Putnam
Michigan
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Because of their limited attractiveness to non-U.S. investors, municipal
bonds did not experience the turbulence endured by taxable bonds,
especially U.S. Treasury issues, in the wake of global investors' flight
to quality last fall. For U.S. investors, however, municipals have
provided unusually handsome current income both in real terms, thanks to
low inflation, and relative to after-tax returns on taxable securities,
especially for higher-bracket taxpayers.
Putnam Michigan Tax Exempt Income Fund's management has been focusing on
generating maximum current income without undue risk to principal,
primarily through careful selection of portfolio holdings and strategies
aimed at risk reduction. Management is also cautiously seeking out bonds
with longer maturities and is currently focusing on noncallable bonds,
both moves designed to lock in attractive current returns.
I am pleased to announce the appointment of David E. Hamlin as the new
manager of your fund. Before joining Putnam in 1998 he was with Vanguard
Group, Provident Institutional Management Corp., and Provident Bank. He
has 17 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 21, 1999
Report from the Fund Manager
David E. Hamlin
The municipal bond universe encountered many conflicting forces during the
year ended May 31, 1999. Falling and rising interest rates, tightening and
widening credit spreads, and dwindling supply in the face of steady demand
were just a few of the trends characterizing the period. With so many
complex market factors at play, maintaining a relatively stable share
price for Putnam Michigan Tax Exempt Income Fund over this period was a
major challenge -- but one that we believe has been successfully met.
Total return for 12 months ended 5/31/99
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------
2.77% -2.15% 2.00% -2.89% 2.36% -0.93%
- -----------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* CAUTIOUS STANCE MUTES IMPACT OF RISING RATES
Bond market headlines currently belong to U.S. Treasuries, with the
long-term bond moving up to just about 6% as this report was being
written. This is the highest yield level for these bonds since spring of
1998. Long-term municipal bond yields have risen as well, but not as
dramatically, illustrating the resistance of the municipal market to a
rise in interest rates. On June 2, 1999, the 30-year municipal bond
yielded 5.375%, which was 89.5% of the Treasury yield, clearly still an
attractive ratio.
As interest rates have moved up, Putnam's municipal bond funds have
performed well primarily because of our focus on the higheryield sectors
(which outperformed the higher-grade sectors) and our overall cautious
stance toward interest rates during the year. We cannot predict when
interest rates will reach their peak, of course, but we do believe that
this is a good time to begin incrementally lengthening maturities in the
funds and locking in higher rates.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 21.3%
Water and
sewerage 9.4%
Education 9.2%
Utilities 6.9%
Transportation 6.3%
Footnote reads:
*Based on net assets as of 5/31/99. Holdings will vary over time.
Concerns are gradually beginning to surface about the effects of Y2K and
Medicare reform proposals on certain sectors of the municipal bond market.
Such concerns are one reason why we have always considered security
selection and credit analysis crucial as a fundamental investment strategy
of each of the funds. Opportunity comes from choosing bonds correctly, not
from overall sector performance. Security and credit research becomes even
more important when we invest in bonds that carry ratings below investment
grade. These are the bonds that can add tremendously to a fund's income
level, but they also mean taking on greater credit risk and require the
most meticulous research efforts.
One strategy we have used to maintain the relative stability of your
fund's net asset value involves an emphasis on discount and premium bonds.
Discount bonds trade below par value, which makes the purchase price of
these securities less than the value of the bond's face amount. Conversely
premium bonds trade above par, making the purchase price of these
securities more than the value of the bond's face amount. We have tried to
steer clear of bonds that are trading close to par. Once a bond's price
hovers around par, the bond starts to trade to its 10-year call date
rather than to its longer maturity date. Since investors assume the issuer
will call the bond and retire the debt, the bond's price can fluctuate
dramatically. This expectation is especially the case during periods of
relatively low interest rates, as we have seen recently.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
AA/Aa -- 2.2%
A -- 8.3%
BBB/Baa -- 20.3%
BB/Ba -- 8.3%
B -- 2.9%
VMIG1/A-1 -- 0.7%
AAA/Aaa -- 57.3%
Footnote reads:
* Based on a percentage of market value as of 5/31/99. A bond rated Baa or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
* AMID TIGHT SUPPLY, GUAM AND PUERTO RICO BONDS PROVIDE DIVERSIFICATION
The level of new bond issuance dropped significantly in Michigan this
year, mirroring a similar trend on the national level. From January
through the end of May, the supply of Michigan municipal bonds declined
more than 36%. Given the heady pace of municipal bond offerings in 1998,
it's likely that many issuers have already addressed funding needs and
that the supply will consequently remain low for some time. The recent
uptick in interest rates may also be responsible for a reduction in new
offerings thus far in 1999.
