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
5-31-05
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the period ended May 31, 2005, the Federal Reserve Board's series
of gradual increases in the federal funds rate occupied investors'
attention. The Fed's more restrictive monetary policy, along with high
energy prices, has moderated the pace of the economic expansion. Recent
reports show the economy is growing at a respectable rate of about 3.5%
annually, but some investors believe that this pace cannot sustain
corporate profits near their robust levels of late. This concern has
held the stock market in check and focused attention on credit risk in
the bond market, even as long-term bond yields remained low. Major
credit rating agencies underscored market concerns in early May by
downgrading bonds issued by Ford and General Motors. Amid the
uncertainties of this environment, security selection takes on even
greater importance and the in-depth, professional research and active
management that mutual funds can provide makes them an intelligent
choice for today's investors.
We want you to know that Putnam Investments' management team, under the
leadership of Chief Executive Officer Ed Haldeman, continues to focus on
investment performance and remains committed to putting the interests of
shareholders first. In keeping with these goals, we are including
additional disclosure about your fund's management team in this report.
Following the Outlook for Your Fund, we provide manager compensation
information that pertains to your fund. In addition, on page 19 of this
report we provide information about the 2004 approval by the Trustees of
your fund's management contract with Putnam.
We would also like to take this opportunity to announce the retirement
of one of your fund's Trustees, Ronald J. Jackson, who has been an
independent Trustee of the Putnam funds since 1996. We thank him for his
service.
In the following pages, members of your fund's management team discuss
the fund's performance, the strategies used to pursue the fund's
investment objectives during the reporting period, and the team's
outlook for the months ahead.
As always, we thank you for your continuing confidence in Putnam.
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 20, 2005
Report from Fund Management
Fund highlights
* For the 12 months ended May 31, 2005, Putnam Michigan Tax Exempt
Income Fund's class A shares returned 6.74% without sales charges.
* The fund's benchmark, the Lehman Municipal Bond Index, returned 7.97%.
* The average return for the fund's Lipper category, Michigan Municipal
Debt Funds, was 6.58%.
* See the Performance Summary beginning on page 10 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
In an environment of rising short-term/falling long-term bond rates,
Putnam Michigan Tax Exempt Income Fund lagged its nationally diversified
benchmark, the Lehman Municipal Bond Index, but was in line with its
Lipper peer group, based on results at net asset value (NAV, or without
sales charges) for the annual fiscal period. The fund's performance
benefited from its holdings in higher-yielding bonds, including tobacco
settlement bonds, which were boosted by a supportive economy and strong
corporate earnings. In addition, our use of interest-rate swaps allowed
us to take advantage of the flattening yield curve as long-term interest
rates fell.
During the fiscal year, as long-term bond rates declined and their
prices rose, the fund's defensive positioning -- namely the shorter
duration of its holdings -- hindered returns somewhat. In addition, the
fund's focus on municipal bonds issued in the State of Michigan caused
it to slightly underperform its benchmark, the Lehman Municipal Bond
Index, because the nationally diversified index includes bonds from
states such as California, which performed exceptionally well during the
period.
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TOTAL RETURN FOR
PERIODS ENDED 5/31/05
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Class A
(inception 10/23/89) NAV POP
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1 year 6.74% 1.95%
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5 years 35.67 29.64
Annual average 6.29 5.33
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10 years 64.57 57.24
Annual average 5.11 4.63
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Annual average
(life of fund) 6.03 5.72
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Data is historical. Past performance does not guarantee 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. Performance assumes reinvestment of
distributions and does not account for taxes. Returns at NAV do not
reflect a sales charge of 4.50%. For the most recent month-end
performance, visit www.putnaminvestments.com. For a portion of the
period, this fund limited expenses, without which returns would have
been lower. A short-term trading fee of up to 2% may apply.
FUND PROFILE
Putnam Michigan Tax Exempt Income Fund seeks to provide as high a level
of 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
Early in the fiscal year, signs of solid economic growth and rising
corporate profits heightened investor concerns about potential
interest-rate increases by the Federal Reserve Board (the Fed). This
concern helped push bond yields somewhat higher and bond prices, which
move in the opposite direction of yields, lower. In June 2004, after the
Fed announced the first of what would be eight 0.25% increases in the
federal funds rate during the fiscal year, bond market investors seemed
encouraged and, initially, rates trended modestly downward. The Fed's
gradual approach to reining in economic growth may have helped allay
investor fears of higher longer-term rates, as long-term bond yields
ended the year lower despite rising short-term rates. As shorter- and
longer-term interest rates began to converge, the yield curve flattened.
