC,
6 1/2s, 10/1/07 Aaa 9,200,000
2,000,000 MI State Hosp. Fin. Auth. Adj. Rate Rev. Bonds
(Detroit-Macomb Hosp. Corp.), Ser. A,
7.4s, 6/1/13 BB+ 2,008,780
MI State Hosp. Fin. Auth. Rev. Bonds
920,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba3 999,350
460,000 (Garden City Hosp.), 8 1/2s, 9/1/17
(prerefunded) Ba3 534,750
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 Baa1 1,417,000
1,350,000 (Detroit-Macomb Hosp. Corp), Ser. A, 7s, 6/1/15 BB+ 1,353,335
4,500,000 (Sinai Hosp.), 6.7s, 1/1/26 A2 4,961,250
2,000,000 (Sinai Hosp.), 6 5/8s, 1/1/16 A2 2,195,000
2,000,000 (Presbyterian Villages), 6 1/2s, 1/1/25 BBB/P 2,100,000
2,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB/P 2,100,000
MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds
1,600,000 Ser. A, FSA, 7.55s, 4/1/23 Aaa 1,766,000
2,900,000 Ser. B, AMBAC, 6 3/4s, 10/1/12 Aaa 2,773,125
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,830,000 Arbor Model & Tooling), 10 1/4s, 9/15/19 B-/P 2,997,478
3,600,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 AAA/P 4,072,500
3,640,000 (Env. Research), 8 1/8s, 10/1/14 A-/P 3,972,150
3,150,000 (Ford Motor Co.), Ser. A, 7.1s, 2/1/06 A1 3,689,438
1,500,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 1,860,000
3,000,000 (Worthington Armstrong Venture),
5 3/4s, 10/1/22 A+ 3,093,750
2,500,000 MI State Strategic Fund Solid Waste Disp.
Rev. Bonds (SD Warren Co.), Ser. C,
7 3/8s, 1/15/22 BB-/P 2,740,625
5,000,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa3 5,043,750
Rochester, Cmnty. School Dist. G.O. Bonds, MBIA
3,375,000 5 7/8s, 5/1/09 Aaa 3,708,281
2,300,000 5 3/4s, 5/1/08 Aaa 2,498,375
2,430,000 Tawas City Hosp. Fin. Auth. Rev. Bonds
(St. Joseph's Hosp.), Ser. A, 8 1/2s, 3/15/12 BB+/P 2,497,846
Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care)
1,500,000 8 3/8s, 7/1/23 B-/P 1,500,000
1,485,000 8s, 7/1/08 B-/P 1,485,000
2,000,000 Wayland, Uni. School Dist. Rev. Bonds, FGIC,
8s, 5/1/10 Aaa 2,590,000
1,000,000 Wayne Charter Cnty., Special Arpt. Fac.
Rev. Bonds (Northwest Airlines Inc.),
6 3/4s, 12/1/15 BB-/P 1,087,500
2,405,000 Wayne Cnty., Bldg. Auth. G.O. Bonds, Ser. A,
MBIA, 6s, 6/1/08 Aaa 2,660,531
2,000,000 Western MI Univ. Rev. Bonds, Ser. A, FGIC,
5s, 7/15/21 Aaa 1,915,000
6,000,000 Western Township, Util. Auth. Swr. Disp. Syst.
Rev. Bonds, 8.2s, 1/1/18 BBB+ 6,341,760
3,200,000 Wyandotte, Elec. Rev. Bonds, MBIA, 6 1/4s, 10/1/17 Aaa 3,448,000
1,800,000 Ypsilanti, School Dist. G.O. Bonds, FGIC,
6 1/2s, 5/1/07 Aaa 2,061,000
--------------
165,902,145
Puerto Rico (7.9%)
- ------------------------------------------------------------------------------------------------------------
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
2,000,000 Ser. Y, 6 1/4s, 7/1/13 Baa1 2,262,500
2,835,000 Ser. Z, MBIA, 6 1/4s, 7/1/11 Aaa 3,253,163
3,000,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. X, MBIA,
6s, 7/1/15 Aaa 3,210,000
3,500,000 PR Pub. Bldg. Auth. Rev. Gtd. (Govt. Fac.), Ser. B,
AMBAC, 5s, 7/1/27 Aaa 3,386,250
2,100,000 PR, Pub. Bldg. Auth. Fac. Rev. Bonds, Ser. A, AMBAC,
6 1/4s, 7/1/14 Aaa 2,415,000
--------------
14,526,913
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Total Municipal Bonds and Notes
(cost $170,276,873) *** $180,429,058
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $182,938,525.
