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:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-03
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
Looking back on an eventful year, we consider it important to take note
of the increasingly positive trends that have become apparent in the
U.S. economy and financial markets. The stimulus provided by fiscal and
monetary policies has drawn the economy out of the slump of early 2003
and rising profits prompted a broad rally for stocks. The bond market
steadied while offering pockets of opportunity. We see indications that
these trends can continue into 2004 and know that Putnam management
teams will seek to position the funds to benefit from them.
During the semiannual period ended November 30, 2003, Putnam Michigan
Tax Exempt Income Fund's class A shares delivered modestly positive
results at net asset value. The returns were in line with the fund's
benchmark index and above its Lipper category average. Details may be
found on the facing page.
In the following report from your fund's management team, you will also
see a detailed discussion of the strategies the managers employed in the
volatile market environment that prevailed during the period. Despite
the challenges, the team delivered competitive results, primarily by
shortening the portfolio's duration, a measure of a fund's sensitivity
to changes in interest rates, and maintaining its ongoing efforts to
keep the portfolio strategically diversified. The team concludes its
report by offering its views on prospects for the fiscal year's second
half.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
January 21, 2004
Report from Fund Management
Fund highlights
* For the semiannual period ended November 30, 2003, Putnam Michigan Tax
Exempt Income Fund's class A shares returned 0.17% at net asset value
(NAV) and -4.57% at public offering price (POP).
* The fund's performance at NAV was in line with that of its benchmark,
the Lehman Municipal Bond Index, which returned 0.18% for the period.
* Based on results at NAV, the fund outperformed the average return for
Lipper's Michigan Municipal Debt Funds category, which was -0.54% for
the period. We attribute this to effective duration management and our
investments in sectors that outperformed.
* See the Performance Summary beginning on page 7 for complete fund
performance, comparative performance, and Lipper data.
Performance commentary
Over the semiannual period ended November 30, 2003, Putnam Michigan Tax
Exempt Income Fund posted returns at NAV that were both positive and in
line with its benchmark. These results reflect a less favorable
environment for fixed-income investments during the period. Interest
rates rose slightly, which detracted somewhat from performance.
Meanwhile, equities rebounded substantially during the past six months
and many of the investors who had helped keep demand for fixed-income
investments high moved money back into the stock market. Despite this
somewhat challenging environment, your fund's management team was able
to deliver competitive returns, primarily through a well-timed
shortening of the fund's duration, ongoing diversification of the fund's
holdings, and the strong performance of a number of sectors within the
portfolio.
FUND PROFILE
Putnam Michigan Tax Exempt Income Fund seeks to provide high current
income free from federal and state of Michigan personal income taxes, as
is believed to be consistent with the preservation of capital. It may be
suitable for Michigan investors seeking tax-free income through a
diversified portfolio primarily consisting of Michigan municipal bonds.
Market overview
Municipal bond yields -- which move in the opposite direction of their
prices -- were unusually volatile between June 1 and November 30, 2003.
Concern about deflation led to falling yields and correspondingly higher
bond prices through mid June. After rising through August, yields
receded again in late September on unfavorable housing and unemployment
data. October's positive economic surprises sent yields back up in
November. Overall, yields ended the semiannual period higher. The
spread, or difference between yields of 10-year municipal bonds and
10-year Treasuries, widened, with municipals yielding close to their
long-term average of 85% of comparable Treasury yields at the end of
November after yielding nearly 100% of Treasury yields earlier in the
year.
As the economy improved, investor demand for higher-yielding municipals
increased. In particular, airline-related industrial development bonds
outperformed other municipal bonds. Tobacco settlement bonds
underperformed in the late spring following unfavorable rulings in some
of the industry's ongoing litigation matters. However, these bonds began
to outperform during the six-month period as prospects for the industry
became more favorable.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 11/30/03
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 0.18%
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Lehman Aggregate Bond Index (broad bond market) -1.04%
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Lehman Intermediate Government Bond Index
(intermediate-maturity U.S. government bonds) -1.27%
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JP Morgan Global High Yield Index
(global high-yield corporate bonds) 9.63%
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Equities
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S&P 500 Index (broad stock market) 10.80%
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Russell 2000 Index (stocks of small and midsize companies) 24.65%
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MSCI EAFE Index (international stocks) 20.26%
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These indexes provide an overview of performance in different market
sectors for the six months ended 11/30/03.
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Strategy overview
We shortened duration (a measure of a fund's sensitivity to changes in
interest rates) in May and June because interest rates were at
historically low levels and were more likely, in our opinion, to rise
than to fall. This defensive strategy helped protect portfolio assets
when rates rose sharply between mid June and the end of July. We resumed
a neutral duration in August and September, as we believed rates were
unlikely to rise further. In September, rates fell again, so we
shortened duration somewhat. This was beneficial when rates rose in
October. At the end of the period, the portfolio's duration remained
slightly defensive.
In late July and early August, we closed out the cross-market arbitrage
position we had established in an earlier period. You may recall that we
sought to take advantage of a market anomaly in which municipal bond
yields, which are generally tax exempt, were nearly as high as
comparable taxable Treasury yields. We bought intermediate-term
municipal bonds and sold 10-year Treasury futures contracts,
anticipating that the muni/Treasury yield ratio would revert to its
long-term average and create an opportunity for gain. In fact, the yield
ratio did fall, and a loss in value of the muni bonds was more than
offset by a gain in the value of the Treasury futures position. We sold
the muni bonds and bought back the Treasury futures contracts, thereby
ending the trade and locking in a profit for the fund.