"Examine your needs for municipal bonds now. If you can use more, market
conditions are very favorable now. Technical factors built into the market
may make today's yields and spreads look very attractive in the future."
- -- "Munis Are Back," Northwestern
Financial Review, March 20, 1999
Given the scarcity of new bonds coming to market, many investors are
holding on to their bonds, since there are few opportunities to replace
them. On the demand side, cash flow to municipal bonds has increased, a
by-product of a volatile stock market and investors' need to rebalance
their portfolios. The ensuing supply/demand relationship is positive for
municipal bond prices and strengthens their resistance to rising interest
rates.
A closer look at municipal credit ratings
Rating agencies such as Moody's Investors Service and Standard & Poor's Corp.
assign ratings to municipal issuers based on an in-depth analysis of the
issuer's financial condition and management, economic and debt
characteristics, and the specific revenue sources securing the bond. The
highest ratings are Aaa (Moody's) and AAA (Standard & Poor's). Bonds rated in
the Baa/BBB category or higher (A and Aa/AA) are considered to be investment
grade. Securities in the Ba/BB group and below are considered to be below
investment grade or high yield. If you look at "The fund's portfolio" in the
back of this report, you will see ratings next to each issuer's name. The pie
chart on page 3 summarizes this listing to give you a sense of the portfolio's
overall quality.
Sometimes smaller bonds are not rated because the cost of obtaining a rating
is not justifiable. Unrated bonds can still offer attractive investment
opportunities and may end up in your fund's portfolio. In such case, Putnam's
analysts perform their own rating of the bonds, and they are identified in the
portfolio listing by a /P rating.
During the period, we invested in Guam and Puerto Rico general obligation
bonds, adding valuable diversification and attractive total return
potential to the portfolio. Income from securities issued in U.S.
territories and commonwealths is tax free to U.S. investors. These
holdings have appreciated in response to growing demand.
Another strategy geared toward protecting the fund's income stream
involves the use of noncallable bonds. By avoiding callable bonds and
buying noncallable issues, which cannot be called for redemption at the
option of the issuer before the specified maturity date, we can provide
more durable returns. One of the more noteworthy purchases during the
period involved the acquisition of Waste Management bonds. In addition to
being noncallable, they provide certain attributes that we regard as
positive. We have high hopes for the current management team and believe
these bonds' Standard and Poor's BBB+ rating has the potential for strong
improvement. While these securities, along with others discussed in this
report, were viewed favorably during the period, all holdings are subject
to review in accordance with the fund's investment strategy and may vary
in the future.
* DESPITE RATE UPTICK, INFLATION REMAINS LOW
With indications that inflation may be starting to rise, the consumer
price index is moving toward an annualized core inflation rate of
approximately 2%. Since inflation in 1998 was practically nonexistent, a
move to 2% may seem tremendous but is actually still well below the 4%
that has been generally considered average. Despite some signs of
returning inflation, we still live in a predominately deflationary world,
one in which many prices are falling. Just look at online stock trading
prices and the discounts available from online bookstores for evidence of
this phenomenon.
In the coming months, we expect that economic and market stability will be
more the rule than the exception. If rates continue to climb gradually as
we expect, the fund's multipronged investment strategy should continue to
yield competitive results in the coming fiscal year.