The same conditions that led to rising interest rates -- an improving
economy and rising corporate earnings -- were particularly favorable for
lower-rated bonds. Among uninsured bonds and especially bonds rated BBB
and below, yield spreads tightened, and bond prices rose. Bonds at the
lower end of the credit spectrum, including BB- and B-rated bonds,
turned in the strongest performance. The improving economy also led
rating agencies to upgrade the State of California's credit rating from
BBB to A. This contributed to higher prices for California bonds and
improved investor perceptions of municipal bonds in general. Puerto Rico
municipal bonds, which are tax-exempt in all states and often trade in
line with bonds issued by the highest-rated and top-performing state,
were also standout performers. Based on continued favorable legal
rulings, yields on tobacco settlement bonds declined overall for the
year, and their prices rose accordingly. Airline-related industrial
development bonds (IDBs) staged a comeback from distressed levels and
outperformed over the trailing one-year period. Callable bonds (which
can be redeemed by their issuers before maturity) outperformed
non-callable bonds, as investors expect bonds priced to call to be less
sensitive to interest-rate increases.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 5/31/05
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 7.97%
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Lehman Aggregate Bond Index (broad bond market) 6.82%
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Lehman Intermediate Government Bond Index
(intermediate-maturity U.S. Treasury and agency securities) 4.06%
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JP Morgan Global High Yield Index (global high-yield
corporate bonds) 10.10%
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Equities
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S&P 500 Index (broad stock market) 8.24%
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Russell 2000 Index (small-company stocks) 9.82%
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MSCI EAFE Index (international stocks) 14.62%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 5/31/05.
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Strategy overview
Given our expectation for rising interest rates, your portfolio's
duration was relatively short, or defensive, at the beginning of the
fund's fiscal year and we continued to shorten it as the year
progressed. Duration is a measure of a fund's sensitivity to changes in
interest rates. Investing in bonds with short duration may help protect
principal when interest rates are rising, but it can reduce the fund's
potential for appreciation when rates fall. As we had expected, the Fed
increased short-term interest rates during the period. However, rates on
long-term bonds unexpectedly trended downward for much of the period and
the prices of these bonds rose as a result. The fund's participation in
this rally was somewhat limited by its overall defensive duration
position.
During the period, we repositioned the portfolio to take advantage of
the flattening of the yield curve. One technique we used to position the
fund to benefit from yield curve flattening was to buy callable bonds
with longer maturities and to sell non-callable bonds with shorter
maturities, generally 10 years or less. This strategy was also in line
with our expectation that callable bonds will outperform in a rising
interest-rate environment.
Among sectors, we overweighted tobacco settlement bonds relative to the
Lipper peer group during the period based on the availability of
attractive yields and our favorable view of this sector. This sector
outperformed during the period and the strategy benefited results.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
5/31/04 11/30/04 5/31/05
Average effective
maturity in years 7.6 6.2 5.8
Duration in years 5.4 4.6 4.3
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
With the more credit-sensitive sectors of the municipal bond market
delivering strong results for the period, the fund's lower-rated
holdings helped its performance substantially. The supply of lower-rated
bonds coming to market is down 22% compared to the same period in 2004,
and in the face of strong demand from yield-hungry investors, prices of
lower-rated municipal bonds in the market have moved higher. Many of the
fund's investments in the health-care, tobacco settlement, and utilities
sectors have rallied as a result.
