Putnam
Michigan
Tax Exempt
Income Fund
ANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Surging tax revenues in most states helped bolster municipal credit
bond ratings. Standard and Poor's says the number of ratings upgrades
in this year's first quarter was more than nine times the number
of downgrades."
-- The Wall Street Journal, April 8, 1998
* "Strong demand nationally for autos and other durable goods has
boosted Michigan's economy, providing a strong credit backdrop for its
municipal market. Amid this positive climate, our focus on income and
value, along with ongoing efforts to improve the fund's call protection,
has continued to produce solid returns."
-- Leslie J. Burke, manager
Putnam Michigan Tax Exempt Income Fund
CONTENTS
4 Report from Putnam Management
10 Fund performance summary
15 Portfolio holdings
19 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Analyzing risk premiums, yield spreads, call dates, yield curves, credit
ratings, supply-and-demand dynamics, taxable versus tax-exempt yield
relationships, and a host of other factors is all in a day's work for Putnam's
Tax-Exempt Bond Group. The result was another period of competitive
performance for Putnam Michigan Tax Exempt Income Fund's fiscal year that
closed on May 31, 1998.
Using her knowledge of Michigan's tax-exempt bond environment and backed by
Putnam's extensive credit analysis capability, Fund Manager Leslie Burke made
the strategic and tactical decisions that provided these positive results. In
the following report, Leslie discusses the fund's performance during fiscal
1998 and then takes a look at prospects for the tax-exempt market, especially
with regard to Michigan, in the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Manager
Leslie J. Burke
The 12 months ended May 31, 1998, marked another period of solid performance
for Putnam Michigan Tax Exempt Income Fund. While supply and demand dynamics
and concerns over the situation in Asia did produce some price and yield
fluctuations, the municipal market generally experienced very little
volatility over the course of the year. Within this quiet playing field, there
were fewer opportunities for profit, but Putnam Michigan Tax Exempt Income
Fund continued to deliver what it has promised to shareholders: a reliable
stream of income exempt from state and federal taxes along with relatively low
share price volatility. For the 12 months ended May 31, 1998, the fund
provided a total return of 8.28% at net asset value (3.18% at public offering
price) for class A shares. Results for class B and class M shares can be found
on pages 10 and 11 of this report.
* MUNICIPAL BOND MARKET BOASTS ATTRACTIVE PRICES, ROBUST SUPPLY AND DEMAND
Despite the relative calm that has fallen over the $1.3 trillion municipal
bond market, these bonds have actually become very attractively priced
relative to the Treasury market -- a state of affairs that hasn't occurred
since the flat-tax scare of 1996. By the end of May, municipal bonds (as
represented by 30-year insured municipals) were offering almost 90% of the
yield of long-term Treasury bonds. Since the typical level is 84%, the current
percentage makes municipal prices remarkably low.
Low interest rates also acted as a catalyst for municipal bond refundings and
new issues in recent months. In fact, so far 1998 has been most notable for
its huge supply, including the sale of the largest municipal bond issue in
history -- $3.4 billion by the Long Island Power Authority in May. The bargain
prices in this market have maintained investors' interest and enabled demand
to keep pace with supply. Also noteworthy is the unusually flat tax-exempt
yield curve. With the 30-year bond paying only a modest 30 to 40 basis points
over a 10-year bond, investors are not compensated for taking on higher risk.
For this reason, we often find the best value (attractive yield with minimal
volatility) in the intermediate-plus range of the yield curve -- anywhere from
10 to 20 years.
* FUND MAINTAINS FLEXIBILITY, STAYS FULLY INVESTED
As the period drew to a close, a number of crosscurrents continued to drive
the financial markets. The U.S. economy remained quite exuberant, with strong
employment and solid income growth fueling robust consumer spending. Indeed,
the Federal Reserve Board remains on alert for indications that economic
strength is producing any uptick in inflation or incipient inflationary
pressures. Thus far, however, Fed action has been restrained by concerns that
the Asian recessions may yet have additional negative consequences for the
U.S. economy, since manufacturers in various industries have already reported
declines in exports to Asia and tough competition from cheaper Asian imports.