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 5/31/99, 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 5/31/99
Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
- ----------------------------------------------------------------------------
1 year 2.77% -2.15% 2.00% -2.89% 2.36% -0.93%
- ----------------------------------------------------------------------------
5 years 34.78 28.10 30.28 28.28 32.55 28.23
Annual average 6.15 5.08 5.43 5.11 5.80 5.10
- ----------------------------------------------------------------------------
Life of fund 90.07 81.10 76.78 76.78 83.20 77.29
Annual average 6.92 6.38 6.11 6.11 6.51 6.15
- ----------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/99
Lehman Bros. Municipal Consumer
Bond Index price index
- ------------------------------------------------------------------------
1 year 4.67% 2.09%
- ------------------------------------------------------------------------
5 years 41.51 12.68
Annual average 7.19 2.42
- ------------------------------------------------------------------------
Life of fund 105.16 32.32
Annual average 7.79 2.97
- ------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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-year, 5-year, 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. 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.
[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
Fund's class A Lehman Bros. Consumer price
Date shares at POP Municipal Bond Index index
10/23/89 9,525 10,000 10,000
5/31/90 9,827 10,453 10,287
5/31/91 10,626 11,506 10,796
5/31/92 11,715 12,636 11,123
5/31/93 13,165 14,148 11,481
5/31/94 13,432 14,497 11,744
5/31/95 14,432 15,822 12,118
5/31/96 14,974 16,545 12,468
5/31/97 16,272 17,918 12,747
5/31/98 17,616 19,600 12,962
5/31/99 $18,110 $20,516 $13,232
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $17,678 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $18,320 ($17,729 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/99
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.440406 $0.379473 $0.412396
- ------------------------------------------------------------------------------
Capital gains1
Long-term 0.003200 0.003200 0.003200
- ------------------------------------------------------------------------------
Short-term 0.022800 0.022800 0.022800
- ------------------------------------------------------------------------------
Total $0.466406 $0.405473 $0.438396
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/98 $9.35 $9.82 $9.82 $9.35 $9.66
- ------------------------------------------------------------------------------
5/31/99 9.14 9.60 9.12 9.13 9.44
- ------------------------------------------------------------------------------
Current dividend rate2 4.89% 4.66% 4.23% 4.59% 4.44%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.47 8.06 7.33 7.95 7.69
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 3.93 3.74 3.28 3.63 3.51
- ------------------------------------------------------------------------------
Taxable equivalent 6.81 6.48 5.68 6.29 6.08
- ------------------------------------------------------------------------------
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 42.26% 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.
TOTAL RETURN FOR PERIODS ENDED 6/30/99 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------------
1 year 0.83% -4.00% 0.20% -4.61% 0.54% -2.70%
- -----------------------------------------------------------------------------
5 years 33.18 26.85 28.90 26.90 30.96 26.65
Annual average 5.90 4.87 5.21 4.88 5.54 4.84
- -----------------------------------------------------------------------------
Life of fund 87.01 78.19 74.23 74.23 80.22 74.41
Annual average 6.68 6.15 5.90 5.90 6.27 5.91
- -----------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. 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 summary for method of performance calculation.
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.
Welcome to www.putnaminv.com
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VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
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New features will be added to the site regularly. So be sure to bookmark us at
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A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as of
the last day of the reporting period. Holdings are organized by asset type and
industry sector, country, or state to show areas of concentration and
diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment income
or realized capital gains) over the current reporting period and the most
recent fiscal year-end. The distributions listed here may not match the
amounts listed in the Statement of Operations because the distributions are
determined on a tax basis and may be paid in a different period from the one
in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
Report of independent accountants
For the fiscal year ended May 31, 1999
To the Trustees and Shareholders of
Putnam Michigan Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, 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,
1999, 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,
1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers, LLP
Boston, Massachusetts
July 13, 1999
<TABLE>
<CAPTION>
The fund's portfolio
May 31, 1999
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
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (102.1%) (a)
PRINCIPAL AMOUNT RATING(RAT) VALUE
<S> <C> <C> <C>
Guam (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
$ 1,500,000 Guam, Pwr. Auth. Rev. Bonds, Ser. A,
5 1/8s, 10/1/29 Baa3 $ 1,443,750
Michigan (91.4%)
- --------------------------------------------------------------------------------------------------------------------------
4,000,000 Battle Creek, Downtown Dev.TAN, MBIA,
5s, 5/1/17 AAA 3,895,000
5,500,000 Battle Creek, Downtown Dev. Auth. Tax
Increment Rev. Bonds, 7.65s, 5/1/22 BBB+ 6,435,000
2,000,000 Battle Creek, Tax Incremental Fin Auth.