We took the opportunity afforded by strong demand for higher-yielding
municipal bonds to take profits where appropriate. We continued to
diversify the portfolio by adding selectively to the fund's lower-rated
investment-grade holdings.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
5/31/03 11/30/03
Average effective
maturity in years 8.1 7.3
Duration in years 5.3 5.2
Footnotes read:
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).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.
How fund holdings affected performance
Patience has its rewards, and in the world of municipal bonds, few
sectors have seen a more gratifying recovery than the airline-related
industrial development bonds (IDBs) sector. IDBs are backed by the
credit of the company benefiting from the financing -- in this case, the
airlines. Following the terrorist attacks of September 11, 2001, these
airline bonds have been negatively affected by declining air traffic,
high fixed costs, and high-profile bankruptcies. When this sector was
not faring well in 2002 and the first half of 2003 as a result of
geopolitical tensions and a prolonged global economic slowdown, we
remained firm in our belief that airline-backed IDBs were part of a
long-term strategy that would eventually pay off. Much like the economic
recovery itself, to which the airline industry is so closely linked, the
wait was trying. As prospects deteriorated, the ratings on many
airline-related IDBs were lowered by the rating agencies.
Over the course of our reporting period, the airline market strengthened
and concerns about bankruptcies diminished. The management team took the
opportunity to reduce the fund's position in Wayne Charter County
Special Airport Facilities Renovation bonds backed by Northwest
Airlines. This was ultimately one of the fund's best-performing holdings
during the period, and trimming the position allowed us to sell into
strength.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa/AAA (72.6%)
Aa/AA (3.2%)
A (5.0%)
Baa/BBB (10.0%)
Ba/BB (3.6%)
B (2.4%)
VMIG1 (3.2%)
Footnote reads:
As a percentage of market value as of 11/30/03. 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.
Overall, the fund's hospital bonds also generally contributed positively
to performance. Garden City Hospital Financing Authority Revenue Bonds
were strong performers during the period and the team sold some of the
fund's position on that strength. Another hospital holding, Michigan
State Hospital Financing Authority Revenue Bonds for Sinai Hospital
System, did not perform well. The Sinai Hospital system suffered
financially due to the continued insurance collection troubles of one of
its hospitals. The same financing authority's bond issued for
Presbyterian Villages Hospitals also detracted somewhat from
performance. We sold the fund's positions in both bonds and used the
assets to further diversify the portfolio within some higher-quality
holdings, such as Michigan State Hospital Financing Authority Revenue
Bonds for Oakwood Hospital, rated A2 by Moody's and A by S&P, with a
coupon of 5 1/2%.
The team continued to seek opportunities within the higher education
sector, which has historically performed well for the fund. Tuition
increases over the past several years have been much higher than the
overall inflation rate, which has been a benefit for schools. We
purchased Michigan Higher Education Financing Authority Revenue Bonds
for Kalamazoo College Project, rated A1 by Moody's, with a coupon of 6%.
We feel these bonds represented an attractive opportunity.
Many of the biggest detractors from performance were the fund's insured
holdings, including those in the intermediate part of the yield curve.
These bonds declined in price over the period as interest rates shifted
upward. The majority of the portfolio is made up of Aaa/AAA-rated
insured bonds, and they typically are the most sensitive to changes in
interest rates. Although we had begun shifting assets to lower-rated
investment-grade bonds, performance still suffered as a result.
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 David Hamlin (Portfolio Leader), Paul Drury
(Portfolio Member), Susan McCormack (Portfolio Member), James St. John
(Portfolio Member), Richard Wyke (Portfolio Member), and Kevin Cronin.
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.
We anticipate continued volatility in the coming six months and believe
the Federal Reserve Board will hold the federal funds rate steady at 1%.
Our 12- to 18-month outlook is less certain. If economic policy
succeeds, we may experience a classic bear market for bonds that may
push yields higher. However, it is also possible that the economy may
not respond satisfactorily to fiscal and monetary policy, and the yield
on 10-year Treasuries could fall. Given this degree of uncertainty, we
have, at this time, positioned the fund's duration somewhat defensively,
and we believe rates may rise in the short term. Currently, we no longer
see much opportunity to capitalize on yield spreads between municipal
bonds and Treasuries, as the relationship between them is now near the
long-term average. We expect that the credit quality of general
obligation municipal bonds will remain under pressure, because tax
revenues cannot be expected to grow significantly until taxpayers begin
to report improved earnings. Although yield spreads between high- and
low-quality municipal bonds have narrowed somewhat, we believe they
could narrow further. As a result, we may see more opportunity for
potential gain in this area. In keeping with the fund's objective, we
will continue to monitor market conditions as we pursue a high level of
tax-free income and manage the fund's risk exposures.
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
the first half of its fiscal year, which ended November 30, 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.
