Putnam
Michigan
Tax Exempt
Income Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Since we reported that municipal bonds were a 'screaming buy' ('Why You
Should Bond With Munis,' September 1998), they have become even more
attractive. . . . Trouble is, it's long been next to impossible for an
individual investor to figure out how to get a good deal on a muni bond. .
. . How can you avoid getting snared? The simple answer is to buy via a
mutual fund."
-- Money, "Munificent Munis," November 1998
* "Putnam Michigan Tax Exempt Income Fund has benefited from a wealth of
opportunities at the local level. For the remainder of the fund's fiscal
year, we anticipate a slowing but still solid economy, which should prove
advantageous for the fund and its holdings of industrial development and
local general obligation bonds."
-- Leslie J. Burke, Fund Manager
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
16 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The rush of foreign investors to the safety of U.S. Treasury bonds in
recent months has driven prices on these securities markedly higher.
Because of the inverse relationship of yields to prices, yields on 30-year
Treasuries have declined to virtually the same level as those on long-term
municipals. This near parity has made Michigan tax-exempt bonds unusually
attractive for the state's tax-conscious investors.
Continued heavy demand for municipal bonds, however, makes the search for
securities that meet Putnam Michigan Tax Exempt Income Fund's exacting
selection criteria more challenging than ever. Among Fund Manager Leslie
Burke's priorities is to seek the highest possible income stream
consistent with the fund's relatively conservative investment policy. She
has largely pursued this goal through intermediate-term securities.
In the following report from Leslie, you will find a discussion of this
strategy and other aspects of the fund's performance during the six months
ended November 30, 1998. She also offers her views on prospects for the
remainder of fiscal 1999.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 20, 1999
Report from the Fund Manager
Leslie J. Burke
Putnam Michigan Tax Exempt Income Fund's performance for the six months
ended November 30, 1998, reflected price and yield fluctuations at work
nationwide. After a turbulent autumn, the municipal bond market calmed
down and even slightly outperformed the Treasury market. Yields on
long-term municipal bonds declined this fall and are now almost the same
as the 30-year Treasury bond yield, an extremely rare situation. Normally
when interest rates fall, a flurry of new borrowings boosts supply, but
rates have been low for some time and most issuers have already funded
their projects. Therefore, the supply of new issues has slowed in most
states.
However, your fund also continued to benefit from a wealth of opportunity
at the local level. For the semiannual period, your fund's class A shares
generated a total return of 2.63% at net asset value (-2.29% at public
offering price). For complete performance information, please refer to the
summary that begins on page 9.
* GENERATING INCOME TOP PRIORITY IN LOWER-RATE ENVIRONMENT
While the economy as a whole is benefiting from the downtrend in interest
rates, it has become increasingly difficult for fixed-income investors to
sustain attractive levels of income. We have made it a priority to ensure
that your fund's income stream remains competitive with other, more
volatile funds with longer maturities. However, it is also our goal to
minimize fluctuations in the value of the portfolio. Since long-term bonds
generally pay a higher coupon than shorter ones, they tend to be more
volatile in price, and we have maintained the fund's maturity on the long
side of intermediate (10 to 20 years), a moderately conservative position.
To boost income, we have relied on the strength of our credit research
department to identify undervalued issues with higher return potential.
Credit analysts are often viewed as number crunchers, but Putnam's credit
research team goes further, looking carefully at issuers and at the
overall industries in which they operate. The research team may also talk
with potential end users, such as elderly people who may be in need of
extended-care services. After their research is complete, Putnam's
analysts work with underwriters to structure deals. The fund's purchase of
Tawas City Hospital bonds exemplifies this collaborative process. It took
considerable work to complete, but the fund was rewarded with great value.
Tawas bonds were recently called so the hospital could take advantage of
the drop in interest rates to refinance old debt. Because we continue to
find the project attractive, we reinvested the proceeds in the new Tawas
bonds.