Rev. Bonds, 7.1s, 5/1/10 A- 2,292,500
1,500,000 Big Rapids, Pub. Schools Dist. G.O. Bonds,
FSA, 4 3/4s, 5/1/25 Aaa 1,383,750
Detroit, G.O. Bonds
2,475,000 Ser. B, 7s, 4/1/04 Baa1 2,741,063
4,875,000 Ser. A, 6.8s, 4/1/15, Prerefunded Aaa 5,551,406
Detroit, City School Dist. G.O. Bonds
1,500,000 Ser. A, AMBAC, 6 1/2s, 5/1/11 Aaa 1,732,500
2,455,000 Ser. A, AMBAC, 6 1/2s, 5/1/09 Aaa 2,823,250
5,000,000 Ser. B, FGIC, 4 3/4s, 5/1/28 Aaa 4,581,250
1,130,000 Detroit, Dev. Fin. Auth. Tax Increment Rev.
Bonds, Ser. A, 9 1/2s, 5/1/21 BBB+/P 1,347,525
5,390,000 Detroit, Downtown Dev. Auth. Tax Increment
Rev. Bonds (Dev. Area No. 1), Ser. A,
MBIA, 4 3/4s, 7/1/25 Aaa 4,938,588
1,500,000 Detroit, Loc. Dev. Fin. Auth. Tax Increment
Rev. Bonds, Ser. A, 5 1/2s, 5/1/21 BB- 1,456,875
Detroit, Wtr. Supply Syst. IFB, FGIC
1,500,000 9.17s, 7/1/22 Aaa 1,726,875
7,000,000 9.17s, 7/1/22, Prerefunded Aaa 8,268,750
3,000,000 Detroit, Wtr. Supply Syst. Rev. Bonds, Ser. A,
MBIA Second Lien, 5 3/4s, 7/1/11 Aaa 3,277,500
3,065,000 Detroit/Wayne Cnty., Stad. Auth. Rev. Bonds,
FGIC, 5 1/4s, 2/1/27 Aaa 3,015,194
4,700,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 Ba1 5,352,125
1,400,000 Ecorse, Pub. School Dist. G.O. Bonds,
FGIC, 6 1/2s, 5/1/08 Aaa 1,603,000
Flint, Hosp. Auth. Rev. Bonds
(Hurley Med. Ctr.), Ser. A
1,250,000 5 3/8s, 7/1/28 Baa1 1,131,250
1,000,000 5 3/8s, 7/1/20 Baa1 923,750
Flint, Hosp. Bldg. Auth. Rev. Bonds
2,000,000 (Hurley Med. Ctr), 7.8s, 7/1/14 Baa1 2,133,500
630,000 (Hurley Med. Ctr.), Ser. A, 6s, 7/1/06 Baa1 666,225
4,235,000 Garden Cty, Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.), Ser. A, 5 3/4s, 9/1/17 (SEG) BBB-/P 4,160,888
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam. Rev.
Bonds, Ser. A, FNMA Coll., 7 5/8s, 9/1/23 AAA 1,078,750
5,500,000 Grand Rapids, Sanitation Swr. Syst. Rev. Bonds,
Ser. A, FGIC, 4 3/4s, 1/1/28 Aaa 5,060,000
4,000,000 Greater Detroit, Res. Recvy. Auth. Rev. Bonds,
Ser. A, AMBAC, 6 1/4s, 12/13/06 Aaa 4,450,000
4,400,000 Ingham Cnty. Econ. Dev. Corp. Ltd. Rev. Bonds,
VRDN (Martin Luther Memorial Home, Inc.),
3.3s, 4/1/22 A-1+ 4,400,000
3,500,000 Kalamazoo, Hosp. Fin. Auth. Fac. IFB, FGIC,
6.958s, 6/1/11 Aaa 3,688,125
3,840,000 MI Muni. Board Auth. State Revolving Rev. Bonds,
6 1/2s, 10/1/17 Aa1 4,329,600
3,280,000 MI Pub. Pwr. Agcy. Rev. Bonds (Belle Riv.), Ser. A,
MBIA, 5 1/4s, 1/1/18 Aaa 3,284,100
7,000,000 MI State Bldg. Auth. Rev. Bonds, Ser. I, AMBAC,
6 1/2s, 10/1/07 Aaa 8,015,000
MI State Hosp. Fin. Auth. Rev. Bonds
920,000 (Garden City Hosp.), 8 1/2s, 9/1/17 BB 1,029,250
460,000 (Garden City Hosp.), 8 1/2s, 9/1/17, Prerefunded Ba3 514,625
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 BBB+ 1,343,706
4,500,000 (Sinai Hosp.), 6.7s, 1/1/26 Baa2 4,708,125
2,000,000 (Sinai Hosp.), 6 5/8s, 1/1/16 Baa2 2,082,500
2,000,000 (Presbyterian Villages), 6 1/2s, 1/1/25 BBB/P 2,117,500
2,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB/P 2,117,500
3,000,000 (Chelsea Cmnty. Hosp.), 5 3/8s, 5/15/19 BBB 2,868,750
MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds
1,600,000 Ser. A, FSA, 7.55s, 4/1/23 Aaa 1,710,000
2,900,000 Ser. B, AMBAC, 6 3/4s, 10/1/12 Aaa 2,972,500
2,500,000 MI State Stragetic Fund Solid Waste Disp. Rev.