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TOTAL RETURN FOR PERIODS ENDED 11/30/03
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Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (4/17/95)
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NAV POP NAV CDSC NAV POP
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6 months 0.17% -4.57% -0.05% -4.96% 0.02% -3.20%
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1 year 5.45 0.41 4.88 -0.12 5.13 1.72
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5 years 23.70 17.78 19.87 17.92 21.85 17.95
Annual average 4.34 3.33 3.69 3.35 4.03 3.36
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10 years 63.83 56.00 53.65 53.65 58.83 53.61
Annual average 5.06 4.55 4.39 4.39 4.74 4.39
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Annual average
(life of fund) 6.24 5.88 5.51 5.51 5.87 5.62
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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.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/03
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Lipper Michigan
Lehman Municipal
Municipal Debt Funds
Bond Index category average*
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6 months 0.18% -0.54%
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1 year 6.66 5.63
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5 years 31.98 24.90
Annual average 5.71 4.54
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10 years 81.80 66.17
Annual average 6.16 5.20
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Annual average
(life of fund) 7.26 6.62
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 11/30/03, there
were 39, 39, 36, and 15 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 11/30/03
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Class A Class B Class M
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Distributions (number) 6 6 6
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Income 1 $0.183599 $0.153915 $0.169956
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Capital gains 1 -- -- --
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Total $0.183599 $0.153915 $0.169956
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Share value: NAV POP NAV NAV POP
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5/31/03 $9.26 $9.72 $9.25 $9.26 $9.57
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11/30/03 9.09 9.54 9.09 9.09 9.40
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Current return (end of period)
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Current dividend rate 2 3.96% 3.77% 3.31% 3.66% 3.54%
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Taxable equivalent 3 6.35 6.04 5.30 5.87 5.67
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Current 30-day SEC yield 4 2.73 2.60 2.09 2.43 2.35
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Taxable equivalent 3 4.38 4.17 3.35 3.89 3.77
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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 37.60% federal and state combined tax rate for 2003.
Results for investors subject to lower tax rates would not be
advantageous.
4 Based only on investment income, calculated using SEC guidelines.
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TOTAL RETURN FOR PERIODS ENDED 12/31/03 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (4/3/95)
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NAV POP NAV CDSC NAV POP
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6 months 1.06% -3.75% 0.73% -4.22% 0.91% -2.37%
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1 year 4.31 -0.60 3.64 -1.36 4.00 0.57
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5 years 24.22 18.37 20.25 18.29 22.37 18.43
Annual average 4.43 3.43 3.76 3.42 4.12 3.44
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10 years 61.43 53.78 51.22 51.22 56.41 51.31
Annual average 4.91 4.40 4.22 4.22 4.57 4.23
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Annual average
(life of fund) 6.24 5.88 5.50 5.50 5.87 5.63
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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
JP Morgan (formerly Chase) Global High Yield Index is an unmanaged index
used to mirror the investable universe of the U.S. dollar global
high-yield corporate debt market of both developed and emerging markets.
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.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
Russell 2000 Index is an unmanaged index of common stocks that generally
measure performance of small to midsize companies within the Russell
3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
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.
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. Our proxy voting guidelines and policies are
available on the Putnam Individual Investor Web site,
www.putnaminvestments.com, by calling Putnam's shareholder services line
at 1-800-225-1581, or on the SEC's Web site, www.sec.gov.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
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 period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the 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.
The fund's portfolio
November 30, 2003 (Unaudited)
Key to Abbreviations
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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
Q-SBLF Qualified School Board Loan Fund
VRDN Variable Rate Demand Notes
Municipal bonds and notes (99.6%) (a)
Principal amount Rating (RAT) Value
Michigan (87.7%)
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$5,500,000 Battle Creek, Downtown Dev. Auth.
Rev. Bonds, MBIA, 7.65s, 5/1/22 AAA/P $5,757,950
1,000,000 Delta Cnty., Econ. Dev. Corp.
Rev. Bonds, Ser. A, 6 1/4s, 4/15/27 Baa2 1,036,250
Detroit, G.O. Bonds
2,475,000 Ser. B, 7s, 4/1/04 A- 2,518,337
4,875,000 Ser. A, 6.8s, 4/1/15 Aaa 5,283,281
Detroit, City School Dist. G.O.
Bonds
1,000,000 (School Bldg. & Site Impt.), Ser. A,
FGIC, 6s, 5/1/21 Aaa 1,201,250
1,000,000 (School Bldg. & Site Impt.), Ser. A,
FGIC, 6s, 5/1/20 Aaa 1,206,250
1,000,000 (School Bldg. & Site Impt.), Ser. A,
FGIC, 6s, 5/1/19 Aaa 1,207,500
1,500,000 Ser. C, FGIC, Q-SBLF, 5 1/4s, 5/1/17 Aaa 1,696,875
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 1,503,750
2,500,000 Detroit, Swr. Disp. Rev. Bonds (Sr.
Lien), Ser. A, FSA, 5 1/2s, 7/1/17 Aaa 2,896,875
5,380,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 1.08s, 7/1/33 VMIG1 5,380,000
Detroit, Wtr. Supply Syst.
Rev. Bonds
3,000,000 Ser. A, MBIA Second Lien, 5 3/4s,
7/1/11 Aaa 3,495,000
2,480,000 (Sr. Lien), Ser. A, MBIA, 5 1/4s,
7/1/19 Aaa 2,690,800
3,065,000 Detroit/Wayne Cnty., Stad. Auth.