Amid these competing forces, the future direction of interest rates remains
unclear. Will the strong economy eventually convince the Fed to raise
short-term rates or will the Asian financial crisis slow growth enough to
prevent such a move? Given this uncertainty, we have maintained a neutral
duration to keep the fund flexible. Duration is a mathematical measure used to
indicate how much the prices of portfolio holdings are likely to move up or
down with each percentage-point shift in interest rates. When we believe
interest rates are more likely to move in one direction or another, we
carefully adjust the fund's duration profile in order to better manage its
interest-rate risk. In the present environment, however, a fairly neutral
duration appears to be the most prudent way to keep the fund ready for
potential interest-rate changes while minimizing share price volatility and
continuing to pursue a steady stream of current income.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 26.2%
Water and sewerage 11.4%
Education 9.5%
Utilities 7.2%
Transportation 5.5%
Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.
Although the uncertain interest-rate climate has not prompted us to take a
more emphatic stand on portfolio duration, the attractive prices of municipal
securities are a compelling argument in favor of staying fully invested in the
market. Because this move could extend the fund's duration farther out than we
deem prudent, we have balanced our municipal investments by selling Treasury
futures contracts, which has the effect of shortening duration. The current
supply and demand situation has also made it wise to keep the fund fully
invested. While the supply of municipal securities has been quite high for
most of the year, there were signs that new issuance was tapering off toward
mid May. At the same time, demand was expected to become even more pronounced
with the seasonal swell in coupon payments on June 1 and July 1. By staying
fully invested, the fund has the potential to realize solid total performance
gains should municipals outperform when demand begins to overwhelm supply.
* PURSUING VALUE AND INCOME WHILE IMPROVING CALL RISK
In a municipal market boasting attractive prices and a flat yield curve, a
focus on value rather than duration management has dominated the fund's
investment strategy. Essentially, this means emphasizing issues that offer the
best relative value along with structural components that will enhance the
fund's income stream while minimizing its share price volatility.
Another way of providing shareholders with the best value is to improve the
call risk within the fund. Noncallable bonds or bonds with distant call dates
enable us to provide the highest and most durable level of income. Callable
bonds have the option of being called away by the issuer at a certain future
date, usually if interest rates are lower than when the bonds are first
issued. By avoiding callable bonds, the portfolio has a better chance of
maintaining a reliable level of income.
[GRAPHIC OMITTED: pie chart of CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Ba -- 3.7%
Baa -- 24.5%
A -- 12.1%
Aa -- 2.4%
Aaa -- 54.1%
B and under -- 3.2%
Footnote reads:
* Based on percentage of market value as of 5/31/98. 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.
At times, our pursuit of noncallable securities led to investment
opportunities outside the state of Michigan. For example, we found several
attractive investment opportunities among securities issued by municipalities
in Puerto Rico. Puerto Rico is a market with a high supply of municipal debt,
as aggressive expansion in the transit and electric power industries
necessitates a large amount of financing. Consequently, many new issues have
been forced to offer higher-than-average coupon payments as well as attractive
prices. Since many of the territory's major programs have already been funded
through recent municipal bond issuance, we anticipate lighter supply in the
second half of the year. At the same time, demand for these securities remains
strong, providing the potential for gains should prices appreciate in the
months ahead.
* HEALTH CARE OPPORTUNITIES, PREREFUNDINGS BOOST RETURNS
For the most part, your fund's sector focus has not changed during the past 12
months. State and local economies continue to provide a positive credit
backdrop for municipal market performance, and we have endeavored to
capitalize on this favorable investment environment through our sector
selections. While your fund is broadly diversified by industry with holdings
in more than 18 sectors, general obligation bonds (GOs) of political
subdivisions and hospitals dominate the portfolio.
Hospitals represented our most active sector during the period as
credit-driven situations produced solid values and attractive investment
opportunities. Several of our recent portfolio additions were smaller
hospitals with strong market share including Garden City Hospital, Chelsea
Community Hospital, and Tawas Hospital. Additionally, the fund's large
position in Detroit's Sinai Hospital bonds continues to produce solid income,
while its credit standing has been enhanced through the hospital's merger with
the larger and financially stronger Detroit Medical Center. We remain
optimistic that the prices of our holdings will rise further should the
Medical Center tender or refund these bonds, which is not uncommon in such
situations. While these holdings, as well as others discussed in this report,
were viewed favorably at the end of the period, all holdings are subject to
review and adjustment in accordance with the fund's investment strategy and
may well vary in the future.