Bonds (SD Warren Co.), Ser. C, 7 3/8s, 1/15/22 BB-/P 2,768,750
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,785,000 (Arbor Model & Tooling), 10 1/4s, 9/15/19 B/P 3,042,613
3,600,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 3,827,268
3,445,000 (Env. Research), 8 1/8s, 10/1/14 AAA/P 3,566,540
3,150,000 (Ford Motor Co.), Ser. A, 7.1s, 2/1/06 A1 3,622,500
1,500,000 (Detroit Edison), Ser. BB, AMBAC, 7s, 5/1/21 Aaa 1,848,750
3,000,000 (Worthington Armstrong Venture), 5 3/4s,
10/1/22 A 3,090,000
1,500,000 (Waste Management, Inc.), 5.2s, 4/1/10 BBB+ 1,483,125
5,000,000 MI State Strategic Fund Ltd. Rev. Bonds (Detroit
Edison Co.), Ser. A, MBIA, 5.55s, 9/1/29 (FWC/WIS) Aaa 4,925,000
5,000,000 Pontiac Hosp. Fin. Auth. Rev. Bonds, 6s, 8/1/23 Baa3 5,093,750
1,440,000 Tawas City, Hosp. Fin. Auth. Rev. Bonds
(St. Joseph Hlth. Syst.), Ser. A, 5 3/4s, 2/15/23 BB+/P 1,425,600
3,000,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth.), 6s, 1/1/39
(acquired 12/31/98, cost $3,000,000) (RES) B-/P 2,790,000
2,000,000 Wayland, Uni. School Dist. Rev. Bonds, FGIC,
8s, 5/1/10 Aaa 2,552,500
2,000,000 Wayne Charter Cnty., Arpt. Rev. Bonds
(Detroit Met. Wayne Cnty), Ser. A, MBIA,
5s, 12/1/28 Aaa 1,885,000
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 2,654,519
3,200,000 Wyandotte, Elec. Rev. Bonds, MBIA,
6 1/4s, 10/1/17 Aaa 3,440,000
1,240,000 Ypsilanti, School Dist. G.O. Bonds, FGIC,
5 3/8s, 5/1/26 Aaa 1,247,750
--------------
177,558,960
Puerto Rico (10.0%)
- --------------------------------------------------------------------------------------------------------------------------
Cmnwlth. of PR, G.O. Bonds
1,000,000 5 1/2s, 7/1/10 A 1,071,250
1,000,000 MBIA, 5.4s, 7/1/25 Aaa 1,022,500
1,400,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN,
MBIA, 3s, 12/1/15 VMIG1 1,400,000
2,000,000 Cmnwlth. of PR, Pub. Impt. G.O. Bonds,
5 1/2s, 7/1/13 A 2,137,500
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
2,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 AAA 2,305,000
2,835,000 Ser. Z, MBIA, 6 1/4s, 7/1/11 Aaa 3,246,075
3,000,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. X, MBIA,
6s, 7/1/15 Aaa 3,285,000
2,500,000 PR Pub. Bldg. Auth. Rev. Gtd. (Govt. Fac.),
Ser. B, AMBAC, 5s, 7/1/27 Aaa 2,421,875
2,100,000 PR Pub. Bldg. Auth. Fac. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 7/1/14 Aaa 2,433,372
--------------
19,322,572
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $190,974,223) (b) $ 198,325,282
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $194,187,253.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
May 31, 1999 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, 1999. 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 $190,974,223, resulting in gross unrealized appreciation and
depreciation of $8,921,716 and $1,570,657, respectively, or net unrealized appreciation of $7,351,059.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
May 31, 1999 was $2,790,000 or 1.4% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at May 31, 1999.