Health-care issues constitute a major portion of your fund's portfolio,
and Michigan offers plenty from which to choose. The state's health-care
industry is active in consolidations, mergers, alignments, and formation
of networks, all of which are occurring at a rapid pace. This activity
makes the sector fairly liquid and provides opportunities for higher
yields. Other names you will see in the portfolio include Chelsea, Hurley,
and Garden City hospitals. These are lower-rated issuers and we currently
plan to hold them for some time to take advantage of what we see as their
potential. Although we have added some other lower-rated holdings, your
fund's overall portfolio quality remains high. While these holdings, along
with others discussed in this report, were viewed favorably at the end of
the fiscal period, all are subject to review and adjustment in accordance
with the fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 26.3%
Water and
sewerage 10.2%
Utilities 9.6%
Transportation 7.2%
Education 7.1%
Footnote reads:
*Based on net assets as of 11/30/98. Holdings will vary over time.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aa -- 2.2%
A -- 9.8%
Baa -- 22.6%
Ba -- 5.0%
B and under -- 2.9%
VMIG1 -- 4.7%
Aaa -- 52.8%
Footnote reads:
Based on percentage of market value as of 11/30/98. 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.
* PUERTO RICAN BONDS OFFER REWARDS FOR MICHIGAN INVESTORS
Dividends from securities of all U.S. territories and commonwealths --
mainly Puerto Rico, Guam, and the U.S. Virgin Islands -- pass tax free to
U.S. investors. During the semiannual period, your fund's portfolio
contained a number of Puerto Rican bonds, chosen for diversification and
attractive total return potential. These bonds are among the highest
yielding of municipal securities because island economies are dominated by
tourism and oil. This makes them more vulnerable to any kind of economic
slowdown in the United States. However, we have used insurance to nullify
credit risk, since our interest in Puerto Rican bonds is based on
opportunity as much as on yield.
Between September 1997 and April 1998, Puerto Rico came to market with a
lot of debt to fund new projects, resulting in an abundance of supply. We
were active buyers, but the supply of new issues diminished over the
summer while demand continued, and we began paring down the fund's
holdings, selling them at a profit. We could not have predicted the
hurricane that hit the island this summer, but we were grateful we had a
security net protecting the fund from any drop in credit quality. Since
the insurance feature stays with the bond even when it is sold, we were
able to continue to profit from the sale of Puerto Rican bonds.
* FUND STRUCTURED TO PERFORM REGARDLESS OF INTEREST-RATE ENVIRONMENT
The squalls that buffeted the U.S. economy this year have made projecting
the future direction of interest rates especially difficult. Since
relative price stability is an important part of your fund's investment
objective, we are not willing to accept the price risk that would be
associated with lengthening duration. Consequently we have balanced the
fund between bonds selling at a discount, which offer upside price
potential in a rising market, and those trading at a premium, which act as
a hedge if bond prices turn down.
To illustrate how this works, consider that a bond selling at $99 7/8 is
about to reach $100 -- its face amount on the date that it is set to
expire (also called its par value). If the market rises, a bond trading
near par will not rise as much as one trading at a discount -- at $92,
$93, or $94, for example. If the market trends down, bonds trading at or
near par offer substantially less downside protection than those trading
at a premium -- $104, $105, or $106, for example. By balancing the
portfolio with discount and premium bonds, our goal is to allow the fund
to make the most of upturns and minimize the impact of downturns.
* LIGHT CALENDAR AHEAD FOR MUNICIPALS
The supply of new municipal issues in Michigan remained strong in October,
but during the holiday season the capital markets in general do not see
much activity. At the close of the period, the fund was fully invested and
had coupon payments due in December and January; our goal is to keep the
cash that accumulates working for shareholders, generating tax-free
income.
Looking toward the balance of the fund's fiscal year, we anticipate a
slowing but still solid economy, supported by Federal Reserve Board
policies and consumers' willingness to spend. As of the close of the
period, the Fed had cut interest rates three times, sending a positive
message to the world and to Wall Street. Many problems still loom,
especially in the international markets, but the U.S. economy seems
steady.
