Putnam
Michigan
Tax Exempt
Income Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-03
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FROM THE TRUSTEES
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Dear Fellow Shareholder:
While we are pleased to report positive results for Putnam Michigan Tax
Exempt Income Fund for the fiscal year ended May 31, 2003, your fund
underperformed both its benchmark and its Lipper peer group average
during the period. Details of these results can be found on page 7.
Significant declines in state and local tax revenues, accompanied by
credit rating downgrades of both municipalities and the corporate
beneficiaries of industrial development bonds, continued to plague the
municipal bond market. The market was further tested as it faced the
challenge of digesting a record level of new issuance during the period.
In the following report, your fund's management team discusses
performance and strategy in detail and provides its view of prospects
for the fiscal year that has just begun.
In bringing you this news of your fund's performance, we would also like
to take the opportunity to tell you how much we appreciate your
confidence in Putnam. We will continue to do our utmost to deliver the
best possible results for your fund.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
July 16, 2003
REPORT FROM FUND MANAGEMENT
FUND HIGHLIGHTS
* For the annual period ended May 31, 2003, Putnam Michigan Tax Exempt
Income Fund's class A shares returned 8.03% at net asset value (NAV) and
2.85% at public offering price (POP).
* Due to disappointing performance from certain industrial development
bond holdings, the fund underperformed its benchmark, the Lehman
Municipal Bond Index, which returned 10.36% for the same period.
* For the same reason, the fund underperformed the average for the
Lipper Michigan Municipal Debt Funds category, which was 9.49% for the
period.
* See the Performance Summary on page 7 for complete fund performance,
comparative performance, and Lipper data.
* PERFORMANCE COMMENTARY
Over the annual period ended May 31, 2003, Putnam Michigan Tax Exempt
Income Fund performed solidly on an absolute basis, although it lagged
its benchmark and the average return for its Lipper peer group. One
factor that affected performance was your fund's exposure to certain
industrial development bonds (IDBs). IDBs are issued by municipalities
but backed by the credit of companies benefiting from the financing. In
this case, the backing companies were airline companies and their
continued financial struggles hurt the demand for these bonds and
detracted from fund performance. Also affecting performance were growing
concerns over the ability of tobacco companies to continue to make
payments on tobacco settlement bonds, which are explained further on
page 4. Holdings in this sector suffered, although your fund had limited
exposure. While exposure to these two sectors led to the fund's relative
underperformance, we believe its absolute returns and the tax advantages
it continues to offer should still be attractive to Michigan investors.
Fund Profile
Putnam Michigan Tax Exempt Income Fund seeks to provide high current
income free from federal and Michigan state income taxes, as believed to
be consistent with the preservation of capital. It may be suitable for
Michigan investors seeking tax-free income through a diversified
portfolio of Michigan municipal bonds.
* MARKET OVERVIEW
The first half of the fiscal year was generally positive for the
municipal bond market. In an environment marked by earnings
disappointments, economic weakness, and numerous allegations of
corporate malfeasance, investors sought the relative safety of
high-quality bonds. Increased demand for bonds pushed their prices
higher, and many of your fund's holdings benefited.
In the fiscal second half, several factors tempered municipal bond
performance, including significant declines in tax revenues and
subsequent downgrades in municipalities' credit quality. United
Airlines, which had provided credit backing for several municipal bond
issues, filed for bankruptcy, as had US Airways in the months before. In
late April, American Airlines narrowly avoided a similar fate. Various
segments of the electric power sector were under duress as well. These
difficulties put pressure on industrial development bonds (IDBs) which
are issued by municipalities but backed by companies benefiting from the
financing. Lastly, over $357 billion in municipal bonds was issued in
2002 -- an all-time record. In 2003, supply continues to swell, and is
on track to exceed the previous year's record. These factors had a
dampening effect on municipal bond prices.
MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 5/31/03
Bonds
Lehman Municipal Bond Index 10.36%
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Lehman Aggregate Bond Index (taxable bonds) 11.58%
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Lehman Intermediate Government Bond Index
(intermediate-maturity government bonds) 10.16%
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Citigroup World Government Bond Index 24.14%
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Equities
S&P 500 Index (broad stock market) -8.06%
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Russell 2000 Index (small- to midsize-company stocks) -8.18%
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MSCI EAFE Index (international stocks) -12.30%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 5/31/03.
* STRATEGY OVERVIEW
Interest-rate sensitivity is an important consideration in the
management of bond portfolios. Duration is an investment term for
measuring this interest-rate sensitivity and can be calculated from bond
coupon rates and maturities. During the summer of 2002, we began
implementing a defensive strategy (shorter duration, less sensitivity)
in anticipation of rising interest rates. When interest rates rose in
October, we returned to a more neutral duration as the outlook for
growth in the economy was less clear. However, this positioning still
limited upside potential when the market rallied in May. As the period
ended, we believed interest rates were unsustainably low and began to
shift the portfolio back toward a more defensive position.
In early 2003, tax-exempt municipal bonds offered investors almost the
same yield as comparable Treasury bonds. To take advantage of this
opportunity, we established a cross-market arbitrage position, in which
we bought intermediate-term municipal bonds and shorted 10-year Treasury
futures contracts. Our thesis was that if interest rates should rise
(causing bond prices to fall), the fund would have a loss on the
municipal bonds, and yet, potential gains on the Treasury futures
contracts would more than compensate for the loss. On the other hand, if
rates should fall (causing bond prices to rise), a loss on the Treasury
futures contracts would be mitigated by an even greater gain on the
municipal bonds. We have seen the latter scenario begin to develop as
municipal bonds appreciated during the period.
[GRAPHIC OMITTED: vertical bar chart THE FUND'S MATURITY AND DURATION COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED*
This chart compares changes in the fund's duration
(a measure of its sensitivity to interest-rate changes)
and its average effective maturity (a weighted average
of the holdings' maturities).
as of 11/30/02 as of 5/31/03
Average effective maturity in years 10.3 8.1
Duration in years 6.2 5.3
Footnote reads:
*Average effective maturity also takes into account put and call features,
where applicable, and reflects prepayments for mortgage-backed securities.
* HOW KEY HOLDINGS AND ALLOCATIONS AFFECTED PERFORMANCE
The fund maintained its exposure to higher-yielding securities to pursue
a higher return through the income and appreciation potential we
believed they were offering. Your fund's exposure to airline-backed
industrial development bonds (IDBs) and tobacco settlement bonds was
something management examined closely during the year. Although issued
by municipalities, IDBs are backed by the credit of companies and their
prices are affected by investor perceptions of the backing company and
its industry. While the airline industry's troubles hurt performance of
airline-backed IDBs -- which in turn detracted from fund performance --
the fund's exposure to the sector was limited. The only airline-backed
holdings in the portfolio were two Wayne Charter County Michigan Special
Airport Facilities Renovation bonds backed by Northwest Airlines.
Northwest is in better financial condition than some of its competitors
and we continued to hold these bonds.