(FWC) When-issued and delayed-delivery securities (Note 1).
The rates shown on IFB, which are securities paying interest rates that vary inversely to changes in the market
interest rates, and VRDN's are the current interest rates at May 31, 1999.
The fund had the following industry group concentrations greater than 10% at May 31, 1999 (as a percentage of net
assets):
Health care 21.3%
The fund had the following insurance concentrations greater than 10% at May 31, 1999 (as a percentage of net
assets):
MBIA 20.4%
FGIC 16.4
AMBAC 13.8
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1999
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
Muni Bond Index Future
(short) $3,659,063 $3,689,654 Jun-99 $30,591
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $190,974,223) (Note 1) $198,325,282
- -----------------------------------------------------------------------------------------------
Cash 338,997
- -----------------------------------------------------------------------------------------------
Interest and other receivables 2,881,437
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 253,192
- -----------------------------------------------------------------------------------------------
Total assets 201,798,908
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 10,312
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 474,303
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 6,456,343
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 212,568
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 295,190
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 21,299
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,854
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,040
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 84,251
- -----------------------------------------------------------------------------------------------
Other accrued expenses 47,495
- -----------------------------------------------------------------------------------------------
Total liabilities 7,611,655
- -----------------------------------------------------------------------------------------------
Net assets $194,187,253
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $188,671,485
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 133,256
- -----------------------------------------------------------------------------------------------
Distributions in excess of net realized gains on investments (Note 1) (1,999,138)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,381,650
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $194,187,253
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($145,438,065 divided by 15,919,094 shares) $9.14
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.14)* $9.60
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($46,827,090 divided by 5,132,660 shares)+ $9.12
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,922,098 divided by 210,448 shares) $9.13
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.13)** $9.44
- -----------------------------------------------------------------------------------------------
* 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, 1999
<S> <C>
Tax exempt interest income: $11,149,183
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,158,327
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 272,954
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 8,024
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,079
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 293,757
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 377,203
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 9,023
- -----------------------------------------------------------------------------------------------
Reports to shareholders 22,285
- -----------------------------------------------------------------------------------------------
Registration fees 3,241
- -----------------------------------------------------------------------------------------------
Auditing 27,772
- -----------------------------------------------------------------------------------------------
Legal 5,747
- -----------------------------------------------------------------------------------------------
Postage 12,399
- -----------------------------------------------------------------------------------------------
Other 20,449
- -----------------------------------------------------------------------------------------------
Total expenses 2,217,260
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (55,843)
- -----------------------------------------------------------------------------------------------
Net expenses 2,161,417
- -----------------------------------------------------------------------------------------------
Net investment income 8,987,766
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 206,330
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (992,256)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (3,345,589)
- -----------------------------------------------------------------------------------------------
Net loss on investments (4,131,515)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 4,856,251
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------------
1999 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 8,987,766 $ 8,969,604
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (785,926) 352,930
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (3,345,589) 4,915,632
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,856,251 14,238,166
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (7,013,975) (7,267,831)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,834,233) (1,659,310)
- ---------------------------------------------------------------------------------------------------------------
Class M (80,990) (58,550)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (408,453) (329,485)
- ---------------------------------------------------------------------------------------------------------------
Class B (125,863) (86,482)
- ---------------------------------------------------------------------------------------------------------------
Class M (4,470) (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) 10,354,967 6,157,905
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 5,743,234 10,645,774
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 188,444,019 177,798,245
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $133,256 and $78,919, respectively) $194,187,253 $188,444,019
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.35 $9.12 $8.85 $9.01 $8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .47 .48 .49 .52
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.18) .27 .27 (.16) .11
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .26 .74 .75 .33 .63
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.47) (.48) (.49) (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- (.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.51) (.48) (.49) (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.14 $9.35 $9.12 $8.85 $9.01