Prerefundings also made important contributions to performance over the
period, as long-time holdings of Battle Creek, Michigan, general obligation
bonds and bonds issued by Hurley Medical Center registered impressive price
appreciation for the fund. In a prerefunding, the issuer floats a second bond
to raise funds to pay off an older issue at the first call date. Proceeds from
the new bond are invested in top-quality instruments such as U.S. Treasury
securities. Because of the safety of principal represented by these
securities, the older prerefunded bond is generally perceived as having a
substantial improvement in its creditworthiness, and its rating is likely to
be upgraded. Upgrades, in turn, often presage higher prices. That is what
occurred in both cases, with the Battle Creek and Hurley Medical Center bonds
gaining substantially in price following the prerefundings.
* OUTLOOK IS CAUTIOUSLY OPTIMISTIC
While the Asian crisis has been widely publicized as negative for economic
growth around the world, it has produced some positive effects in the United
States. Fears of the financial turmoil in Asia and other emerging markets have
helped keep interest rates low. In turn, low interest rates have helped
improve corporate balance sheets, contributed to low unemployment, and helped
bring out additional municipal securities supply.
Our outlook for the municipal market remains fairly constructive. With
municipal bond supply relatively high and demand on the upswing, securities
valuations are unlikely to remain inexpensive relative to Treasuries.
Municipal investors stand to benefit from any price appreciation that may
occur as this supply and demand imbalance straightens out. Eventually,
however, today's economic good times may give way to slightly higher
inflation, and so we remain somewhat cautious. In our opinion, this is not a
good time to expose the portfolio to bonds with longer maturities and higher
interest-rate risk. Accordingly, we believe the fund's neutral duration,
bulleted portfolio structure, and emphasis on low call risk and in-depth
credit research will continue to produce the best returns in the months ahead.
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 5/31/98, 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 5/31/98
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 8.28% 3.18% 7.58% 2.58% 7.95% 4.40%
- ------------------------------------------------------------------------------
5 years 33.46 27.18 29.05 27.05 31.42 27.20
Annual average 5.94 4.93 5.23 4.90 5.62 4.93
- ------------------------------------------------------------------------------
Life of fund 84.47 75.77 73.29 73.29 78.56 72.81
Annual average 7.38 6.78 6.60 6.60 6.97 6.57
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98
Lehman Brothers Consumer
Municipal Bond Index Price Index
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1 year 9.39% 1.69%
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5 years 38.53 12.90
Annual average 6.74 2.46
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Life of fund 96.00 29.62
Annual average 8.16 3.07
- ------------------------------------------------------------------------------
Past performance is no assurance of 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 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.