** The Moody's or Standard & Poor's ratings indicated are
believed to be the most recent ratings available at November 30, 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 November 30, 1997. Securities rated by Putnam are
indicated by "/P" and are not publicly rated.
*** The aggregate identified cost on a tax basis is $170,276,873,
resulting in gross unrealized appreciation and depreciation of
$10,629,375 and $477,190, respectively, or net unrealized appreciation
of $10,152,185.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at
November 30, 1997.
The rates shown on IFBs, which are securities paying interest
rates that vary inversely to changes in the market interest rates are the
current interest rates at November 30, 1997.
The fund had the following industry group concentrations greater
than 10% at November 30, 1997 as a percentage of net assets:
Health care 22.5%
Education 14.9
Water & Sewer 14.2
Housing 12.9
The fund had the following insurance concentrations greater than
10% at November 30, 1997 as a percentage of net assets:
MBIA 17.9%
AMBAC 15.1
FGIC 15.0
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1997 (Unaudited)
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond
20 yr (Short) $10,369,313 $10,072,063 Dec. 20 $(297,250)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $170,276,873) (Note 1) $180,429,058
- ---------------------------------------------------------------------------------------------------
Cash 146,286
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 2,866,801
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 224,348
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 195,004
- ---------------------------------------------------------------------------------------------------
Total assets 183,861,497
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 8,156
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 442,510
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 53,114
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 271,790
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 29,193
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,807
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,078
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 75,074
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 35,250
- ---------------------------------------------------------------------------------------------------
Total liabilities 922,972
- ---------------------------------------------------------------------------------------------------
Net assets $182,938,525
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $173,245,158
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 96,505
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (258,073)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,854,935
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $182,938,525
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($144,044,773 divided by 15,435,194 shares) $9.33
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.33)* $9.80
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($37,748,493 divided by 4,050,335 shares)** $9.32
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,145,259 divided by 122,750 shares) $9.33
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.33)*** $9.64
- ---------------------------------------------------------------------------------------------------
* 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
Six months ended November 30, 1997 (Unaudited)
<S> <C>
Tax exempt interest income: $5,464,162
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 545,348
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 106,269
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 4,088
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,187
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 144,426
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 154,792
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,361
- --------------------------------------------------------------------------------------------------
Reports to shareholders 9,554
- --------------------------------------------------------------------------------------------------
Registration fees 1,380
- --------------------------------------------------------------------------------------------------
Auditing 13,854
- --------------------------------------------------------------------------------------------------
Legal 7,941
- --------------------------------------------------------------------------------------------------
Postage 8,133
- --------------------------------------------------------------------------------------------------
Other 4,744
- --------------------------------------------------------------------------------------------------
Total expenses 1,006,077
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (53,806)
- --------------------------------------------------------------------------------------------------
Net expenses 952,271
- --------------------------------------------------------------------------------------------------
Net investment income 4,511,891
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 764,916
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (756,008)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the period 4,043,328
- --------------------------------------------------------------------------------------------------
Net gain on investments 4,052,236
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $8,564,127
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
1997* 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 4,511,891 $ 9,052,110
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 8,908 1,100,833
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,043,328 4,120,815
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 8,564,127 14,273,758
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------------------
Class A (3,677,369) (7,517,724)
- ----------------------------------------------------------------------------------------------------------------------
Class B (807,462) (1,498,538)
- ----------------------------------------------------------------------------------------------------------------------
Class M (22,507) (33,100)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 1,083,491 4,254,756
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 5,140,280 9,479,152
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 177,798,245 168,319,093
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $96,505 and $91,952, respectively) $182,938,525 $177,798,245
- ----------------------------------------------------------------------------------------------------------------------
* Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share Nov. 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.12 $ 8.85 $ 9.01 $ 8.90 $ 9.30 $ 8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .24 .48 .49 .52 .52 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .21 .27 (.16) .11 (.32) .52