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.77 8.28 8.67 3.76 7.45
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $145,438 $145,547 $142,038 $138,390 $136,010
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.00 .99 .99 1.00 .95
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.81 5.02 5.33 5.42 6.03
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.51 32.44 55.30 139.08 82.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 31,1996 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.34 $9.11 $8.84 $9.00 $8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38 .41 .43 .43 .47
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.19) .27 .26 (.16) .10
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .19 .68 .69 .27 .57
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.41) (.42) (.43) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- (.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.41) (.45) (.42) (.43) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.12 $9.34 $9.11 $8.84 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.00 7.58 7.99 3.05 6.72
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $46,827 $41,155 $35,041 $29,371 $21,071
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.65 1.64 1.64 1.65 1.59
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.16 4.36 4.68 4.74 5.31
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.51 32.44 55.30 139.08 82.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 31,1996 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share April 17, 1995+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.35 $9.12 $8.85 $9.00 $8.80
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .42 .44 .46 .47 .05(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.20) .27 .27 (.16) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .22 .71 .73 .31 .26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.41) (.44) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.03) (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- (.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.48) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.13 $9.35 $9.12 $8.85 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.36 7.95 8.36 3.53 2.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,922 $1,742 $719 $558 $119
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.30 1.29 1.29 1.28 .20*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.51 4.70 5.01 5.06 .84*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 19.51 32.44 55.30 139.08 82.91
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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 31,1996 and thereafter, includes amounts paid
through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
Notes to financial statements
May 31, 1999
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.
Securities purchased or sold on a delayed delivery basis may be settled a
month or more after the trade date; interest income is accrued based on
the terms of the security. Losses may arise due to changes in the market
value of the underlying securities or if the counterparty does not perform
under the contract.
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, 1999, 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.
At May 31, 1999, the fund had a capital loss carryover of approximately
$493,000 available to offset future net capital gain, if any, which will
expire on May 31, 2007.
F) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid 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 temporary and permanent differences of post-October
loss deferrals, dividends payable, unrealized gains and losses on certain
futures contracts, and straddle loss deferrals. 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, 1999, the fund reclassified $4,231
to decrease undistributed net investment income and a decrease to
distributions in excess of net realized gains of $4,231. 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 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.
On June 4, 1999, the Trustees approved a management fee schedule to become
effective on July 1, 1999, based upon the lesser of (i) an annual rate of
0.50% of the average net asset value of the Fund or (ii) the initial tiers
mentioned above.
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, 1999, fund expenses were reduced by $55,843
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 have approved 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, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $25,075 and $882 from the sale of
class A and class M shares, respectively and $115,377 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 that were purchased without an initial sales charge as part of an
investment of $1 million or more. For the year ended May 31, 1999, 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, 1999, purchases and sales of investment
securities other than short-term investments aggregated $47,557,509 and
$36,842,875, 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, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,725,193 $16,064,790
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 479,808 4,473,481
- -----------------------------------------------------------------------------
2,205,001 20,538,271
Shares
repurchased (1,845,179) (17,183,402)
- -----------------------------------------------------------------------------
Net increase 359,822 $ 3,354,869
- -----------------------------------------------------------------------------
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, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,234,921 $11,495,290
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 131,932 1,228,568
- -----------------------------------------------------------------------------
1,366,853 12,723,858
Shares
repurchased (639,785) (5,947,004)
- -----------------------------------------------------------------------------
Net increase 727,068 $ 6,776,854
- -----------------------------------------------------------------------------
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, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 94,529 $877,829
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 6,653 62,037
- -----------------------------------------------------------------------------
101,182 939,866
Shares
repurchased (77,035) (716,622)
- -----------------------------------------------------------------------------
Net increase 24,147 $223,244
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Fund information
WEB SITE
www.putnaminv.com
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
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
David E. Hamlin
Vice President and Fund Manager
Richard A. Monaghan
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' Web site: 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
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN048-53214 846/237/126 7/99