[GRAPHIC OMITTED: worm 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
Plot Points
Fund's class A
shares Lehman Municipal Consumer Price
Date at POP Bond Index Index
10/23/89 9,529 10,258 10,400
5/31/90 9,831 11,006 10,653
5/31/91 10,630 12,342 10,979
5/31/92 11,720 13,429 11,297
5/31/93 13,171 15,078 11,608
5/31/94 13,438 14,302 11,918
5/31/95 14,438 16,799 12,221
5/31/96 14,981 17,545 12,627
5/31/97 16,279 19,159 12,842
5/31/98 $17,577 $19,600 $12,962
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 $17,329 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$17,856 ($17,281 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/98
Class A Class B Class M
- --------------------------------------------------------------------------
Distributions (number) 12 12 12
- --------------------------------------------------------------------------
Income $0.470122 $0.408726 $0.441919
- --------------------------------------------------------------------------
Capital gains1
- --------------------------------------------------------------------------
Long-term 0.014000 0.014000 0.014000
- --------------------------------------------------------------------------
Short-term 0.025000 0.025000 0.025000
- --------------------------------------------------------------------------
Total $0.509122 $0.447726 $0.480919
- --------------------------------------------------------------------------
Share value NAV POP NAV NAV POP
- --------------------------------------------------------------------------
5/31/97 $9.12 $9.57 $9.11 $9.12 $9.43
- --------------------------------------------------------------------------
5/31/98 9.35 9.82 9.34 9.35 9.66
- --------------------------------------------------------------------------
Current return (end of period)
- --------------------------------------------------------------------------
Current dividend rate2 4.89% 4.66% 4.24% 4.59% 4.44%
- --------------------------------------------------------------------------
Taxable equivalent 8.47 8.07 7.34 7.95 7.69
- --------------------------------------------------------------------------
Current 30-day SEC yield4 4.68 4.45 4.03 4.37 4.23
- --------------------------------------------------------------------------
Taxable equivalent3 8.11 7.71 6.98 7.57 7.33
- --------------------------------------------------------------------------
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 6/30/98
(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 7.40% 2.28% 6.59% 1.59% 6.97% 3.47%
- ------------------------------------------------------------------------------
5 years 31.53 25.28 27.11 25.14 29.36 25.12
Annual average 5.63 4.61 4.91 4.59 5.28 4.58
- ------------------------------------------------------------------------------
Life of fund 84.98 76.25 73.49 73.49 78.82 73.05
Annual average 7.34 6.75 6.55 6.55 6.93 6.52
- ------------------------------------------------------------------------------
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 4.75% maximum 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
To the Trustees and Shareholders of
Putnam Michigan Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned (except for bond ratings) and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of Putnam Michigan Tax Exempt Income Fund (the "fund") at May 31,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at May 31, 1998
by correspondence with the custodian and the application of alternative
auditing procedures where investments purchased were not yet received by the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 13, 1998
Portfolio of investments owned
May 31, 1998
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 (98.5%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
Michigan (84.7%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 4,000,000 Battle Creek, Downtown Dev.TAN, MBIA,
5s, 5/1/17 AAA $ 3,945,000
5,500,000 Battle Creek, Downtown Dev. Auth. Tax
Increment Rev. Bonds, 7.65s, 5/1/22 BBB+ 6,551,875
2,000,000 Battle Creek, Tax Incremental Fin Auth. Rev.
Bonds, 7.1s, 5/1/10 A- 2,327,500
1,400,000 Clarkson, Cmnty. School, G.O. Bonds,
MBIA, 6 1/4s, 5/1/07 Aaa 1,585,500
Detroit, G.O. Bonds
2,475,000 Ser. B, 7s, 4/1/04 BBB+ 2,772,000
4,875,000 Ser. A, 6.8s, 4/1/15 AAA 5,642,810
Detroit, City School Dist. G.O. Bonds,
Ser. A, AMBAC
1,500,000 6 1/2s, 5/1/11 Aaa 1,758,750
2,455,000 6 1/2s, 5/1/09 Aaa 2,866,213
1,145,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment Rev.
Bonds, Ser. A, 8.72s, 5/1/21 BBB+/P 1,421,231
Detroit, Wtr. Supply Syst. IFB, FGIC
7,000,000 9.729s, 7/1/22 (Prerefunded) Aaa 8,382,500
1,500,000 9.729s, 7/1/22 Aaa 1,755,000
Detroit, Wtr. Supply Syst. Rev. Bonds, MBIA
1,750,000 7 7/8s, 7/1/19 (SEG) Aaa 1,790,583
3,000,000 Second Lien, Ser. A, 5 3/4s, 7/1/11 Aaa 3,296,250
4,700,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB- 5,463,750
1,400,000 Ecorse, Pub. School Dist. G.O. Bonds,
FGIC, 6 1/2s, 5/1/08 Aaa 1,624,000
Flint, Hosp. Auth. Rev. Bonds
(Hurley Med. Ctr.), Ser. A
1,250,000 5 3/8s, 7/1/28 Baa1 1,226,563
1,000,000 5 3/8s, 7/1/20 Baa1 983,750
Flint, Hosp. Bldg. Auth. Rev. Bonds
(Hurley Med. Ctr)
2,000,000 7.8s, 7/1/14 Baa1 2,187,500
630,000 Ser. A, 6s, 7/1/06 Baa1 671,738
4,235,000 Garden Cty, Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.), Ser. A, 5 3/4s, 9/1/17 BBB-/P 4,182,063
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam. Rev.