Tobacco settlement bonds enjoyed strong performance during the fiscal
year and the fund benefited from our decision to overweight this sector,
relative to the benchmark. An improving litigation environment following
a favorable Federal Appeals Court ruling combined with stable cigarette
sales have contributed to a favorable outlook for this sector. Tobacco
settlement bonds are secured by the income stream from tobacco
companies' settlement obligations to the states and generally offer
higher yields than bonds of comparable quality. In what has amounted to
an ongoing threat to this income stream, the Department of Justice (DOJ)
initiated a lawsuit in 1999 against the major tobacco companies seeking
billions of dollars that the DOJ claimed had been obtained fraudulently
from the sale of cigarettes. As noted in the Market Overview section of
this report, this sector benefited from a February 4, 2005, ruling by a
panel of the U.S. Circuit Court of Appeals for the District of Columbia
against the federal government. Investors believe this has significantly
mitigated the potential financial impact of the DOJ's lawsuit on tobacco
companies. Since the ruling, bonds from this sector have strengthened
considerably and because we had overweighted the sector based on our
analysts' favorable outlook, the fund benefited accordingly. The fund
holds tobacco settlement bonds issued by Children's Trust Fund of Puerto
Rico, which, like all Puerto Rico bonds, offer tax-exempt income to
residents of all 50 states.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa (71.9%)
Aa (5.5%)
A (6.5%)
Baa (6.9%)
Ba (2.9%)
B (2.1%)
VMIG1 (4.2%)
Footnote reads:
As a percentage of market value as of 5/31/05. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's
ratings; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
At the other end of the credit spectrum, many of the fund's AAA-rated
long-maturity holdings also performed well, because the municipal bond
yield curve flattened during the year as long-term rates fell. Many of
these holdings are callable bonds, which we believe can be expected to
outperform non-callable bonds in a rising-rate environment. Since buying
long-maturity callable bonds lengthens the fund's duration, which makes
it more vulnerable to the negative effects of rising interest rates, and
since we have focused on keeping the duration relatively short, we owned
fewer of these bonds than would have otherwise been the case.
The fund benefited from its yield curve positioning, which included our
holdings of long-maturity bonds as well as our swap position. This
approach allowed us to reduce fund exposure to shorter-term securities
- -- which were declining in price as short-term rates increased -- and to
focus more on longer maturities in order to take advantage of a
flattening yield curve.
Fund performance also was boosted by the increase in value of some
distressed bonds held in the portfolio. These bonds were issued by the
Waterford Economic Development Corporation to fund
Canterbury-On-the-Lake, a continuing-care retirement community located
in Waterford, Michigan. During the period, bondholders worked with the
issuer to restructure the credit. The price of the bonds rose as
bondholders agreed in principle to tender the outstanding bonds.
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 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.
Economic growth has remained solid, despite the Fed's efforts to slow
growth and curb inflation by raising short-term interest rates.
Long-term rates remain surprisingly low. In fact, after rising modestly
in late March and early April of 2005, long-term rates generally fell
again from mid-April through the end of the period. Nevertheless, based
on sustained economic growth and continued robust corporate earnings, we
believe the Fed will maintain its policy of increasing rates through
2005. We believe Fed actions are likely to cause rising yields. We also
expect more Fed tightening than is currently anticipated by the market,
and believe that bond yields may begin to rise more quickly as other
investors come to the same conclusion. In light of current market
conditions, we plan to maintain the fund's defensive duration and to
continue to increase its exposure to callable bonds, which, in our
opinion, are likely to outperform in a rising-rate cycle.
We have a positive view of the single-family housing sector and plan to
add selectively to the fund's positions. We believe that the recent
outperformance of lower-rated, higher-yielding bonds will likely slow
and we plan to reduce the fund's exposure to this segment of the credit
spectrum in favor of higher-quality issues. Despite recent
outperformance, we remain bearish on airline-related IDBs in light of
likely continued fundamental weaknesses in this sector. Our view on
tobacco settlement bonds is positive and we are seeking to increase the
fund's exposure as opportunities arise.
We believe we are headed into a more challenging environment for bond
investing. Our task will be to continue to search for the most
attractive opportunities among tax-exempt securities, and to balance the
pursuit of current income with prudent risk management.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. This fund invests
in fewer issuers or concentrates its investments by region or sector,
and involves more risk than a fund that invests more broadly. 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. Mutual funds that invest in bonds
are subject to certain risks, including interest-rate risk, credit risk,
and inflation risk. As interest rates rise, the prices of bonds fall.
Long-term bonds are more exposed to interest-rate risk than short-term
bonds. Unlike bonds, bond funds have ongoing fees and expenses. Tax-free
funds may not be suitable for IRAs and other non-taxable accounts.
Your fund's management
Your fund is managed by the members of the Putnam Tax Exempt
Fixed-Income Team. David Hamlin is the Portfolio Leader, and Paul Drury,
Susan McCormack, and James St. John are Portfolio Members of your fund.