While we continue to believe it is in shareholders' best interest to
minimize the fund's sensitivity to changing interest rates, its holdings
of industrial development bonds and local general obligations bonds should
prove advantageous in a climate of slow, steady economic growth.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 11/30/98, 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 11/30/98
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
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6 months 2.63% -2.29% 2.29% -2.71% 2.47% -0.82%
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1 year 5.86 0.79 5.18 0.18 5.54 2.15
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5 years 32.42 26.10 28.18 26.18 30.34 26.07
Annual average 5.78 4.75 5.09 4.76 5.44 4.74
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Life of fund 89.80 80.84 77.65 77.65 83.41 77.49
Annual average 7.30 6.73 6.52 6.52 6.89 6.51
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/98
Lehman
Brothers
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 3.84% 0.74%
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1 year 7.77 1.55
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5 years 37.81 12.48
Annual average 6.63 2.38
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Life of fund 103.52 30.57
Annual average 8.14 2.98
- ------------------------------------------------------------------------------
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-, 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. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/98
Class A Class B Class M
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Distributions (number) 6 6 6
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Income $0.222471 $0.191732 $0.208175
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Capital gains1 -- -- --
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Total $0.222471 $0.191732 $0.208175
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Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/98 $9.35 $9.82 $9.34 $9.35 $9.66
- ------------------------------------------------------------------------------
11/30/98 9.37 9.84 9.36 9.37 9.68
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Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.71% 4.49% 4.06% 4.40% 4.26%
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Taxable equivalent3 8.16 7.78 7.03 7.62 7.38
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Current 30-day SEC yield4 3.91 3.72 3.19 3.67 3.55
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Taxable equivalent3 6.77 6.44 5.52 6.36 6.15
- ------------------------------------------------------------------------------
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 12/31/98
(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
- ------------------------------------------------------------------------------
6 months 2.48% -2.43% 2.26% -2.74% 2.44% -0.86%
- ------------------------------------------------------------------------------
1 year 4.57 -0.42 3.89 -1.08 4.25 0.81
- ------------------------------------------------------------------------------
5 years 29.93 23.78 25.76 23.79 27.83 23.67
Annual average 5.38 4.36 4.69 4.36 5.03 4.34
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Life of fund 90.07 81.10 77.81 77.81 83.63 77.70
Annual average 7.24 6.68 6.46 6.46 6.84 6.46
- ------------------------------------------------------------------------------
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.
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.
<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1998 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
FGIC -- Financial Guaranty Insurance Company
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
TAN -- Tax Anticipation Notes
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (103.7%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C> <C>
Michigan (91.4%)
- --------------------------------------------------------------------------------------------------------------------------
$4,000,000 Battle Creek, Downtown Dev.TAN, MBIA,
5s, 5/1/17 AAA $ 4,010,000
5,500,000 Battle Creek, Downtown Dev. Auth. Tax Increment
Rev. Bonds, 7.65s, 5/1/22 BBB+ 6,572,500
2,000,000 Battle Creek, Tax Incremental Fin. Auth. Rev. Bonds,
7.1s, 5/1/10 A- 2,337,500
Detroit, G.O. Bonds
2,475,000 Ser. B, 7s, 4/1/04 BBB+ 2,787,469
4,875,000 Ser. A, 6.8s, 4/1/15 Aaa 5,685,469
Detroit, City School Dist. G.O. Bonds
1,500,000 Ser. A, AMBAC, 6 1/2s, 5/1/11 Aaa 1,781,250
2,455,000 Ser. A, AMBAC, 6 1/2s, 5/1/09 Aaa 2,893,831
5,000,000 Ser. B, FGIC, 4 3/4s, 5/1/28 Aaa 4,750,000
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 5,133,975
Detroit, Dev. Fin. Auth. Tax Increment Rev. Bonds,
Ser. A
1,145,000 9 1/2s, 5/1/21 BBB+/P 1,405,488
1,500,000 5 1/2s, 5/1/21 BB- 1,477,500
Detroit, Wtr. Supply Syst. IFB, FGIC
1,500,000 9.221s, 7/1/22 Aaa 1,743,750
7,000,000 Prerefunded, 9.221s, 7/1/22 Aaa 8,478,750
3,000,000 Detroit, Wtr. Supply Syst. Rev. Bonds, Ser. A, MBIA
Second Lien, 5 3/4s, 7/1/11 Aaa 3,367,500
4,700,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 BBB- 5,422,625
1,400,000 Ecorse, Pub. School Dist. G.O. Bonds, FGIC,
6 1/2s, 5/1/08 Aaa 1,645,000
Flint, Hosp. Auth. Rev. Bonds (Hurley Med. Ctr.),
Ser. A
1,250,000 5 3/8s, 7/1/28 Baa1 1,246,875
1,000,000 5 3/8s, 7/1/20 Baa1 997,500
Flint, Hosp. Bldg. Auth. Rev. Bonds (Hurley Med. Ctr.)