Your fund also benefited from a limited exposure to tobacco settlement
bonds. These bonds are issued by municipalities and secured by cash
payments made in satisfaction of legal judgments against the tobacco
industry. Although they are investment grade securities, these bonds
generally offer higher yields than other bonds of comparable quality
because they are subject to special risks. Among the special risks of
investing in tobacco settlement bonds is the possibility that interest
payments could be affected by further litigation against the tobacco
industry. Furthermore, if the supply of tobacco settlement bonds exceeds
demand, which was of particular concern recently, the value of the bonds
could drop. We have always approached these bonds with caution, and
maintain a low exposure to the sector overall.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa/AAA -- 72.4%
Aa/AA -- 3.0%
A -- 4.3%
Baa/BBB -- 9.7%
Ba/BB -- 5.3%
B -- 3.1%
Other (VMIG1) -- 2.2%
Footnote reads:
* As a percentage of market value as of 5/31/03. A bond rated Baa/BBB or
higher is considered investment grade. The chart reflects Moody's and
Standard & Poor's ratings; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
As a part of our efforts to more broadly diversify your fund's
portfolio, we sold $4 million of Pontiac Hospital Financing Authority
bonds issued for North Oakland Medical Center. This hospital's financial
condition had not improved to the extent we believed it would when we
first bought the bond, and we moved a portion of the proceeds from the
sale into a more promising issue by purchasing $1.65 million worth of a
30-year Macomb County Hospital Financing Authority bonds issued for
Mount Clemens General Hospital. Mount Clemens General Hospital has a
history of solid profitability and a growing market share in an
increasingly popular area of Michigan. The capital raised from these
bonds will be used to build a surgical and cancer center, as well as a
5-story parking lot. These improvements should help increase
profitability and market share for the hospital.
We also moved out of short-duration Ford Motor Company-backed IDBs and
into Dow Chemical bonds with a comparable duration, both issued by the
Michigan State Strategic Foundation. We believe the automotive
industry's outlook to be sluggish for the near term, and that Dow
Chemical is better positioned to benefit as the economic recovery
continues.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
* THE FUND'S MANAGEMENT TEAM
The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The
members of the team are Susan McCormack (Portfolio Leader), Paul Drury
(Portfolio Member), David Hamlin (Portfolio Member), Richard Wyke
(Portfolio Member), Joyce Dragone, and Jerome Jacobs.
THE OUTLOOK FOR YOUR FUND
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
Our current outlook for the municipal bond market is cautiously
optimistic. The conflict with Iraq is largely over, and investors are
focused on economic concerns on the home front. While serious issues
remain, the level of uncertainty in the world seems to have eased a bit,
though we expect continued volatility.
Further, we expect that market yields will move higher in the near term
as a weakening dollar, Federal Reserve Board policy, the recently
enacted tax cut package, and growing federal budget deficits take
effect.
Municipal budgets will continue to face significant pressures in the
months ahead. Governments will wrangle with how to implement costly
home-front protection measures while at the same time pushing tax cuts
to stimulate economic growth. Historically, improvement in the credit
quality of state and local governments has lagged a general economic
recovery, so we expect municipal credit quality to remain fragile for
some time to come.
Over the next few months, we believe the ratio of muni-bond yields to
comparable Treasury yields is likely to return to more normal levels.
Accordingly, we will look for opportunities to reduce our cross-market
arbitrage position (by selling municipal bonds to cover the Treasury
futures contracts) and we expect the fund will profit from the
transactions.
In our opinion, the market continues to offer attractive value and
compelling risk/reward characteristics. With credit spreads remaining
very generous, we believe credit risk is worth taking in moderate
amounts. We believe municipal bonds could perform well relative to other
fixed-income sectors, because demand for the bonds is firm and supply
should moderate as rates move higher. We believe we have positioned your
fund to take advantage of the market's potential.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. This fund
concentrates its investments in one state and involves more risk than a
fund that invests more broadly.
PERFORMANCE SUMMARY
This section provides information about your fund's performance during
its fiscal year, which ended May 31, 2003. In accordance with regulatory
requirements, we also include performance for the most current calendar
quarter-end. Performance should always be considered in light of a
fund's investment strategy. Past performance does not indicate future
results. More recent returns may be less or more than those shown.
Investment return and principal value will fluctuate and you may have a
gain or a loss when you sell your shares. A profile of your fund's
strategy appears on the first page of this report. See page 9 for
definitions of some terms used in this section.
TOTAL RETURN FOR PERIODS ENDED 5/31/03
Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (4/17/95)
NAV POP NAV CDSC NAV POP
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1 year 8.03% 2.85% 7.33% 2.33% 7.70% 4.21%
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5 years 26.71 20.65 22.67 20.68 24.82 20.82
Annual average 4.85 3.83 4.17 3.83 4.53 3.85
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10 years 69.58 61.59 58.65 58.65 64.43 59.16
Annual average 5.42 4.92 4.72 4.72 5.10 4.76
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Annual average
(life of fund) 6.46 6.08 5.72 5.72 6.09 5.83
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.75% and 3.25%, respectively. Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Performance for class B and M shares
before their inception is derived from the historical performance of
class A shares, adjusted for the applicable sales charge (or CDSC) and
higher operating expenses for such shares.
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/03
Lipper Michigan
Lehman Municipal Municipal Debt Funds
Bond Index category average*
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1 year 10.36% 9.49%
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5 years 36.79 29.58
Annual average 6.47 5.31
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10 years 89.42 76.12
Annual average 6.60 5.82
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Annual average
(life of fund) 7.53 6.90
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*Index and Lipper results should be compared to fund performance at net asset
value. Over the 1-, 5-, and 10-year periods ended 5/31/03, there were 39, 36,
and 13 funds, respectively, in this Lipper category.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 5/31/93
Fund's class A Lehman Municipal
shares at POP Bond Index
5/31/93 9,525 10,000
5/31/94 9,842 10,247
5/31/95 10,446 11,180
5/31/96 10,728 11,691
5/31/97 11,883 12,659
5/31/98 12,766 13,847
5/31/99 13,106 14,494
5/31/00 12,839 14,370
5/31/01 14,140 16,114
5/31/02 15,025 17,163
5/31/03 $16,159 $18,942
Footnote reads:
Past performance does not indicate 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 $15,865 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class M shares
would have been valued at $16,443 ($15,916 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/03
Class A Class B Class M
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Distributions
(number) 12 12 12
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Income 1 $0.393410 $0.334021 $0.366074
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Capital gains 1 -- -- --
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Total $0.393410 $0.334021 $0.366074
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Share value: NAV POP NAV NAV POP
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5/31/02 $8.95 $9.40 $8.94 $8.95 $9.25
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5/31/03 9.26 9.72 9.25 9.26 9.57
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Current return (end of period)
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Current
dividend
rate 2 4.02% 3.83% 3.39% 3.73% 3.61%
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Taxable
equivalent 3 6.45 6.14 5.44 5.98 5.79
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Current
30-day SEC
yield 4 2.78 2.65 2.14 2.49 2.41
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Taxable
equivalent 3 4.46 4.25 3.43 3.99 3.87
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1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 37.67% federal and state combined tax rate for 2003.
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 6/30/03 (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
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1 year 6.81% 1.72% 6.13% 1.13% 6.49% 3.05%
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5 years 25.95 19.92 22.06 20.09 24.21 20.21
Annual average 4.72 3.70 4.07 3.73 4.43 3.75
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10 years 66.13 58.23 55.51 55.51 61.06 55.80
Annual average 5.21 4.70 4.51 4.51 4.88 4.53
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Annual average
(life of fund) 6.40 6.02 5.65 5.65 6.02 5.77
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See first page of performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. The
NAV is calculated by dividing the net value of all the fund's assets by
the number of outstanding shares.
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 class B 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.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without 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 (except on certain
redemptions of shares bought without an initial sales charge).
COMPARATIVE INDEXES
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Intermediate Government Bond Index is an unmanaged index of
government bonds with maturities between 1 and 10 years.