Bonds, Ser. A, FNMA Coll., 7 5/8s, 9/1/23 Aaa 1,101,250
4,000,000 Greater Detroit, Res. Recvy. Auth. Rev. Bonds,
Ser. A, AMBAC, 6 1/4s, 12/13/06 Aaa 4,490,000
3,500,000 Kalamazoo, Hosp. Fin. Auth. Fac. IFB, FGIC,
7.608s, 6/1/11 Aaa 3,661,875
3,395,000 Lincoln Pk., School Dist. G.O. Bonds, FGIC, 5s,
5/1/20 Aaa 3,344,075
3,000,000 MI Hosp. Fin. Auth. Rev. Bonds
(Chelsea Cmnty. Hosp.), 5 3/8s, 5/15/19 BBB 2,973,750
3,840,000 MI Muni. Board Auth. State Revolving Rev. Bonds,
6 1/2s, 10/1/17 Aa1 4,372,800
3,000,000 MI St. Strategic Fund Ltd. Oblig. Rev. Bonds
(Worthington Armstrong Venture), 5 3/4s,
10/1/22 A 3,191,250
7,000,000 MI State Bldg. Auth. Rev. Bonds, Ser. I, AMBAC,
6 1/2s, 10/1/07 Aaa 8,076,250
MI State Hosp. Fin. Auth. Rev. Bonds
920,000 (Garden City Hosp.), 8 1/2s, 9/1/17 Ba3 1,059,150
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 BBB+ 1,395,914
4,500,000 (Sinai Hosp.), 6.7s, 1/1/26 A2 5,017,500
2,000,000 (Sinai Hosp.), 6 5/8s, 1/1/16 A2 2,220,000
2,000,000 (Presbyterian Villages), 6 1/2s, 1/1/25 BBB/P 2,125,000
2,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB/P 2,127,500
460,000 MI State Hosp. Fin. Auth. Rev. Bonds,
(Garden City Hosp.), 8 1/2s, 9/1/17 Ba3 529,575
MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds
1,600,000 Ser. A, FSA, 7.55s, 4/1/23 Aaa 1,748,000
2,900,000 Ser. B, AMBAC, 6 3/4s, 10/1/12 Aaa 2,827,500
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 2,815,625
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,830,000 (Arbor Model & Tooling), 10 1/4s, 9/15/19 B-/P 2,975,264
3,600,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 AAA 3,996,000
3,640,000 (Env. Research), 8 1/8s, 10/1/14 A-/P 3,903,900
3,150,000 (Ford Motor Co.), Ser. A, 7.1s, 2/1/06 A1 3,701,250
1,500,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 1,923,750
5,000,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa3 5,131,250
1,440,000 Tawas City, Hosp. Fin. Auth. Rev. Bonds
(St. Joseph Hlth. Syst.), Ser. A, 5 3/4s, 2/15/23 BB+/P 1,443,600
Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care)
1,500,000 8 3/8s, 7/1/23 B-/P 1,470,000
1,485,000 8s, 7/1/08 B-/P 1,455,300
2,000,000 Wayland, Uni. School Dist. Rev. Bonds,
FGIC, 8s, 5/1/10 Aaa 2,625,000
1,000,000 Wayne Charter Cnty., Special Arpt. Fac.
Rev. Bonds (Northwest Airlines Inc.),
6 3/4s, 12/1/15 BB-/P 1,097,500
2,405,000 Wayne Cnty., Bldg. Auth. G.O. Bonds, Ser. A,
MBIA, 6s, 6/1/08 Aaa 2,681,575
2,000,000 Western MI Univ. Rev. Bonds, Ser. A, FGIC,
5s, 7/15/21 Aaa 1,955,000
6,000,000 Western Township, Util. Auth. Swr. Disp. Syst.