Rev. Bonds, FGIC, 5 1/4s, 2/1/27 Aaa 3,168,444
1,000,000 Dickinson Cnty., Econ. Dev. Corp.
Env. Impt. Rev. Bonds (Paper Co.),
Ser. A, 5 3/4s, 6/1/16 Baa2 1,070,000
4,700,000 Dickinson Cnty., Memorial Hosp.
Syst. Rev. Bonds, 8 1/8s, 11/1/24 Baa3 5,082,392
1,400,000 Ecorse, Pub. School Dist. G.O.
Bonds, FGIC, Q-SBLF, 6 1/2s, 5/1/08 Aaa 1,639,750
Flint, Hosp. Auth. Rev. Bonds
(Hurley Med. Ctr.), Ser. A
630,000 6s, 7/1/06 Baa2 656,775
1,000,000 5 3/8s, 7/1/20 Baa3 887,500
Forest Hills, Pub. Schools G.O.
Bonds
1,455,000 5 5/8s, 5/1/14 Aa2 1,656,881
1,590,000 5 5/8s, 5/1/13 Aa2 1,816,575
1,525,000 Garden City, Hosp. Fin. Auth.
Rev. Bonds (Garden City Hosp. OB
Group), Ser. A, 5 3/4s, 9/1/17 Ba2 1,220,000
1,000,000 Grand Rapids, Hsg. Fin. Auth.
Rev. Bonds, Ser. A, FNMA Coll.,
7 5/8s, 9/1/23 AAA 1,018,830
2,000,000 Greater Detroit, Res. Recvy. Auth.
Rev. Bonds, Ser. A, AMBAC, 6 1/4s,
12/13/06 Aaa 2,265,000
2,190,000 Harper Creek, Cmnty. School Dist.
G.O. Bonds, Q-SBLF, 5 1/8s, 5/1/31 AAA 2,239,275
1,500,000 Hartland, Cons. School Dist. G.O.
Bonds, FGIC, 6s, 5/1/18 Aaa 1,771,875
1,000,000 Holland, School Dist. G.O. Bonds,
AMBAC, zero %, 5/1/19 Aaa 485,000
1,000,000 Huron, School Dist. G.O. Bonds, FSA,
5 5/8s, 5/1/15 Aaa 1,122,500
1,215,000 Jackson Cnty., Econ. Dev. Corp. Ltd.
Oblig. VRDN (Vista Grande Villa),
Ser. A, 1.10s, 11/1/31 A-1 1,215,000
7,000,000 Kalamazoo, Hosp. Fin. Auth. Fac.
Rev. Bonds, FGIC, 5.244s, 6/1/11 Aaa 7,233,870
1,450,000 Kent, Hosp. Fin. Auth. Rev. Bonds
(Spectrum Hlth.), Ser. A, MBIA,
5 1/2s, 1/15/16 AAA 1,622,188
1,035,000 Lansing, Bldg. Auth. G.O. Bonds,
Ser. A, MBIA, 5 3/8s, 6/1/20 AAA 1,125,563
1,650,000 Macomb Cnty., Hosp. Fin. Auth.
Rev. Bonds (Mt. Clemens Gen. Hosp.),
Ser. B, 5 7/8s, 11/15/34 BBB- 1,588,125
800,000 Manistee, Area School Dist. G.O.
Bonds, FGIC, 5 3/4s, 5/1/19 Aaa 930,000
MI Higher Ed. Fac. Auth. Rev. Bonds
1,000,000 (Ltd. Obligation-Hope College),
Ser. A, 5.55s, 4/1/24 BBB 1,031,250
250,000 (Kalamazoo College), 5s, 12/1/20 A1 255,000
MI Muni. Board Auth. Rev. Bonds
3,840,000 (State Revolving Fund), 6 1/2s,
10/1/17 Aaa 4,088,102
1,000,000 (Drinking Wtr. Revolving Fund),
5 1/2s, 10/1/18 Aaa 1,163,750
1,000,000 (Clean Wtr. Revolving Fund), 5 1/2s,
10/1/16 Aaa 1,162,500
2,300,000 MI Pub. Pwr. Agcy. Rev. Bonds (Belle
River), Ser. A, MBIA, 5 1/4s, 1/1/15 Aaa 2,596,125
MI State Bldg. Auth. Rev. Bonds
5,750,000 Ser. I, AMBAC, 6 1/2s, 10/1/07 Aaa 6,684,375
1,830,000 (Fac. Program), Ser. I, 4 3/4s,
10/15/25 Aa1 1,930,650
MI State Hosp. Fin. Auth. Rev. Bonds
1,000,000 (Oakwood Hosp.), Ser. A, 6s, 4/1/22 A2 1,075,000
650,000 (Sparrow Hosp.), 5 1/2s, 11/15/21 A1 663,000
1,000,000 (Oakwood Oblig. Group), 5 1/2s,
11/1/17 A2 1,047,500
1,000,000 (Chesea Cmnty. Hosp.), 5 3/8s,
5/15/19 BBB 971,250
2,900,000 MI State Hsg. Dev. Auth. Rental Hsg.