2,000,000 7.8s, 7/1/14 Baa1 2,170,000
630,000 Ser. A, 6s, 7/1/06 Baa1 681,188
4,235,000 Garden Cty, Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.), Ser. A, 5 3/4s, 9/1/17 (SEG) BBB-/P 4,203,238
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam. Rev. Bonds,
Ser. A, FNMA Coll., 7 5/8s, 9/1/23 AAA 1,092,500
4,000,000 Greater Detroit, Res. Recvy. Auth. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 12/13/06 Aaa 4,575,000
4,400,000 Ingham Cnty. Econ. Dev. Corp. Ltd. Rev. Bonds,
VRDN (Martin Luther Memorial Home, Inc.),
3.45s, 4/1/22 A-1+ 4,400,000
3,500,000 Kalamazoo, Hosp. Fin. Auth. Fac. IFB, FGIC,
6.788s, 6/1/11 Aaa 3,762,500
3,000,000 MI Hosp. Fin. Auth. Rev. Bonds (Chelsea
Cmnty. Hosp.), 5 3/8s, 5/15/19 BBB 2,992,500
3,840,000 MI Muni. Board Auth. State Revolving Rev. Bonds,
6 1/2s, 10/1/17 Aa1 4,406,400
3,280,000 MI Pub. Pwr. Agcy. Rev. Bonds (Belle Riv.), Ser. A,
MBIA, 5 1/4s, 1/1/18 Aaa 3,333,300
7,000,000 MI State Bldg. Auth. Rev. Bonds, Ser. I, AMBAC,
6 1/2s, 10/1/07 Aaa 8,216,250
MI State Hosp. Fin. Auth. Rev. Bonds
920,000 (Garden City Hosp.), 8 1/2s, 9/1/17 BB 1,052,250
460,000 Prerefunded (Garden City Hosp.), 8 1/2s, 9/1/17 BB 526,125
1,300,000 (Metropolitan Hosp.), Ser. B, 8 1/8s, 7/1/18 BBB+ 1,376,167
4,500,000 (Sinai Hosp.), 6.7s, 1/1/26 A3 5,023,125
2,000,000 (Sinai Hosp.), 6 5/8s, 1/1/16 A3 2,225,000
2,000,000 (Presbyterian Villages), 6 1/2s, 1/1/25 BBB/P 2,137,500
2,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB/P 2,140,000
MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds
1,600,000 Ser. A, FSA, 7.55s, 4/1/23 Aaa 1,732,000
2,900,000 Ser. B, AMBAC, 6 3/4s, 10/1/12 Aaa 2,943,500
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 2,800,000
5,000,000 MI State Strategic Fund Ltd. Rev. Bonds
(Detroit Edison Co.), Ser. A, MBIA, 5.55s, 9/1/29 Aaa 5,093,750
MI State Strategic Fund Ltd. Oblig. Rev. Bonds
2,785,000 (Arbor Model & Tooling), 10 1/4s, 9/15/19 B-/P 2,910,158
3,600,000 (Mercy Svcs. for Aging), 9.4s, 5/15/20 Aaa 3,924,000
3,445,000 (Env. Research), 8 1/8s, 10/1/14 AAA/P 3,655,283
3,150,000 (Ford Motor Co.), Ser. A, 7.1s, 2/1/06 A1 3,689,438
1,500,000 7s, 5/1/21 Aaa 1,942,500
1,700,000 (Crown Paper Co.), Ser. A, 6 1/2s, 8/1/21 BB- 1,604,375
3,000,000 (Worthington Armstrong Venture),
5 3/4s, 10/1/22 A 3,176,250
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 1,441,800
Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth. Care, Inc.)
1,500,000 8 3/8s, 7/1/23 (acquired 9/7/95,
cost $1,558,050) (RES) B-/P 1,425,000
1,485,000 8s, 7/1/08 (acquired 9/7/95, cost $1,499,568) (RES) B-/P 1,410,750
2,000,000 Wayland, Uni. School Dist. Rev. Bonds, FGIC,
8s, 5/1/10 Aaa 2,645,000
2,000,000 Wayne Charter Cnty., Arpt. Rev. Bonds (Detroit
Met. Wayne Cnty), Ser. A, MBIA, 5s, 12/1/28 Aaa 1,947,500
1,000,000 Wayne Charter Cnty., Special Arpt. Fac. Rev. Bonds
(Northwest Airlines Inc.), 6 3/4s, 12/1/15 BB+/P 1,098,750
2,405,000 Wayne Cnty., Bldg. Auth. G.O. Bonds, Ser. A, MBIA,
6s, 6/1/08 Aaa 2,708,631
6,000,000 Western Township, Util. Auth. Swr. Disp. Syst.