Citigroup World Government Bond Index is an unmanaged index of
government bonds from 14 countries.
S&P 500 Index is an unmanaged index of common stock performance.
Russell 2000 Index is an unmanaged index of common stocks that generally
measure performance of small to midsize companies within the Russell
3000 Index.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ.
You cannot invest directly in an index.
Lipper Inc. is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
PUTNAM'S POLICY ON CONFIDENTIALITY
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances.
It is our policy to protect the confidentiality of your information,
whether or not you currently own shares of our funds, and in
particular, not to sell information about you or your accounts to
outside marketing firms. We have safeguards in place designed to
prevent unauthorized access to our computer systems and procedures to
protect personal information from unauthorized use.
Under certain circumstances, we share this information with outside
vendors who provide services to us, such as mailing and proxy
solicitation. In those cases, the service providers enter into
confidentiality agreements with us, and we provide only the information
necessary to process transactions and perform other services related to
your account. We may also share this information with our Putnam
affiliates to service your account or provide you with information about
other Putnam products or services. It is also our policy to share
account information with your financial advisor, if you've listed one on
your Putnam account.
If you would like clarification about our confidentiality policies or
have any questions or concerns, please don't hesitate to contact us at
1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or
Saturdays from 9:00 a.m. to 5:00 p.m. Eastern Time.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, as well as the accompanying Notes,
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 are determined. All investment and noninvestment 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.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
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 sources 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-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Shareholders of
Putnam Michigan Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the 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, 2003, and the results of its operations, the changes
in its net assets and the financial highlights for the periods
indicated, in conformity with accounting principles generally accepted
in the United States of America. 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
auditing standards generally accepted in the United States of America,
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, 2003, by correspondence with the custodian,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 9, 2003
THE FUND'S PORTFOLIO
May 31, 2003
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
MBIA -- MBIA Insurance Company
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.8%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
Michigan (83.7%)
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$5,500,000 Battle Creek, Downtown Dev. Auth. Tax Increment
Rev. Bonds, 7.65s, 5/1/22 AAA/P $5,928,230
1,000,000 Delta Cnty., Econ. Dev. Corp. (Mead Westvaco)
Rev. Bonds, Ser. A, 6 1/4s, 4/15/27 Baa2 1,040,000
Detroit, City School Dist. G.O. Bonds
(School Bldg. & Site Impt.), Ser. A, FGIC
1,000,000 6s, 5/1/21 Aaa 1,255,000
1,000,000 6s, 5/1/20 Aaa 1,260,000
1,000,000 6s, 5/1/19 Aaa 1,265,000
1,500,000 5 1/4s, 5/1/17 Aaa 1,773,750
1,500,000 Detroit, Downtown Dev. Auth. Tax Increment Rev.
Bonds (Dev. Area No. 1), Ser. A, MBIA, 4 3/4s, 7/1/25 Aaa 1,539,375
Detroit, G.O. Bonds
2,475,000 Ser. B, 7s, 4/1/04 A- 2,591,375
4,875,000 Ser. A, 6.8s, 4/1/15 Aaa 5,423,438
1,405,000 Detroit, Local Dev. Fin. Auth. Tax Increment Rev. Bonds,
Ser. A, 5 1/2s, 5/1/21 BB- 1,185,469
2,500,000 Detroit, Swr. Disp. Rev. Bonds (Sr. Lien), Ser. A, FSA,
5 1/2s, 7/1/17 Aaa 3,028,125
3,000,000 Detroit, Wtr. Supply Syst. Rev. Bonds (Sr. Lien), Ser. A,
MBIA, 5 3/4s, 7/1/11 Aaa 3,600,000
3,065,000 Detroit/Wayne Cnty., Stad. Auth. Rev. Bonds, FGIC,
5 1/4s, 2/1/27 Aaa 3,237,406
1,000,000 Dickinson Cnty., Econ. Dev. Corp. Rev. Bonds,
5 3/4s, 6/1/16 Baa2 1,048,750
4,700,000 Dickinson Cnty., Hosp. Rev. Bonds
(Memorial Hosp. Syst.), 8 1/8s, 11/1/24 Baa3 5,246,375
1,400,000 Ecorse, Pub. School Dist. G.O. Bonds, FGIC,
6 1/2s, 5/1/08 Aaa 1,678,250
Flint, Hosp. Auth. Rev. Bonds (Hurley Med. Ctr.), Ser. A
630,000 6s, 7/1/06 Baa2 681,975
1,000,000 5 3/8s, 7/1/20 Baa3 931,250
Forest Hills, Pub. Schools G.O. Bonds
1,455,000 5 5/8s, 5/1/14 Aa2 1,720,538
1,590,000 5 5/8s, 5/1/13 Aa2 1,876,200
3,525,000 Garden City, Hosp. Fin. Auth. Rev. Bonds
(Garden City Hosp.), Ser. A, 5 3/4s, 9/1/17 (SEG) B1 2,661,375
1,000,000 Grand Rapids, Hsg. Fin. Auth. Multi-Fam. Rev. Bonds,
Ser. A, FNMA Coll., 7 5/8s, 9/1/23 AAA 1,035,000
1,000,000 Grand Rapids, Sanitation Swr. Syst. Rev. Bonds, Ser. A,
FGIC, 4 3/4s, 1/1/28 Aaa 1,022,500
2,000,000 Greater Detroit, Res. Recvy. Auth. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 12/13/06 Aaa 2,320,000
2,190,000 Harper Creek, Cmnty. School Dist. G.O. Bonds,
5 1/8s, 5/1/31 Aaa 2,296,763
1,500,000 Hartland, Cons. School Dist. G.O. Bonds, FGIC,
6s, 5/1/18 Aaa 1,822,500
1,000,000 Holland, School District G.O. Bonds, AMBAC,
zero %, 5/1/19 Aaa 503,750
1,000,000 Huron, School Dist. G.O. Bonds, FSA, 5 5/8s, 5/1/15 Aaa 1,150,000
7,000,000 Kalamazoo, Hosp. Fin. Auth. Fac. Rev. Bonds, FGIC,
5.244s, 6/1/11 Aaa 7,341,320
1,450,000 Kent, Hosp. Fin. Auth. Rev. Bonds (Spectrum Hlth.),