Rev. Bonds, Ser. B, AMBAC, 5.45s,
10/1/12 Aaa 2,970,992
2,000,000 MI State South Central Pwr. Agcy.
Rev. Bonds, AMBAC, 5s, 11/1/09 Aaa 2,247,500
1,000,000 MI State Strategic Fund Solid Waste
Disp. Mandatory Put Bonds (Waste
Mgt., Inc.), 4.2s, 12/1/12 BBB 1,037,500
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
1,500,000 (Genesee Pwr. Station), 7 1/2s,
1/1/21 B/P 1,426,875
1,200,000 (S D Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 1,201,500
MI State Strategic Fund, Ltd. Oblig.
Mandatory Put Bonds
1,000,000 (Detroit Edison Co.), AMBAC, 4.85s,
9/1/30 Aaa 1,100,000
1,500,000 (Dow Chemical), 3.8s, 6/1/14 A3 1,546,875
MI State Strategic Fund, Ltd. Oblig.
Rev. Bonds
1,150,000 (Ford Motor Co.), Ser. A, 7.1s,
2/1/06 Baa1 1,234,813
1,500,000 (Detroit Edison Co.), AMBAC, 7s,
5/1/21 Aaa 1,940,625
3,000,000 (Worthington Armstrong Venture),
5 3/4s, 10/1/22 AAA/P 3,393,750
1,500,000 (Detroit Edison Co.), Ser C, 5.65s,
9/1/29 AAA 1,533,750
5,000,000 (Detroit Edison Co.), Ser. A, MBIA,
5.55s, 9/1/29 Aaa 5,275,000
1,350,000 Midland Cnty., Econ. Dev. Corp.
Rev. Bonds, 6 7/8s, 7/23/09 Ba3 1,390,500
1,350,000 Mount Clemens, Cmnty. School Dist.
G.O. Bonds (School Bldg. & Site),
Q-SBLF, 5 1/2s, 5/1/18 Aaa 1,501,875
1,000,000 Pontiac, Hosp. Fin. Auth. Rev. Bonds
(North Oakland Med. Ctr.), 6s,
8/1/23 Ba1 798,750
1,500,000 Pontiac, Tax Increment Fin. Auth.
Rev. Bonds, 6 3/8s, 6/1/31 BB+ 1,509,375
1,400,000 Rochester, Cmnty. School Dist. G.O.
Bonds, Ser. II, Q-SBLF, 5 1/2s,
5/1/21 Aaa 1,533,000
1,015,000 Romulus, Cmnty. Schools G.O. Bonds,
Q-SBLF, 5s, 5/1/11 AAA 1,129,188
1,000,000 Royal Oak, Hosp. Fin. Auth.
Rev. Bonds (William Beaumont Hosp.),
Ser. M, MBIA, 5 1/4s, 11/15/35 Aaa 1,035,000
1,000,000 Walled Lake, Cons. School Dist. G.O.
Bonds, Q-SBLF, 5 1/2s, 5/1/12 AAA 1,142,500
1,370,000 Warren, Cons. School Dist. G.O.
Bonds, Q-SBLF, 5s, 5/1/12 AAA 1,520,700
3,000,000 Waterford, Econ. Dev. Corp.
Rev. Bonds (Canterbury Hlth.), 6s,
1/1/39 B-/P 2,115,000
2,000,000 Wayland, Uni. School Dist. G.O.
Bonds, FGIC, Q-SBLF, 8s, 5/1/10 Aaa 2,565,000
500,000 Wayne Charter Cnty., Special Arpt.
Fac. Rev. Bonds (Northwest Airlines,
Inc.), 6s, 12/1/29 B+/P 410,625
2,405,000 Wayne Cnty., Bldg. Auth. G.O. Bonds,
Ser. A, MBIA, 6s, 6/1/08 Aaa 2,675,561
1,000,000 West Bloomfield, School Dist. G.O.
Bonds (School Bldg. & Site), MBIA,
5 5/8s, 5/1/16 Aaa 1,118,750
Western MI U. Rev. Bonds, AMBAC
1,180,000 5s, 7/15/11 Aaa 1,315,700
1,120,000 5s, 7/15/10 Aaa 1,253,000
1,240,000 Ypsilanti, School Dist. G.O. Bonds,
FGIC, 5 3/8s, 5/1/26 Aaa 1,281,850
--------------
147,563,717
Puerto Rico (11.9%)
- -------------------------------------------------------------------------------
695,000 Children's Trust Fund Tobacco
Settlement Rev. Bonds, 5 3/8s,
5/15/33 Baa2 661,119
Cmnwlth. of PR, G.O. Bonds (Pub.
Impt.), MBIA
2,500,000 5 3/4s, 7/1/26 Aaa 2,903,125
2,000,000 Ser. A, 5 1/2s, 7/1/20 Aaa 2,317,500
3,085,000 Ser. A, 5 1/2s, 7/1/16 AAA 3,590,169
2,100,000 Cmnwlth. of PR, Pub. Bldg. Auth.