Rev. Bonds, 8.2s, 1/1/18 BBB+ 6,263,100
3,200,000 Wyandotte, Elec. Rev. Bonds, MBIA, 6 1/4s,
10/1/17 Aaa 3,468,000
1,800,000 Ypsilanti, School Dist. G.O. Bonds, FGIC,
6 1/2s, 5/1/07 Aaa 2,072,250
--------------
159,674,329
Puerto Rico (13.8%)
- -------------------------------------------------------------------------------------------------------------
2,000,000 Cmnwlth. of PR, G.O. Bonds (Pub. Impt.),
5 1/2s, 7/1/13 A 2,122,500
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev.
Bonds, MBIA
2,835,000 Ser. Z, 6 1/4s, 7/1/11 Aaa 3,277,969
2,000,000 Ser. Y, 6 1/4s, 7/1/13 AAA 2,322,500
1,000,000 Cnmwlth. of PR, G.O. Bonds, 5 1/2s, 7/1/10 Aaa 1,076,250
PR Elec. Pwr. Auth. Rev. Bonds, MBIA
3,000,000 Ser. X, 6s, 7/1/15 Aaa 3,285,000
5,000,000 5s, 7/1/28 Aaa 4,931,250
6,500,000 PR Pub. Bldg. Auth. Rev. Gtd. (Govt. Fac.),
Ser. B, AMBAC, 5s, 7/1/27 Aaa 6,426,875
2,100,000 PR, Pub. Bldg. Auth. Fac. Rev. Bonds,
Ser. A, AMBAC, 6 1/4s, 7/1/14 Aaa 2,446,500
--------------
$ 25,888,844
- -------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $174,645,122) $ 185,563,173
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $188,444,019.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at May 31, 1998 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, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings
are not covered by the Report of independent accountants.
(b) The aggregate identified cost on a tax basis is $174,645,122, resulting in gross unrealized appreciation
and depreciation of $11,552,947 and $634,896, respectively, or net unrealized appreciation of $10,918,051.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at May 31, 1998.
The rates shown on IFBs, which are securities paying interest rates that vary inversely to changes in the
market interest rates, are current interest rates at May 31, 1998.
The fund had the following industry group concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
Health care 26.2%
Water and sewerage 11.4
The fund had the following insurance concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
AMBAC 16.4%
MBIA 16.2
FGIC 13.5
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1998
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
US Treasury Futures (short) $16,675,468 16,484,656 Jun-98 $(190,812)
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $174,645,122) (Note 1) $185,563,173
- ---------------------------------------------------------------------------------------------------
Cash 221,413
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 2,910,550
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 377,285
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 3,350,000
- ---------------------------------------------------------------------------------------------------
Total assets 192,422,421
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 34,250
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 457,457
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 2,964,758
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 93,066
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 281,614
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 38,398
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,551
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,024
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 78,987
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 21,297
- ---------------------------------------------------------------------------------------------------
Total liabilities 3,978,402
- ---------------------------------------------------------------------------------------------------
Net assets $188,444,019
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $178,316,518
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 78,919
- ---------------------------------------------------------------------------------------------------
Distributions in excess of gains on investments (Note 1) (678,657)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 10,727,239
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $188,444,019
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($145,546,935 divided by 15,559,272 shares) $9.35
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.35)* $9.82
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($41,154,856 divided by 4,405,592 shares) + $9.34
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,742,228 divided by 186,301 shares) $9.35
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.35)** $9.66
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales the
offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the
offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent deferred
sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1998
<S> <C>
Tax exempt interest income: $10,964,896
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,101,894
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 245,637
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,433
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,223
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 288,865
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 322,826
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 6,250
- --------------------------------------------------------------------------------------------------
Reports to shareholders 14,224
- --------------------------------------------------------------------------------------------------
Registration fees 3,271
- --------------------------------------------------------------------------------------------------
Auditing 28,168
- --------------------------------------------------------------------------------------------------
Legal 18,746
- --------------------------------------------------------------------------------------------------
Postage 13,811
- --------------------------------------------------------------------------------------------------
Other 8,180
- --------------------------------------------------------------------------------------------------
Total expenses 2,066,528
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (71,236)
- --------------------------------------------------------------------------------------------------
Net expenses 1,995,292
- --------------------------------------------------------------------------------------------------
Net investment income 8,969,604
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,422,396
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,069,466)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 4,915,632
- --------------------------------------------------------------------------------------------------
Net gain on investments 5,268,562
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,238,166
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31,
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 8,969,604 $ 9,052,110
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 352,930 1,100,833
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,915,632 4,120,815
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,238,166 14,273,758
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (7,267,831) (7,517,724)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,659,310) (1,498,538)
- ----------------------------------------------------------------------------------------------------------------------
Class M (58,550) (33,100)
- ----------------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (329,485) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (86,482) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (2,621) --