Rev. Bonds, 8.2s, 1/1/18 BBB+ 6,141,240
3,200,000 Wyandotte, Elec. Rev. Bonds, MBIA, 6 1/4s, 10/1/17 Aaa 3,492,000
--------------
176,963,200
Puerto Rico (12.3%)
- --------------------------------------------------------------------------------------------------------------------------
Cmnwlth. of PR, G.O. Bonds
2,000,000 (Pub. Impt.), 5 1/2s, 7/1/13 A 2,175,000
1,000,000 5 1/2s, 7/1/10 A 1,093,750
5,000,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA,
3.05s, 12/1/15 VMIG1 5,000,000
1,500,000 Cmnwlth. of PR, Elec. Pwr. Auth. Rev. Bonds,
Ser. GG, FSA, 4 3/4s, 7/1/21 Aaa 1,473,750
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
2,835,000 Ser. Z, MBIA, 6 1/4s, 7/1/11 Aaa 3,363,019
2,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 AAA 2,367,500
3,000,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. X, MBIA,
6s, 7/1/15 Aaa 3,333,750
2,100,000 PR Pub. Bldg. Auth. Fac. Rev. Bonds, Ser. A, AMBAC,
6 1/4s, 7/1/14 Aaa 2,485,872
2,500,000 PR Pub. Bldg. Auth. Rev. Gtd. (Govt. Fac.), Ser. B,
AMBAC, 5s, 7/1/27 Aaa 2,515,625
--------------
23,808,266
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Total Investments (cost $189,312,666) (b) $ 200,771,466
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $193,692,358.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
November 30, 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 November 30, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $189,312,666, resulting in gross unrealized appreciation and
depreciation of $12,198,116 and $739,316, respectively, or net unrealized appreciation of $11,458,800.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at November 30, 1998 was $1,835,750 or 1.5% of net assets.
(SEG) A portion of this this security was pledged and segregated with the custodian to cover margin requirements
for futures contracts at November 30, 1998.
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 November 30, 1998.
The fund had the following industry group concentrations greater than 10% at November 30, 1998 (as a percentage of
net assets):
Health care 26.3%
Water and sewerage 10.2
The fund had the following insurance concentrations greater than 10% at November 30, 1998 (as a percentage of net
assets):
MBIA 22.3%
AMBAC 13.1
FGIC 11.9
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1998 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Muni Bond Index Future
(long) $3,920,531 $3,891,621 12/21/98 $ 28,910
U.S. Treasury Bond 20 yr.
(short) 1,295,938 1,294,019 3/22/99 (1,919)
U.S. Treasury Bond 20 yr.
(short) 7,011,563 6,854,212 12/21/98 (157,351)
- -------------------------------------------------------------------------------
$(130,360)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $189,312,666) (Note 1) $200,771,466
- -----------------------------------------------------------------------------------------------
Cash 288,853
- -----------------------------------------------------------------------------------------------
Interest and other receivables 2,797,097
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 599,965
- -----------------------------------------------------------------------------------------------
Total assets 204,457,381
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 67,888
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 460,467
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 9,718,242
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 97,687
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 288,799
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 17,894
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,462
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,016
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 81,720
- -----------------------------------------------------------------------------------------------
Other accrued expenses 22,848
- -----------------------------------------------------------------------------------------------
Total liabilities 10,765,023
- -----------------------------------------------------------------------------------------------
Net assets $193,692,358
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $183,225,774
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 24,709
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (886,565)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 11,328,440
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $193,692,358
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($147,244,419 divided by 15,712,033 shares) $9.37
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.37)* $9.84
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($44,838,078 divided by 4,791,821 shares)*** $9.36
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,609,861 divided by 171,860 shares) $9.37
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.37)** $9.68
- -----------------------------------------------------------------------------------------------
* 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
Six months ended November 30, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $5,432,645
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 575,213
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 119,116
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 4,158
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,037
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 147,242
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 181,412
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 4,646
- -----------------------------------------------------------------------------------------------
Reports to shareholders 6,950
- -----------------------------------------------------------------------------------------------
Registration fees 111
- -----------------------------------------------------------------------------------------------
Auditing 13,868
- -----------------------------------------------------------------------------------------------
Postage 5,994
- -----------------------------------------------------------------------------------------------
Other 38,763
- -----------------------------------------------------------------------------------------------
Total expenses 1,100,510
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (22,815)
- -----------------------------------------------------------------------------------------------
Net expenses 1,077,695
- -----------------------------------------------------------------------------------------------
Net investment income 4,354,950
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 831,728
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,039,636)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts during the period 601,201
- -----------------------------------------------------------------------------------------------
Net gain on investments 393,293
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $4,748,243
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
1998* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 4,354,950 $ 8,969,604
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (207,908) 352,930
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 601,201 4,915,632
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,748,243 14,238,166
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (3,494,703) (7,267,831)
- ---------------------------------------------------------------------------------------------------------------