Rev. Bonds, Ser. A, AMBAC, 6 1/4s,
7/1/14 Aaa 2,583,000
PR Elec. Pwr. Auth. Rev. Bonds
3,000,000 Ser. X, MBIA, 6s, 7/1/15 Aaa 3,281,250
3,000,000 Ser. HH, FSA, 5 1/4s, 7/1/29 Aaa 3,153,750
1,500,000 PR Indl. Tourist Edl. Med. & Env.
Control Fac. Rev. Bonds (Cogen.
Fac.-AES), 6 5/8s, 6/1/26 Baa2 1,580,625
--------------
20,070,538
- -------------------------------------------------------------------------------
Total Investments (cost $160,292,754) $167,634,255
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $168,280,428.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at November 30, 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 November 30, 2003. Securities rated by Putnam are
indicated by "/P" and are not publicly rated.
The rates shown on VRDN and mandatory put bonds are the current interest
rates shown at November 30, 2003.
The fund had the following industry group concentrations greater than
10% at November 30, 2003
(as a percentage of net assets):
Health care 13.2%
Utilities 10.2
The fund had the following insurance concentrations greater than 10% at
November 30, 2003
(as a percentage of net assets):
MBIA 24.4%
FGIC 14.2
AMBAC 13.6
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
November 30, 2003 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$160,292,754) (Note 1) $167,634,255
- -------------------------------------------------------------------------------
Cash 28,844
- -------------------------------------------------------------------------------
Interest and other receivables 2,036,307
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 3,678
- -------------------------------------------------------------------------------
Total assets 169,703,084
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 320,735
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 707,113
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 224,119
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 35,659
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 24,155
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 501
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 73,376
- -------------------------------------------------------------------------------
Other accrued expenses 36,998
- -------------------------------------------------------------------------------
Total liabilities 1,422,656
- -------------------------------------------------------------------------------
Net assets $168,280,428
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $164,691,708
- -------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (30,232)
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (3,722,549)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,341,501
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $168,280,428
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($128,998,824 divided by 14,185,395 shares) $9.09
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.09)* $9.54
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($37,689,618 divided by 4,148,462 shares)** $9.09
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,591,986 divided by 175,040 shares) $9.09
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.09)*** $9.40
- -------------------------------------------------------------------------------
* 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
Six months ended November 30, 2003 (Unaudited)
Interest income: $4,571,921
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 459,912
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 104,829
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 6,578
- -------------------------------------------------------------------------------
Administrative services (Note 2) 2,794
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 141,097
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 174,687
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 4,948
- -------------------------------------------------------------------------------
Other 56,163
- -------------------------------------------------------------------------------
Total expenses 951,008
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (10,667)
- -------------------------------------------------------------------------------
Net expenses 940,341
- -------------------------------------------------------------------------------
Net investment income 3,631,580
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,299,683)
- -------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 1,017,203
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures
contracts during the period (3,244,160)
- -------------------------------------------------------------------------------
Net loss on investments (3,526,640)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $104,940
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
Increase (decrease) in net assets 2003* 2003
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $3,631,580 $7,743,964
- -------------------------------------------------------------------------------
Net realized loss on investments (282,480) (226,188)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (3,244,160) 6,921,972
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 104,940 14,439,748
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From ordinary income
Class A -- (77,270)
- -------------------------------------------------------------------------------
Class B -- (22,974)
- -------------------------------------------------------------------------------
Class M -- (1,249)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (2,848,506) (6,167,477)
- -------------------------------------------------------------------------------
Class B (696,805) (1,561,703)
- -------------------------------------------------------------------------------
Class M (37,043) (100,605)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (20,152,266) (3,464,319)
- -------------------------------------------------------------------------------
Total increase (decrease) in net assets (23,629,680) 3,044,151
Net assets
- -------------------------------------------------------------------------------
Beginning of period 191,910,108 188,865,957
- -------------------------------------------------------------------------------
End of period (including distributions in
excess of net investment income of $30,232
and $79,458, respectively) $168,280,428 $191,910,108
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
November 30
Per-share (Unaudited) Year ended May 31
operating performance 2003 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $9.26 $8.95 $8.83 $8.38 $9.14 $9.35
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .19 .38 .43 .45 .46 .44
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.18) .32 .12 .45 (.76) (.18)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .01 .70 .55 .90 (.30) .26
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.18) (.39) (.43) (.45) (.46) (.44)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.03)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.18) (.39) (.43) (.45) (.46) (.47)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.09 $9.26 $8.95 $8.83 $8.38 $9.14
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) .17* 8.03 6.39 10.95 (3.30) 2.77
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $128,999 $146,255 $142,706 $130,071 $116,715 $145,438
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .44* .89 .87 .87 .88 1.00
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.05* 4.23 4.82 5.18 5.30 4.81
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 2.86* 24.48 20.71 14.46 7.36 19.51
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(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
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
November 30
Per-share (Unaudited) Year ended May 31
operating performance 2003 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $9.25 $8.94 $8.83 $8.36 $9.12 $9.34
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .16 .33 .37 .39 .40 .38
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) .31 .12 .48 (.76) (.19)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.01) .64 .49 .87 (.36) .19
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.15) (.33) (.38) (.40) (.40) (.38)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.03)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.15) (.33) (.38) (.40) (.40) (.41)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.09 $9.25 $8.94 $8.83 $8.36 $9.12
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (.05)* 7.33 5.58 10.50 (3.95) 2.00
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $37,690 $43,632 $43,308 $45,406 $40,060 $46,827
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .77* 1.54 1.52 1.52 1.53 1.65
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.73* 3.58 4.17 4.53 4.65 4.16
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 2.86* 24.48 20.71 14.46 7.36 19.51
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(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
- ---------------------------------------------------------------------------------------------------------------------------------
Six months
ended
November 30
Per-share (Unaudited) Year ended May 31
operating performance 2003 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $9.26 $8.95 $8.83 $8.37 $9.13 $9.35
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .17 .36 .40 .43 .43 .42
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.17) .32 .13 .46 (.76) (.20)
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations -- (c) .68 .53 .89 (.33) .22
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.17) (.37) (.41) (.43) (.43) (.41)
- ---------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.03)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.17) (.37) (.41) (.43) (.43) (.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.09 $9.26 $8.95 $8.83 $8.37 $9.13
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) .02* 7.70 6.07 10.75 (3.60) 2.36
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,592 $2,023 $2,852 $2,320 $2,010 $1,922
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .59* 1.19 1.17 1.17 1.18 1.30
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.90* 3.93 4.53 4.88 5.02 4.51
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 2.86* 24.48 20.71 14.46 7.36 19.51
- ---------------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(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).