Ser. A, MBIA, 5 1/2s, 1/15/16 Aaa 1,663,875
1,650,000 Macomb Cnty., Hosp. Fin. Auth. Rev. Bonds
(Mt. Clemens Gen. Hosp.), Ser. B, 5 7/8s, 11/15/34 BBB- 1,639,688
Manistee, Area School Dist. G.O. Bonds
800,000 FGIC, 5 3/4s, 5/1/19 Aaa 953,000
1,985,000 5s, 5/1/24 Aaa 2,079,288
1,000,000 MI Higher Ed. Fac. Auth. Rev. Bonds (Ltd. Obligation-
Hope College), Ser. A, 5.55s, 4/1/24 BBB 1,060,000
MI Muni. Bond Auth. Rev. Bonds
3,840,000 (State Revolving Fund), 6 1/2s, 10/1/17 Aaa 4,195,200
1,000,000 (Drinking Wtr. Revolving Fund), 5 1/2s, 10/1/18 Aaa 1,193,750
1,000,000 (Clean Wtr.), 5 1/2s, 10/1/16 Aaa 1,216,250
2,300,000 MI Pub. Pwr. Agcy. Rev. Bonds (Belle River Project),
Ser. A, MBIA, 5 1/4s, 1/1/15 Aaa 2,699,625
MI State Bldg. Auth. Rev. Bonds
5,750,000 Ser. I, AMBAC, 6 1/2s, 10/1/07 Aaa 6,835,313
1,870,000 (Fac. Program), Ser. I, 4 3/4s, 10/15/25 Aa1 2,012,588
MI State Hosp. Fin. Auth. Rev. Bonds
1,000,000 (Sinai Hosp.), 6 5/8s, 1/1/16 Ba1 907,500
2,000,000 (Presbyterian Villages), 6.4s, 1/1/15 BBB-/P 1,945,000
1,000,000 (Oakwood Hosp.), Ser. A, 6s, 4/1/22 A2 1,076,250
650,000 (Sparrow Hosp.), 5 1/2s, 11/15/21 A1 678,438
1,000,000 (Chelsea Cmnty. Hosp.), 5 3/8s, 5/15/19 BBB 1,000,000
1,495,000 MI State Hsg. Dev. Auth. VRDN, Ser. 2000A,
1 1/4s, 12/1/16 A-1 1,495,000
2,900,000 MI State Hsg. Dev. Auth. Rental Hsg. Rev. Bonds, Ser. B,
AMBAC, 5.45s, 10/1/12 Aaa 2,996,251
2,000,000 MI State South Central Pwr. Agcy. Rev. Bonds,
AMBAC, 5s, 11/1/09 Aaa 2,305,000
MI State Strategic Fund, Ltd. Obligation Rev. Bonds
1,150,000 (Ford Motor Co.), Ser. A, 7.1s, 2/1/06 Baa1 1,236,250
1,500,000 (Detroit Edison Co.), AMBAC, 7s, 5/1/21 Aaa 2,047,500
3,000,000 (Worthington Armstrong Venture), 5 3/4s, 10/1/22 AAA/P 3,547,500
1,500,000 (Detroit Edison Poll. Control), 5.65s, 9/1/29 AAA 1,561,875
5,000,000 (Detroit Edison Co.), Ser. A, MBIA, 5.55s, 9/1/29 Aaa 5,418,750
1,000,000 (Detroit Ed CC Conv), AMBAC, 4.85s, 9/1/30 Aaa 1,130,000
1,000,000 MI State Strategic Fund Solid Waste Disp. Mandatory
Put Bonds (Waste Mgt., Inc.), 4.2s, 12/1/12 BBB 1,025,000
MI State Strategic Fund Solid Waste Disp. Rev. Bonds
1,500,000 (Genesee Pwr. Station), 7 1/2s, 1/1/21 BB+/P 1,445,625
2,500,000 (SD Warren Co.), Ser. C, 7 3/8s, 1/15/22 BB/P 2,550,000
2,500,000 MI State Strategic Fund, Ltd. Mandatory Put Bonds
(Dow Chemical Project), 3.8s, 6/1/14 A 2,578,125
1,500,000 Midland Cnty., Econ. Dev. Corp. Rev. Bonds,
6 7/8s, 7/23/09 Ba3 1,539,375
1,350,000 Mount Clemens Cmnty. School Dist. Rev. Bonds
(School Bldg. & Site), 5 1/2s, 5/1/18 Aaa 1,528,875
2,700,000 Northern Michigan U. VRDN, 1.35s, 6/1/31 VMIG1 2,700,000
1,000,000 Pontiac, Hosp. Fin. Auth. Rev. Bonds (North Oakland
Med. Ctr.), 6s, 8/1/23 Ba1 807,500
1,500,000 Pontiac, Tax Increment Fin. Auth. Rev. Bonds,
6 3/8s, 6/1/31 BB+ 1,556,250
2,150,000 Port Huron Area School Dist. G.O. Bonds
(School Building and Site), 5 1/4s, 5/1/15 Aaa 2,467,125
1,400,000 Rochester Cmnty. School Dist. G.O. Bonds, Ser. II,
5 1/2s, 5/1/21 Aaa 1,550,500
1,015,000 Romulus, Township Cmnty. Schools G.O. Bonds,
5s, 5/1/11 Aaa 1,160,906
1,000,000 Royal Oak, Hosp. Fin. Auth. Rev. Bonds (William
Beaumont Hosp.), Ser. M, MBIA, 5 1/4s, 11/15/35 Aaa 1,060,000
1,000,000 Walled Lake, Cons. School Dist. G.O. Bonds,
5 1/2s, 5/1/12 Aaa 1,185,000
1,370,000 Warren Cons. School Dist. G.O. Bonds, 5s, 5/1/12 Aaa 1,573,788
3,000,000 Waterford, Econ. Dev. Corp. Rev. Bonds
(Canterbury Hlth.), 6s, 1/1/39 B-/P 2,126,250
2,000,000 Wayland, Univ. School Dist. Rev. Bonds, FGIC, 8s, 5/1/10 Aaa 2,637,500
Wayne Charter Cnty., Special Arpt. Fac. Rev. Bonds
(Northwest Airlines, Inc.)
750,000 6 3/4s, 12/1/15 B+/P 543,750
1,000,000 6s, 12/1/29 B+/P 627,500
2,405,000 Wayne Cnty., Bldg. Auth. G.O. Bonds, Ser. A,
MBIA, 6s, 6/1/08 Aaa 2,735,688
1,000,000 West Bloomfield, School Dist. G.O. Bonds
(School Bldg. & Site), MBIA, 5 5/8s, 5/1/16 Aaa 1,143,750
Western MI U. Rev. Bonds, AMBAC
1,180,000 5s, 7/15/11 Aaa 1,354,050
1,120,000 5s, 7/15/10 Aaa 1,283,800
2,500,000 Western Township Util. G.O. Bonds, FGIC, 5s, 1/1/13 AAA 2,862,500
1,240,000 Ypsilanti, School Dist. G.O. Bonds, FGIC, 5 3/8s, 5/1/26 Aaa 1,311,300
-------------
160,711,762
Puerto Rico (15.1%)
- -------------------------------------------------------------------------------------------------------------------
1,460,000 Children's Trust Fund Tobacco Settlement Rev. Bonds,
5 3/8s, 5/15/33 A3 1,270,200
Cmnwlth. of PR, G.O. Bonds
2,500,000 MBIA, 6s, 7/1/13 Aaa 3,112,500
2,500,000 MBIA, 5 3/4s, 7/1/26 Aaa 3,018,750
2,000,000 (Pub. Impt.), Ser. A, MBIA, 5 1/2s, 7/1/20 Aaa 2,417,500
3,085,000 (Pub. Impt.), Ser. A, MBIA, 5 1/2s, 7/1/16 Aaa 3,736,706
2,000,000 Cmnwlth. of PR, Muni. Fin. Agcy. Rev. Bonds, Ser. A,
FSA, 5s, 8/1/13 Aaa 2,295,000
2,100,000 Cmnwlth. of PR, Pub. Bldg. Auth. Rev. Bonds, Ser. A,
AMBAC, 6 1/4s, 7/1/14 Aaa 2,690,620
PR Elec. Pwr. Auth. Rev. Bonds
3,000,000 Ser. X, MBIA, 6s, 7/1/15 Aaa 3,363,750
3,000,000 Ser. HH, FSA, 5 1/4s, 7/1/29 Aaa 3,258,750
1,800,000 Ser. JJ, MBIA, 5 1/4s, 7/1/15 Aaa 2,133,000
1,500,000 PR Indl. Tourist Edl. Med. & Env. Control Fac. Rev. Bonds
(Cogen. Fac.-AES Project), 6 5/8s, 6/1/26 Baa2 1,578,750
-------------
28,875,526
- -------------------------------------------------------------------------------------------------------------------
Total Investments (cost $178,945,615) $189,587,288
- -------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $191,910,108.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at May 31, 2003 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, 2003. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the Report
of independent accountants.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at May 31,
2003.