Class B (873,756) (1,659,310)
- ---------------------------------------------------------------------------------------------------------------
Class M (40,701) (58,550)
- ---------------------------------------------------------------------------------------------------------------
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) 4,909,256 6,157,905
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 5,248,339 10,645,774
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 188,444,019 177,798,245
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $24,709 and $78,919, respectively) $193,692,358 $188,444,019
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share Nov. 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.35 $9.12 $8.85 $9.01 $8.90 $9.30
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 .47 .48 .49 .52 .52
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02 .27 .27 (.16) .11 (.32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .24 .74 .75 .33 .63 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.47) (.48) (.49) (.52) (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.03) -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- (.01) -- -- -- (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.51) (.48) (.49) (.52) (.60)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.37 $9.35 $9.12 $8.85 $9.01 $8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.63* 8.28 8.67 3.76 7.45 2.03
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $147,244 $145,547 $142,038 $138,390 $136,010 $128,921
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .50* .99 .99 1.00 .95 .99
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.35* 5.02 5.33 5.42 6.03 5.58
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 15.16* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 July 15, 1993+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.34 $9.11 $8.84 $9.00 $8.90 $9.43
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .19 .41 .43 .43 .47 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02 .27 .26 (.16) .10 (.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .21 .68 .69 .27 .57 (.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.19) (.41) (.42) (.43) (.47) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.03) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- (.01) -- -- -- (.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.19) (.45) (.42) (.43) (.47) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.36 $9.34 $9.11 $8.84 $9.00 $8.90
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.29* 7.58 7.99 3.05 6.72 (.68)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $44,838 $41,155 $35,041 $29,371 $21,071 $10,251
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .83* 1.64 1.64 1.65 1.59 1.42*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.03* 4.36 4.68 4.74 5.31 4.25*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 15.16* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 April 17, 1995+
operating performance (Unaudited) Year ended May 30 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 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 .21 .44 .46 .47 .05(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02 .27 .27 (.16) .21
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .23 .71 .73 .31 .26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.44) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net gain
on investments -- (.01) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.48) (.46) (.46) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.37 $9.35 $9.12 $8.85 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.47* 7.95 8.36 3.53 2.03*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,610 $1,742 $719 $558 $119
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .65* 1.29 1.29 1.28 .20*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.20* 4.70 5.01 5.06 .84*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 15.16* 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
November 30, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Michigan Tax Exempt Income Fund (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks as high a level of current
income exempt from federal income tax and Michigan personal income tax as
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc., believes
is consistent with preservation of capital by investing primarily in a
portfolio of Michigan tax-exempt securities.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value.
B) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy or
sell is executed). Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
D) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended November 30, 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. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on 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.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended November 30, 1998, fund expenses were reduced by
$22,815 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 $350 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 six months ended November 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $11,470 and $508 from
the sale of class A and class M shares, respectively and $42,565 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 six months ended November
30, 1998, Putnam Mutual Funds Corp., acting as underwriter received no
monies on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended November 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$29,565,416 and $28,473,636, respectively. There were no purchases and
sales of U.S. government obligations. In determining the net gain or loss
on securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At November 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 733,354 $ 6,867,612
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 225,625 2,109,920
- -----------------------------------------------------------------------------
958,979 8,977,532
Shares
repurchased (806,218) (7,548,689)
- -----------------------------------------------------------------------------
Net increase 152,761 $ 1,428,843
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 585,278 $5,474,226
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 58,102 542,759
- -----------------------------------------------------------------------------
643,380 6,016,985
Shares
repurchased (257,151) (2,401,555)
- -----------------------------------------------------------------------------
Net increase 386,229 $3,615,430
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 25,766 $ 240,814
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,326 31,106
- -----------------------------------------------------------------------------
29,092 271,920
Shares
repurchased (43,533) (406,937)
- -----------------------------------------------------------------------------
Net decrease (14,441) $(135,017)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic 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
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
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Leslie J. Burke
Vice President and Fund Manager
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:
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
www.putnaminv.com
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