(c) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
November 30, 2003 (Unaudited)
Note 1
Significant accounting policies
Putnam Michigan Tax Exempt Income Fund (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. The fund seeks as high a level
of current income exempt from federal income tax and Michigan personal
income tax as Putnam Investment Management, 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 investment-grade Michigan tax-exempt
securities with intermediate- to long-term maturities. The fund may be
affected by economic and political developments in the state of
Michigan.
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 and class M 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
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 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 During the period, the fund was entered into a
committed line of credit with certain banks. The line of credit
agreement included restrictions that the fund maintain an asset coverage
ratio of at least 300% and borrowings must not exceed prospectus
limitations. For the period ended August 6, 2003, the fund had no
borrowings against the line of credit. Effective August 6, 2003, the
fund no longer participated in a committed 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 $2,486,051
available to the extent allowed by tax law to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------
$939,071 May 31, 2008
1,546,980 May 31, 2009
The aggregate identified cost on a tax basis is $160,292,754, resulting
in gross unrealized appreciation and depreciation of $9,123,872 and
$1,782,371, respectively, or net unrealized appreciation of $7,341,501.
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. 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.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services quarterly based on the average net assets of the fund. Such fee
is based on the lesser of (i) an annual rate of 0.50% of the average net
assets of the fund or (ii) the following annual rates expressed as a
percentage of the fund's average net assets: 0.60% of the first $500
million, 0.50% of the next $500 million, 0.45% of the next $500 million,
0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355% of
then 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 six months ended November 30,
2003, the fund's expenses were reduced by $10,667 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $632 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 Trustee compensation and expenses in the
Statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses 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 an
annual rate up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund 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 six months ended November 30, 2003, Putnam Retail Management,
acting as underwriter, received net commissions of $6,624 and $106 from
the sale of class A and class M shares, respectively, and received
$58,676 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 six
months ended November 30, 2003, Putnam Retail Management, acting as
underwriter, received $581 on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended November 30, 2003, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $4,985,574 and $24,506,202, respectively. There
were no purchases and sales of U.S. government obligations.
Note 4
Capital shares
At November 30, 2003, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended November 30, 2003
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 629,140 $5,516,891
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 196,284 1,962,942
- ----------------------------------------------------------------
825,424 7,479,833
Shares repurchased (2,439,415) (22,091,308)
- ----------------------------------------------------------------
Net decrease (1,613,991) $(14,611,475)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
Six months ended November 30, 2003
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 103,788 $941,530
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 53,663 486,613
- ----------------------------------------------------------------
157,451 1,428,143
Shares repurchased (726,892) (6,575,749)
- ----------------------------------------------------------------
Net decrease (569,441) $(5,147,606)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
Six months ended November 30, 2003
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 10,368 $93,330
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,916 26,465
- ----------------------------------------------------------------
13,284 119,795
Shares repurchased (56,683) (512,980)
- ----------------------------------------------------------------
Net decrease (43,399) $(393,185)
- ----------------------------------------------------------------
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)
- ----------------------------------------------------------------
Note 5
Regulatory matters and litigation
On November 13, 2003, Putnam Management agreed to entry of an order by
the Securities and Exchange Commission (SEC) in partial resolution of
administrative and cease-and-desist proceedings initiated by the SEC on
October 28, 2003 in connection with alleged excessive short-term trading
by at least six Putnam Management investment professionals. The SEC's
findings reflect that four of those employees engaged in such trading in
funds over which they had investment decision-making responsibility and
had access to non-public information regarding, among other things,
current portfolio holdings, and valuations. The six individuals are no
longer employed by Putnam Management. Under the order, Putnam Management
will make restitution for losses attributable to excessive short-term
trading by Putnam employees, institute new employee trading restrictions
and enhanced employee trading compliance, retain an independent
compliance consultant, and take other remedial actions. Putnam
Management neither admitted nor denied the order's findings, which
included findings that Putnam Management willfully violated provisions
of the federal securities laws. A civil monetary penalty and other
monetary relief, if any, will be determined at a later date. If a
hearing is necessary to determine the amounts of such penalty or other
relief, Putnam Management will be precluded from arguing that it did not
violate the federal securities laws in the manner described in the SEC
order, the findings set forth in the SEC order will be accepted as true
by the hearing officer and additional evidence may be presented. Putnam
Management, and not the investors in any Putnam fund, will bear all
costs, including restitution, civil penalties and associated legal fees.