The rates shown on VRDN's and Mandatory Put Bonds are the current
interest rates shown at May 31, 2003.
The fund had the following industry group concentration greater
than 10% at May 31, 2003 (as a percentage of net assets):
Utilities 16.2%
Health care/hospitals 12.8
The fund had the following insurance greater than 10% at May 31,
2003 (as a percentage of net assets):
MBIA 19.6%
FGIC 14.8
AMBAC 12.2
- ------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 2003
Market Aggregate Face Expiration Unrealized
Value Value Date Depreciation
- ------------------------------------------------------------------------------
US Treasury Note
10 yr (Short) $10,540,928 $10,484,916 Sep-03 $(56,012)
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2003
Assets
- -------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$178,945,615) (Note 1) $189,587,288
- -------------------------------------------------------------------------------------------
Cash 732,510
- -------------------------------------------------------------------------------------------
Interest and other receivables 2,436,012
- -------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 156,791
- -------------------------------------------------------------------------------------------
Receivable for securities sold 100,003
- -------------------------------------------------------------------------------------------
Receivable for variation margin (Note 1) 5,563
- -------------------------------------------------------------------------------------------
Total assets 193,018,167
Liabilities
- -------------------------------------------------------------------------------------------
Distributions payable to shareholders 377,070
- -------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 349,169
- -------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 239,457
- -------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 23,228
- -------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 20,578
- -------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 733
- -------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 80,740
- -------------------------------------------------------------------------------------------
Other accrued expenses 17,084
- -------------------------------------------------------------------------------------------
Total liabilities 1,108,059
- -------------------------------------------------------------------------------------------
Net assets $191,910,108
Represented by
- -------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $184,843,974
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (79,458)
- -------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (3,440,069)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 10,585,661
- -------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares
outstanding $191,910,108
Computation of net asset value and offering price
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($146,255,209 divided by 15,799,386 shares) $9.26
- -------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.26)* $9.72
- -------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($43,632,366 divided by 4,717,903 shares)** $9.25
- -------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,022,533 divided by 218,439 shares) $9.26
- -------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.26)*** $9.57
- -------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000
or more and on group sales, the offering price is reduced.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
*** On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales, the offering price is reduced.
The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS
Year ended May 31, 2003
Interest income: $9,687,071
- -------------------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 949,998
- -------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 216,164
- -------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,708
- -------------------------------------------------------------------------------------------
Administrative services (Note 2) 8,260
- -------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 288,724
- -------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 366,402
- -------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 12,612
- -------------------------------------------------------------------------------------------
Other 122,527
- -------------------------------------------------------------------------------------------
Total expenses 1,977,395
- -------------------------------------------------------------------------------------------
Expense reduction (Note 2) (34,288)
- -------------------------------------------------------------------------------------------
Net expenses 1,943,107
- -------------------------------------------------------------------------------------------
Net investment income 7,743,964
- -------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 451,737
- -------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (677,925)
- -------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures contracts
during the year 6,921,972
- -------------------------------------------------------------------------------------------
Net gain on investments 6,695,784
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,439,748
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS
Year ended May 31
-----------------------------------
2003 2002
- -------------------------------------------------------------------------------------------------------
Increase in net assets
- -------------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------------
Net investment income $7,743,964 $8,700,272
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (226,188) 886,911
- -------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,921,972 1,421,327
- -------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,439,748 11,008,510
- -------------------------------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------------------------------
From tax-exempt income
Class A (6,167,477) (6,706,451)
- -------------------------------------------------------------------------------------------------------
Class B (1,561,703) (1,934,062)
- -------------------------------------------------------------------------------------------------------
Class M (100,605) (116,851)
- -------------------------------------------------------------------------------------------------------
From ordinary income
Class A (77,270) --
- -------------------------------------------------------------------------------------------------------
Class B (22,974) --
- -------------------------------------------------------------------------------------------------------
Class M (1,249) --
- -------------------------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (3,464,319) 8,818,250
- -------------------------------------------------------------------------------------------------------
Total increase in net assets 3,044,151 11,069,396
Net assets
- -------------------------------------------------------------------------------------------------------
Beginning of year 188,865,957 177,796,561
- -------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net investment
income of $79,458 and undistributed net investment income
of $152,881, respectively) $191,910,108 $188,865,957
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS A
- -----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- -----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.95 $8.83 $8.38 $9.14 $9.35
- -----------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------
Net investment income .38 .43 .45 .46 .44
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .32 .12 .45 (.76) (.18)
- -----------------------------------------------------------------------------------------------------
Total from
investment operations .70 .55 .90 (.30) .26
- -----------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------
From net
investment income (.39) (.43) (.45) (.46) (.44)
- -----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.03)
- -----------------------------------------------------------------------------------------------------
Total distributions (.39) (.43) (.45) (.46) (.47)
- -----------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.26 $8.95 $8.83 $8.38 $9.14
- -----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 8.03 6.39 10.95 (3.30) 2.77
- -----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $146,255 $142,706 $130,071 $116,715 $145,438
- -----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .89 .87 .87 .88 1.00
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.23 4.82 5.18 5.30 4.81
- -----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 24.48 20.71 14.46 7.36 19.51
- -----------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS B
- -----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- -----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.94 $8.83 $8.36 $9.12 $9.34
- -----------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------
Net investment income .33 .37 .39 .40 .38
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .31 .12 .48 (.76) (.19)
- -----------------------------------------------------------------------------------------------------
Total from
investment operations .64 .49 .87 (.36) .19
- -----------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------
From net
investment income (.33) (.38) (.40) (.40) (.38)
- -----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.03)
- -----------------------------------------------------------------------------------------------------
Total distributions (.33) (.38) (.40) (.40) (.41)
- -----------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.25 $8.94 $8.83 $8.36 $9.12
- -----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 7.33 5.58 10.50 (3.95) 2.00
- -----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $43,632 $43,308 $45,406 $40,060 $46,827
- -----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.54 1.52 1.52 1.53 1.65
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.58 4.17 4.53 4.65 4.16
- -----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 24.48 20.71 14.46 7.36 19.51
- -----------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS
(For a common share outstanding throughout the period)
CLASS M
- -----------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- -----------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.95 $8.83 $8.37 $9.13 $9.35
- -----------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------
Net investment income .36 .40 .43 .43 .42
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .32 .13 .46 (.76) (.20)
- -----------------------------------------------------------------------------------------------------
Total from
investment operations .68 .53 .89 (.33) .22
- -----------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------
From net
investment income (.37) (.41) (.43) (.43) (.41)
- -----------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.03)
- -----------------------------------------------------------------------------------------------------
Total distributions (.37) (.41) (.43) (.43) (.44)
- -----------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.26 $8.95 $8.83 $8.37 $9.13
- -----------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 7.70 6.07 10.75 (3.60) 2.36
- -----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,023 $2,852 $2,320 $2,010 $1,922
- -----------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.19 1.17 1.17 1.18 1.30
- -----------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.93 4.53 4.88 5.02 4.51
- -----------------------------------------------------------------------------------------------------
Portfolio turnover (%) 24.48 20.71 14.46 7.36 19.51
- -----------------------------------------------------------------------------------------------------
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
May 31, 2003
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 income tax
as Putnam Investment Management, LLC ("Putnam Management"), the fund's
manager, an indirect wholly-owned subsidiary of Putnam, LLC, 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 higher than class A shares but lower
than class B 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 fund may be affected by economic and political
developments in the state of Michigan. The preparation of financial
statements is in conformity with accounting principles generally
accepted in the United States of America and requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and the reported amounts of
increases and decreases in net assets from operations during the
reporting period. Actual results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are valued on the basis
of valuations provided by an independent pricing service, approved by
the Trustees. Such services use information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Restricted securities are valued at fair value
following procedures approved by the Trustees. Such valuations and
procedures are reviewed periodically by the Trustees.