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .45 .75 .33 .63 .20 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.24) (.48) (.49) (.52) (.52) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.03) (.01)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- -- -- -- (.05) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.24) (.48) (.49) (.52) (.60) (.57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 9.33 $ 9.12 $ 8.85 $ 9.01 $ 8.90 $ 9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.95 * 8.67 3.76 7.45 2.03 12.38
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $144,045 $142,038 $138,390 $136,010 $128,921 $113,074
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .49 * .99 1.00 .95 .99 1.04
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.56 * 5.33 5.42 6.03 5.58 6.04
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 15.96 * 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 period ended May 31,1994 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 July 15, 1993+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.11 $ 8.84 $ 9.00 $ 8.90 $ 9.43
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .21 .43 .43 .47 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .21 .26 (.16) .10 (.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .42 .69 .27 .57 (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.42) (.43) (.47) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.42) (.43) (.47) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 9.32 $ 9.11 $ 8.84 $ 9.00 $ 8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.61 * 7.99 3.05 6.72 (.68)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $37,749 $35,041 $29,371 $21,071 $10,251
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .81 * 1.64 1.65 1.59 1.42 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.23 * 4.68 4.74 5.31 4.25 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 15.96 * 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 period ended May 31,1994 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 April 17, 1995+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.12 $8.85 $9.00 $8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 .46 .47 .05 (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .21 .27 (.16) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .43 .73 .31 .26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $ 9.33 $9.12 $8.85 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.79 * 8.36 3.53 2.03 *
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,145 $ 719 $ 558 $ 119
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .64 * 1.29 1.28 .20 *
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.39 * 5.01 5.06 .84 *
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 15.96 * 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 period ended May 31,1994 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
November 30, 1997 (Unaudited)
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. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
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) Line of Credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the period ended November 30, 1997 the fund
had no borrowings against the line of credit.
E) 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.
F) 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. 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.
G) 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 zero coupon bonds,
original issue discount, stepped-coupon bonds and payment in kind bonds are
accreted according to the yield to maturity basis.
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, 0.34% of the next $5 billion, and 0.33% thereafter.
The fund reimburses Putnam Management an allocated amount 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 subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the six months ended November 30, 1997, fund expenses were reduced by
$53,806 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 funds receive an annual Trustees fee of which $390 has been
allocated to the fund 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 "Deferral 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
Deferral 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 currently limit payment by the fund to 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 six months ended November 30, 1997, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $13,390 and $559 from the sale of
class A and class M shares, respectively and $48,666 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 six
months ended November 30, 1997, Putnam Mutual Funds Corp., acting as
underwriter received no monies on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended November 30, 1997, purchases and sales of
investment securities other than short-term investments aggregated $35,557,959
and $27,959,646, 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 November 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Six months ended
November 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 699,027 $ 6,471,926
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 239,463 2,216,186
- ------------------------------------------------------------
938,490 8,688,112
Shares
repurchased (1,069,610) (9,909,084)
- ------------------------------------------------------------
Net decrease (131,120) $(1,220,972)
- ------------------------------------------------------------
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)
- ------------------------------------------------------------
Six months ended
November 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 427,945 $ 3,963,083
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 55,113 509,327
- ------------------------------------------------------------
483,058 4,472,410
Shares
repurchased (278,092) (2,573,916)
- ------------------------------------------------------------
Net increase 204,966 $ 1,898,494
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Six months ended
November 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 45,282 $ 418,631
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,429 13,232
- ------------------------------------------------------------
46,711 431,863
Shares
repurchased (2,783) (25,894)
- ------------------------------------------------------------
Net increase 43,928 $ 405,969
- ------------------------------------------------------------
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
- ------------------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund *
International New Opportunities Fund
Investors Fund
New Opportunities Fund +
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund +
High Yield Total Return Fund
High Yield Trust +
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGESM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* Formerly Overseas Growth Fund
+ Closed to new investors. Some exceptions may apply. Contact Putnam
for details.
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Blake E. Anderson
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 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. 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 the 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
- --------------------
SA048-36885 1/98