Administrative proceedings instituted by the Commonwealth of
Massachusetts on October 28, 2003 against Putnam Management in
connection with alleged market timing activities by Putnam employees and
by participants in some Putnam-administered 401(k) plans are pending.
Putnam Management has committed to make complete restitution for any
losses suffered by Putnam shareholders as a result of any improper
market-timing activities by Putnam employees or within
Putnam-administered 401(k) plans.
The SEC's and Commonwealth's allegations and related matters also serve
as the general basis for numerous lawsuits, including purported class
action lawsuits filed against Putnam Management and certain related
parties, including certain Putnam funds. Putnam Management has agreed to
bear any costs incurred by Putnam funds in connection with these
lawsuits. Based on currently available information, Putnam Management
believes that the likelihood that the pending private lawsuits and
purported class action lawsuits will have a material adverse financial
impact on the fund is remote, and the pending actions are not likely to
materially affect its ability to provide investment management services
to its clients, including the Putnam funds.
Review of these matters by counsel for Putnam Management and by separate
independent counsel for the Putnam funds and their independent Trustees
is continuing. In addition, Marsh & McLennan Companies, Inc., Putnam
Management's parent company, has engaged counsel to conduct a separate
review of Putnam Management's policies and controls related to
short-term trading. The fund may experience increased redemptions as a
result of these matters, which could result in increased transaction
costs and operating expenses.
Services for shareholders
Investor services
Help your investment grow Set up a program for systematic investing with
as little as $25 a month from a Putnam fund or from your own savings or
checking account. (Regular investing does not guarantee a profit or
protect against loss in a declining market.)
Switch funds easily* You can move money from one Putnam fund to another
within the same class of shares without a service charge.
Access your money easily You can have checks sent regularly or redeem
shares any business day at the then-current net asset value, which may
be more or less than the original cost of the shares. Class B and class
C shares carry a sales charge that is applied to certain withdrawals.
How to buy additional shares You may buy shares through your financial
advisor or directly from Putnam. To open an account by mail, send a
check made payable to the name of the fund along with a completed fund
application. To add to an existing account, complete the investment slip
found at the top of your Confirmation of Activity statement and return
it with a check payable to your fund.
For more information
Visit www.putnaminvestments.com A secure section of our Web site
contains complete information on your account, including balances and
transactions, updated daily. You may also conduct transactions, such as
exchanges, additional investments, and address changes. Log on today to
get your password.
Use our toll-free number 1-800-225-1581 Ask a helpful Putnam
representative or your financial advisor for details about any of these
or other services, or see your prospectus.
*This privilege is subject to change or termination. An exchange of
funds may result in a taxable event. Certain funds have imposed a 1%
redemption fee on total assets redeemed or exchanged within 90 days of
purchase. See a prospectus for details.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
Investors should consider the investment objective, risks, charges, and
expenses of a fund before investing. For a prospectus containing this
and other information for any Putnam fund or product, call your
financial advisor at 1-800-225-1581 and ask for a prospectus. Please
read the prospectus carefully before investing.
Growth Funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
Blend Funds
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
Value Funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund+
Income Funds
American Government Income Fund
Diversified Income Trust
Global Income Trust*
High Yield Advantage Fund+*
High Yield Trust*
Income Fund
Intermediate U.S. Government Income Fund
Money Market Fund [DOUBLE DAGGER]
U.S. Government Income Trust
Tax-free Income Funds
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund [DOUBLE DAGGER]
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
Asset Allocation Funds
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
* A 1% redemption fee on total assets redeemed or exchanged within 90
days of purchase may be imposed for all share classes of these funds.
+ Closed to new investors.
[DOUBLE DAGGER] An investment in a money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation
or any other government agency. Although the funds seek
to preserve your investment at $1.00 per share, it is
possible to lose money by investing in the fund.
Check your account balances and current performance at
www.putnaminvestments.com.
Fund information
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
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
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
Beth S. Mazor
Vice President
Gordon H. Silver
Vice President
Mark C. Trenchard
Vice President and
BSA Compliance Officer
William H. Woolverton
Vice President and
Chief Legal Officer
Judith Cohen
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Michigan
Tax Exempt Income Fund. It may also be used as sales literature when
preceded or accompanied by the current prospectus, which gives details
of sales charges, investment objectives, and operating policies of the
fund, and the most recent copy of Putnam's Quarterly Performance Summary
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site www.putnaminvestments.com.
SA048-203430 846/237/126 1/04
Not FDIC Insured May Lose Value No Bank Guarantee
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:
- --------------------------------
(a) 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.
(b) Changes in internal control over financial reporting:
Not applicable
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: January 23, 2004
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: January 23, 2004
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Financial Officer
Date: January 23, 2004
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: January 23, 2004