B) Security transactions and related investment income Security
transactions are recorded on the trade date (date the order to buy or
sell is executed). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis. The premium in
excess of the call price, if any, is amortized to the call date;
thereafter, any remaining premium is amortized to maturity.
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. The fund and the broker
agree to exchange an amount of cash equal to the daily fluctuation in
the value of the futures contract. Such receipts or payments are known
as "variation margin." 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.
Futures and written option contracts outstanding at period end are
listed after the fund's portfolio.
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 that
borrowings not exceed prospectus limitations. For the year ended May 31,
2003, 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, 2003, the fund had a capital loss carryover of approximately
$2,486,000 available to the extent allowed by tax law to offset future
capital gains, if any. The amount of the carryover and the expiration
dates are:
Loss Carryover Expiration
- -------------- ---------------------------
$939,000 May 31, 2008
1,547,000 May 31, 2009
F) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, 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 dividends payable, realized and
unrealized gains and losses on certain futures contracts, book
amortization/ accretion 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, 2003, the fund
reclassified $45,025 to increase distributions in excess of net
investment income and a decrease to accumulated net realized losses of
$45,025. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $13,738,963
Unrealized depreciation 3,097,290
------------------
Net unrealized appreciation 10,641,673
Undistributed tax exempt income 289,060
Capital loss carryforward (2,486,051)
Cost for federal income
tax purposes $178,945,615
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 lesser of (i) the annual rate of
0.50% of the average net assets of the fund or (ii) 0.60% of the first
$500 million of average net assets, 0.50% of the next $500 million,
0.45% of the next $500 million, 0.40% of the next $5 billion, 0.375% of
the next $5 billion, 0.355% of the next $5 billion, 0.34% of the next $5
billion and 0.33% thereafter.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam, LLC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the year ended May 31, 2003, the
fund's expenses were reduced by $34,288 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $635 has been allocated to the fund, and an additional fee for
each Trustees meeting attended. 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
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 a 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 Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, 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 Retail Management at
annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund at the annual rates 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, 2003, Putnam Retail Management, acting as
underwriter, received net commissions of $24,216 and $774 from the sale
of class A and class M shares, respectively, and received $69,438 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1.00% 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,
2003, Putnam Retail Management, acting as underwriter, received $22,098
on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 2003, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $44,891,469 and $43,377,671, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At May 31, 2003, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 2003
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 1,821,906 $16,541,795
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 459,635 4,180,409
- ---------------------------------------------------------------------------
2,281,541 20,722,204
Shares repurchased (2,434,123) (22,132,180)
- ---------------------------------------------------------------------------
Net decrease (152,582) $(1,409,976)
- ---------------------------------------------------------------------------
Year ended May 31, 2002
- ---------------------------------------------------------------------------
Class A Shares Amount
- ---------------------------------------------------------------------------
Shares sold 2,732,171 $24,406,429
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 503,342 4,509,781
- ---------------------------------------------------------------------------
3,235,513 28,916,210
Shares repurchased (2,006,283) (17,930,192)
- ---------------------------------------------------------------------------
Net increase 1,229,230 $10,986,018
- ---------------------------------------------------------------------------
Year ended May 31, 2003
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 670,060 $6,074,989
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 122,967 1,117,212
- ---------------------------------------------------------------------------
793,027 7,192,201
Shares repurchased (920,764) (8,346,119)
- ---------------------------------------------------------------------------
Net decrease (127,737) $(1,153,918)
- ---------------------------------------------------------------------------
Year ended May 31, 2002
- ---------------------------------------------------------------------------
Class B Shares Amount
- ---------------------------------------------------------------------------
Shares sold 997,153 $8,906,869
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 153,435 1,373,088
- ---------------------------------------------------------------------------
1,150,588 10,279,957
Shares repurchased (1,449,961) (12,940,484)
- ---------------------------------------------------------------------------
Net decrease (299,373) $(2,660,527)
- ---------------------------------------------------------------------------
Year ended May 31, 2003
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 41,144 $374,936
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 9,166 83,368
- ---------------------------------------------------------------------------
50,310 458,304
Shares repurchased (150,624) (1,358,729)
- ---------------------------------------------------------------------------
Net decrease (100,314) $(900,425)
- ---------------------------------------------------------------------------
Year ended May 31, 2002
- ---------------------------------------------------------------------------
Class M Shares Amount
- ---------------------------------------------------------------------------
Shares sold 158,610 $1,405,448
- ---------------------------------------------------------------------------
Shares issued in connection
with reinvestment
of distributions 10,095 90,349
- ---------------------------------------------------------------------------
168,705 1,495,797
Shares repurchased (112,581) (1,003,038)
- ---------------------------------------------------------------------------
Net increase 56,124 $492,759
- ---------------------------------------------------------------------------
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 98.70% 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 2004 will show the tax status of
all distributions paid to your account in calendar 2003.
TRUSTEES
Name, Address,1 Date of Birth,
Position(s) Held with Fund
and Length of Service Principal Occupation(s)
as a Putnam Fund Trustee 2 During Past 5 Years Other Directorships Held by Trustee
- ------------------------------------------------------------------------------------------------------------
Jameson A. Baxter (9/6/43), President, Baxter Director of ASHTA Chemicals, Inc.,
Trustee since 1994 Associates, Inc. Banta Corporation (a printing and
(a consulting and digital imaging firm), Ryerson Tull,
private investment Inc. (a steel service corporation),
firm) Advocate Health Care, and the
National Center for Nonprofit Boards.
Chairman Emeritus of the Board of
Trustees, Mount Holyoke College.
Until 2002, Mrs. Baxter was a
director of Intermatic Corporation,
a manufacturer of energy control
products. Also held various positions
in investment banking and corporate
finance, including Vice President and
principal of the Regency Group and
Vice President of and consultant to
First Boston Corp.
Charles B. Curtis (4/27/40), President and Chief Member of the Council on Foreign
Trustee since 2001 Operating Officer, Relations and the Trustee Advisory
Nuclear Threat Council of the Applied Physics
Initiative (a private Laboratory at Johns Hopkins
foundation dealing University. Until 2003, Mr. Curtis
with national security was a Member of the Electric Power
issues), also serves as Research Institute Advisory Council,
Senior Advisor to the and the University of Chicago Board
United Nations of Governors for Argonne National
Foundation Laboratory. Prior to 2002, Mr. Curtis
was a Member of the Board of
Directors of the Gas Technology
Institute and the Board of Directors
of the Environment and Natural
Resources Program Steering
Committee, John F. Kennedy School
of Government, Harvard University.
Until 2001, Mr. Curtis was a Member
of the Department of Defense Policy
Board and Director of EG&G
Technical Services, Inc. (fossil energy
research and development support).