- ----------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments
Class A (272,362) --
- ----------------------------------------------------------------------------------------------------------------------
Class B (71,489) --
- ----------------------------------------------------------------------------------------------------------------------
Class M (2,167) --
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 6,157,905 4,254,756
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 10,645,774 9,479,152
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 177,798,245 168,319,093
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $78,919 and $91,952, respectively) $188,444,019 $177,798,245
- ----------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.12 $8.85 $9.01 $8.90 $9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .47 .48 .49 .52 .52
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .27 .27 (.16) .11 (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .74 .75 .33 .63 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.47) (.48) (.49) (.52) (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments (.01) -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.51) (.48) (.49) (.52) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.35 $9.12 $8.85 $9.01 $8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.28 8.67 3.76 7.45 2.03
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $145,547 $142,038 $138,390 $136,010 $128,921
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .99 .99 1.00 .95 .99
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.02 5.33 5.42 6.03 5.58
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 32.44 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 B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 15, 1993+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 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 .41 .43 .43 .47 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .27 .26 (.16) .10 (.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .68 .69 .27 .57 (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.41) (.42) (.43) (.47) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments (.01) -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.45) (.42) (.43) (.47) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.34 $9.11 $8.84 $9.00 $8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.58 7.99 3.05 6.72 (.68)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $41,155 $35,041 $29,371 $21,071 $10,251
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.64 1.64 1.65 1.59 1.42*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.36 4.68 4.74 5.31 4.25*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 32.44 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
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share April 17, 1995+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 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 .44 .46 .47 .05(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .27 .27 (.16) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .71 .73 .31 .26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments (.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.35 $9.12 $8.85 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.95 8.36 3.53 2.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,742 $719 $558 $119
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.29 1.29 1.28 .20*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.70 5.01 5.06 .84*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 32.44 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
May 31, 1998
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 within approximately six to 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 year ended May 31, 1998, 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. These differences include treatment of unrealized gains
and losses on certain futures contracts and current year straddles.
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, 1998, the fund
reclassified $3,054 to increase undistributed net investment income and $3,054
to decrease paid-in-capital. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
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 original issue discount
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,
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 year ended May 31, 1998, fund expenses were reduced by $71,236 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.
Each Trustee of the fund receives an annual Trustee fee, of which $340 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 year ended May 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $26,799 and $802 from the sale of
class A and class M shares, respectively and $74,493 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, 1998, 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, 1998, purchases and sales of investment
securities other than short-term investments aggregated $69,775,578 and
$58,309,329, 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, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,436,408 $ 13,364,868
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 466,207 4,341,440
- ------------------------------------------------------------
1,902,615 17,706,308
Shares
repurchased (1,909,657) (17,772,405)
- ------------------------------------------------------------
Net decrease (7,042) $ (66,097)
- ------------------------------------------------------------
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, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 921,679 $ 8,581,338
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 110,708 1,029,532
- ------------------------------------------------------------
1,032,387 9,610,870
Shares
repurchased (472,164) (4,386,108)
- ------------------------------------------------------------
Net increase 560,223 $ 5,224,762
- ------------------------------------------------------------
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, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 121,707 $ 1,132,419
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,374 40,812
- ------------------------------------------------------------
126,081 1,173,231
Shares
repurchased (18,602) (173,991)
- ------------------------------------------------------------
Net increase 107,479 $ 999,240
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $339,224 as 28% capital gain for its taxable
year ended May 31, 1998.
The Form 1099 you receive in January 1999 will show the tax status of
all distributions paid to your account in calendar 1998.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities 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 [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
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
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
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
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[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
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
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
Ian C. Ferguson
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
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.
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PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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AN048-43769 846/237/126 7/98