Prior to May 1997, Mr. Curtis was
Deputy Secretary of Energy. He
served as Chairman of the Federal
Energy Regulatory Commission from
1977 to 1987 and has held positions
on the staff of the U.S. House of
Representatives, the U.S. Treasury
Department, and the Securities and
Exchange Commission. Mr. Curtis
is also a lawyer with over 15 years
of experience.
John A. Hill (1/31/42), Vice-Chairman and Director of Devon Energy
Trustee since 1985 and Managing Director, Corporation (formerly known as
Chairman since 2000 First Reserve Snyder Oil Corporation),
Corporation TransMontaigne Oil Company,
(a registered investment Continuum Health Partners of
advisor investing in New York, Sarah Lawrence College,
companies in the and various private companies owned
world-wide energy by First Reserve Corporation.
industry on behalf of Trustee of TH Lee, Putnam
institutional investors) Investment Trust (a closed-end
investment company). Prior to
acquiring First Reserve in 1983,
Mr. Hill held executive positions with
several advisory firms and various
positions with the federal government,
including Associate Director of the
Office of Management and Budget
and Deputy Director of the Federal
Energy Administration.
Ronald J. Jackson Private investor Former Chairman, President, and
(12/17/43), Chief Executive Officer of Fisher-
Trustee since 1996 Price, Inc. (a toy manufacturer).
Previously served as President and
Chief Executive Officer of Stride-Rite,
Inc. and Kenner Parker Toys. Also
held financial and marketing positions
with General Mills, Parker Brothers,
and Talbots. President of the
Kathleen and Ronald J. Jackson
Foundation (charitable trust). Member
of the Board of Overseers of WGBH
(public television and radio). Member
of the Board of Overseers of the
Peabody Essex Museum.
Paul L. Joskow (6/30/47), Elizabeth and James Director, National Grid Transco
Trustee since 1997 Killian Professor of (formerly National Grid Group,
Economics and a UK-based holding company
Management and with interests in electric and gas
Director of the Center transmission and distribution and
for Energy and telecommunications infrastructure),
Environmental Policy and the Whitehead Institute for
Research, Massachusetts Biomedical Research (a non-profit
Institute of Technology research institution). President of the
Yale University Council. Prior to
February 2002, March 2000, and
September 1998, Dr. Joskow was a
Director of State Farm Indemnity
Company (an automobile insurance
company), Director of New England
Electric System (a public utility
holding company) and a consultant
to National Economic Research
Associates, respectively.
Elizabeth T. Kennan Chairman, Cambus- Director, Northeast Utilities, and
(2/25/38), Kenneth Bloodstock (a Talbots (a distributor of women's
Trustee since 1992 limited liability company apparel). Trustee of Centre College.
involved in thoroughbred Prior to 2001, Dr. Kennan was a
horse breeding and member of the Oversight Committee
farming), President of Folger Shakespeare Library.
Emeritus of Mount Prior to September 2000, June 2000,
Holyoke College and November 1999, Dr. Kennan
was a Director of Chastain Real
Estate, Bell Atlantic, and Kentucky
Home Life Insurance, respectively.
Prior to 1995, Dr. Kennan was a
Trustee of Notre Dame University.
For 12 years, she was on the faculty
of Catholic University.
John H. Mullin, III Chairman and CEO Director Alex. Brown Realty, Inc.,
(6/15/41), of Ridgeway Farm Sonoco Products, Inc. (a packaging
Trustee since 1997 (a limited liability company), The Liberty Corporation
company engaged in (a company engaged in the
timber and farming) broadcasting industry), and Progress
Energy, Inc. (a utility company,
formerly known as Carolina Power &
Light). Trustee Emeritus of
Washington & Lee University. Prior
to October 1997, January 1998, and
May 2001, Mr. Mullin was a Director
of Dillon, Read & Co. Inc., The
Ryland Group, Inc., and Graphic
Packaging International Corp.,
respectively.
Robert E. Patterson Senior Partner of Cabot Chairman of the Joslin Diabetes
(3/15/45), Properties, L.P. and Center, Trustee of SEA Education
Trustee since 1984 Chairman of Cabot Association, and Director of
Properties, Inc. Brandywine Trust Company (a trust
company). Prior to February 1998,
Mr. Patterson was Executive Vice
President and Director of
Acquisitions of Cabot Partners
Limited Partnership. Prior to
December 2001, Mr. Patterson was
President and Trustee of Cabot
Industrial Trust (publicly traded real
estate investment trust). Prior to
1990, Mr. Patterson was Executive
Vice President of Cabot, Cabot &
Forbes Realty Advisors, the
predecessor of Cabot Partners, and
prior to that was Senior Vice
President of the Beal Companies.
W. Thomas Stephens Corporate Director Director of Xcel Energy Incorporated
(9/2/42), (public utility company), TransCanada
Trustee since 1997 Pipelines, Norske Canada, Inc.
(paper manufacturer), and Qwest
Communications (communications
company). Until 2003, Mr. Stephens
was a Director of Mail-Well, a
printing and envelope company.
Prior to July 2001 and October 1999,
Mr. Stephens was Chairman of Mail-
Well and MacMillan-Bloedel (forest
products company). Prior to 1996,
Mr. Stephens was Chairman and
Chief Executive Officer of
Johns Manville.
W. Nicholas Thorndike Director of various Trustee of Northeastern University and
(3/28/33), corporations and Honorary Trustee of Massachusetts
Trustee since 1992 charitable organizations, General Hospital. Prior to
including Courier September 2000, April 2000, and
Corporation (a book December 2001, Mr. Thorndike was
manufacturer and a Director of Bradley Real Estate,
publisher) and Inc., a Trustee of Eastern Utilities
Providence Journal Co. Associates, and a Trustee of Cabot
(a newspaper publisher) Industrial Trust, respectively.
Previously served as Chairman of the
Board and managing partner of
Wellington Management/Thorndike
Doran Paine & Lewis, and Chairman
and Director of Ivest Fund.
Lawrence J. Lasser* President and Chief Director of Marsh & McLennan
(11/1/42), Executive Officer of Companies, Inc. and the United Way
Trustee since 1992 Putnam Investments of Massachusetts Bay. Member of the
Vice President since 1981 and Putnam Board of Governors of the Investment
Management Company Institute, Trustee of the
Museum of Fine Arts, Boston, a
Trustee and Member of the Finance
and Executive Committees of Beth
Israel Deaconess Medical Center,
Boston, and a Member of the
CareGroup Board of Managers
Investment Committee, the Council
on Foreign Relations, and the
Commercial Club of Boston.
George Putnam, III* President, New Director of The Boston Family
(8/10/51), Generation Research, Office, L.L.C. (registered investment
Trustee since 1984 and Inc. (a publisher of advisor), Trustee of St. Mark's
President since 2000 financial advisory and School, and Trustee of Shore
other research services Country Day School. Until 2002,
relating to bankrupt and Mr. Putnam was a Trustee of the
distressed companies) SEA Education Association.
and New Generation Previously, Mr. Putnam was an
Advisers, Inc. attorney with the firm of Dechert
(a registered Price & Rhoads.
investment adviser)
A.J.C. Smith* (4/13/34), Director of Marsh & Director of Trident Corp. (a limited
Trustee since 1986 McLennan partnership with over 30 institutional
Companies, Inc. investors). Trustee of the Carnegie
Hall Society, the Educational
Broadcasting Corporation and the
National Museums of Scotland.
Chairman of the Central Park
Conservancy. Member of the Board
of Overseers of the Joan and
Sanford I. Weill Graduate School
of Medical Sciences of Cornell
University. Fellow of the Faculty of
Actuaries in Edinburgh, the
Canadian Institute of Actuaries, and
the Conference of Actuaries.
Associate of the Society of Actuaries.
Member of the American Actuaries,
the International Actuarial
Association and the International
Association of Consulting Actuaries.
Prior to May 2000 and November
1999, Mr. Smith was Chairman and
CEO, respectively, of Marsh &
McLennan Companies, Inc.
- ------------------------------------------------------------------------------------------------------------
1 The address of each Trustee is One Post Office Square, Boston, MA 02109. As of May 31, 2003, there
were 104 Putnam Funds.
2 Each Trustee serves for an indefinite term, until his or her resignation, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as defined in the Investment Company
Act of 1940) of the fund, Putnam Management, Putnam Retail Management or Marsh & McLennan Companies,
Inc., the parent company of Putnam LLC and its affiliated companies. Messrs. Putnam, III, Lasser
and Smith are deemed "interested persons" by virtue of their positions as officers or shareholders
of the fund or Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc.
George Putnam, III is the President of your fund and each of the other Putnam funds. Lawrence J.
Lasser is the President and Chief Executive Officer of Putnam Investments and Putnam Management.
Mr. Lasser and Mr. Smith serve as Directors of Marsh & McLennan Companies, Inc.
OFFICERS
In addition to George Putnam III and Lawrence J. Lasser, the other officers of the fund are
shown below:
Name, Address, 1 Date of Birth, Length of Service with
Position(s) Held with Fund the Putnam Funds Principal Occupation(s) During Past 5 Years
- ------------------------------------------------------------------------------------------------------------
Charles E. Porter Since 1989 Managing Director, Putnam Investments
(7/26/38), Executive Vice and Putnam Management
President, Treasurer and
Principal Financial Officer
Patricia C. Flaherty Since 1993 Senior Vice President, Putnam Investments
(12/1/46), Senior Vice and Putnam Management
President
Karnig H. Durgarian Since 2002 Senior Managing Director, Putnam
(1/13/56), Vice President and Investments
Principal Executive Officer
Steven D. Krichmar Since 2002 Managing Director, Putnam Investments.
(6/27/58), Vice President and Prior to July 2001, Partner,
Principal Financial Officer PricewaterhouseCoopers LLP
Michael T. Healy Since 2000 Managing Director, Putnam Investments
(1/24/58), Assistant Treasurer
and Principal Accounting
Officer
Brett C. Browchuk Since 1994 Managing Director, Putnam Investments
(2/27/63), Vice President and Putnam Management
Charles E. Haldeman Jr. Since 2002 Senior Managing Director, Putnam
(10/29/48), Vice President Investments and Putnam Management.
Prior to October 2002, Chief Executive
Officer, Lincoln National Investment
Companies; prior to January 2000,
President and Chief Operating Officer,
United Asset Management.
Beth S. Mazor Since 2002 Senior Vice President, Putnam Investments
(4/6/58), Vice President
Richard A. Monaghan Since 1998 Senior Managing Director, Putnam
(8/25/54), Vice President Investments and Putnam Retail
Management. Prior to November 1998,
Managing Director, Merrill Lynch
Stephen M. Oristaglio Since 1998 Senior Managing Director, Putnam
(8/21/55), Vice President Investments and Putnam Management.
Prior to July 1998, Managing Director,
Swiss Bank Corp.
Gordon H. Silver Since 1990 Senior Managing Director, Putnam
(7/3/47), Vice President Investments, Putnam Management and
Putnam Retail Management
Mark C. Trenchard Since 2002 Senior Vice President, Putnam Investments
(6/5/62), Vice President
Judith Cohen Since 1993 Clerk and Assistant Treasurer, The
(6/7/45), Clerk and Putnam Funds
Assistant Treasurer
Jerome J. Jacobs Since 1996 Managing Director of Putnam Management
(8/20/58), Vice President
- ------------------------------------------------------------------------------------------------------------
1 The address of each Officer is One Post Office Square, Boston, MA 02109.
[GRAPHIC OMITTED: PHOTO OF SAMUEL PUTNAM]
PUTNAM IS A LEADER IN GLOBAL MONEY MANAGEMENT
Putnam Investments traces its heritage to the early 19th century when
ship captains hired trustees to manage their money while they were away
at sea. In a landmark 1830 decision that involved one such trustee,
Massachusetts Supreme Judicial Court Justice Samuel Putnam established
The Prudent Man Rule, a legal foundation for responsible money
management. In 1937, his great-great grandson founded Putnam with The
George Putnam Fund of Boston, the first fund to offer a balanced
portfolio of stocks and bonds. Today, Putnam Investments is one of the
largest investment management firms in the world, and this balanced
approach remains the foundation of everything we do.
With over 65 years of experience, Putnam has nearly $251 billion in
assets under management, over 100 mutual funds, over 13 million
shareholder accounts, and nearly 3,000 institutional and 401(k) clients.
(Information as of 12/31/02.)
We're one of the largest mutual fund companies in the United States.
Putnam has won the DALBAR award for service twelve times in the past
thirteen years. Putnam offers products in every investment category,
including growth, value, and blend as well as international and fixed
income.
Teamwork is a cornerstone of Putnam's investment philosophy. Our funds
are managed by teams in a collaborative environment that promotes an
active exchange of information.
Putnam's disciplined investment philosophy is based on style
consistency. We aim for less volatility over the short term and strong,
consistent performance over time. Our truth in labeling approach helps
us adhere to every fund's stated objective, style, and risk positioning.
We are committed to helping financial advisors provide sound, sensible
guidance, information, and expertise to help investors reach their
financial goals.
FUND INFORMATION
ABOUT PUTNAM INVESTMENTS
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
INVESTMENT MANAGER
Putnam Investment Management, LLC
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray LLP
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
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, III
President
Charles E. Porter
Executive Vice President, Treasurer
and Principal Financial Officer
Patricia C. Flaherty
Senior Vice President
Karnig H. Durgarian
Vice President and
Principal Executive Officer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Brett C. Browchuk
Vice President
Charles E. Haldeman, Jr.
Vice President
Lawrence J. Lasser
Vice President
Beth S. Mazor
Vice President
Richard A. Monaghan
Vice President
Stephen M. Oristaglio
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President
Jerome J. Jacobs
Vice President
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Michigan
Tax Exempt Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary and
Putnam's Quarterly Ranking Summary. For more information or to request a
prospectus, call toll free: 1-800-225-1581. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
Visit www.putnaminvestments.com or call a representative at 1-800-225-1581.
NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ---------------------
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminvestments.com
AN048-88663 846/237/126 7/03
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Items 5-6. [Reserved]
- ---------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. [Reserved]
- ------------------
Item 9. Controls and Procedures:
- --------------------------------
The registrant's principal executive officer and principal financial
officers have concluded, based on their evaluation of the effectiveness
of the design and operation of the registrant's disclosure controls and
procedures as of a date within 90 days of the filing date of this report
on Form N-CSR, that the design and operation of such procedures are
effective to provide reasonable assurance that information required to
be disclosed by the investment company in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in
the Commission's rules and forms.
There have been no significant changes in the registrant's internal
controls subsequent to the date of their evaluation.
Item 10. Exhibits:
- ------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002
are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: July 24, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Karnig H. Durgarian
---------------------------
Karnig H. Durgarian
Principal Executive Officer
Date: July 24, 2003
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Financial Officer
Date: July 24, 2003
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: July 24, 2003