The Portfolio Leader and Portfolio Members coordinate the team's
management of the fund.
For a complete listing of the members of the Putnam Tax Exempt
Fixed-Income Team, including those who are not Portfolio Leaders or
Portfolio Members of your fund, visit Putnam's Individual Investor Web
site at www.putnaminvestments.com.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Members have invested in the fund (in dollar ranges).
Information shown is as of May 31, 2005, and May 31, 2004.
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FUND PORTFOLIO LEADER AND PORTFOLIO MEMBERS
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$1 - $10,001 - $50,001- $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
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David Hamlin 2005 *
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Portfolio Leader 2004 *
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Paul Drury 2005 *
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Portfolio Member 2004 *
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Susan McCormack 2005 *
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Portfolio Member 2004 *
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James St. John 2005 *
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Portfolio Member 2004 *
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Fund manager compensation
The total 2004 fund manager compensation that is attributable to your
fund is approximately $30,000. This amount includes a portion of 2004
compensation paid by Putnam Management to the fund managers listed in
this section for their portfolio management responsibilities, calculated
based on the fund assets they manage taken as a percentage of the total
assets they manage. The compensation amount also includes a portion of
the 2004 compensation paid to the Chief Investment Officer of the team
and the Group Chief Investment Officer of the fund's broader investment
category for their oversight responsibilities, calculated based on the
fund assets they oversee taken as a percentage of the total assets they
oversee. This amount does not include compensation of other personnel
involved in research, trading, administration, systems, compliance, or
fund operations; nor does it include non-compensation costs. These
percentages are determined as of the fund's fiscal period-end. For
personnel who joined Putnam Management during or after 2004, the
calculation reflects annualized 2004 compensation or an estimate of 2005
compensation, as applicable.
Other Putnam funds managed by the Portfolio Leader and Portfolio Members
David Hamlin is the Portfolio Leader and Paul Drury, Susan McCormack,
and James St. John are Portfolio Members for Putnam's tax-exempt funds
for the following states: Arizona, California, Florida, Massachusetts,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania. The same group
also manages Putnam AMT-Free Insured Municipal Fund*, Putnam California
Investment Grade Municipal Trust, Putnam High Yield Municipal Trust,
Putnam Investment Grade Municipal Trust, Putnam Managed Municipal Income
Trust, Putnam Municipal Bond Fund, Putnam Municipal Opportunities Trust,
Putnam New York Investment Grade Municipal Trust, Putnam Tax Exempt
Income Fund, Putnam Tax-Free Health Care Fund, and Putnam Tax-Free High
Yield Fund.
David Hamlin, Paul Drury, Susan McCormack, and James St. John may also
manage other accounts and variable trust funds advised by Putnam
Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended May 31, 2005, Portfolio Member Richard Wyke left
your fund's management team.
* Formerly Putnam Tax-Free Insured Fund.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is as of
May 31, 2005, and May 31, 2004.
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PUTNAM EXECUTIVE BOARD
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$1 - $10,001 - $50,001- $100,001
Year $0 $10,000 $50,000 $100,000 and over
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Philippe Bibi 2005 *
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Chief Technology Officer 2004 *
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John Boneparth 2005 *
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Head of Global Institutional Mgmt 2004 *
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Joshua Brooks 2005 *
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Deputy Head of Investments N/A
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Kevin Cronin 2005 *
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Head of Investments 2004 *
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Charles Haldeman, Jr. 2005 *
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President and CEO 2004 *
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Amrit Kanwal 2005 *
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Chief Financial Officer 2004 *
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Steven Krichmar 2005 *
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Chief of Operations 2004 *
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Francis McNamara, III 2005 *
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General Counsel 2004 *
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Richard Monaghan 2005 *
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Head of Retail Management 2004 *
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Richard Robie, III 2005 *
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Chief Administrative Officer 2004 *
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Edward Shadek 2005 *
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Deputy Head of Investments N/A
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N/A indicates the individual was not a member of Putnam's Executive
Board as of 5/31/04.
Performance summary
This section shows your fund's performance during its fiscal year, which
ended May 31, 2005. 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. Data represents past performance. Past performance does not
guarantee 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. For the most
recent month-end performance, please visit www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 5/31/05
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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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1 year 6.74% 1.95% 6.06% 1.06% 6.41% 2.94%
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5 years 35.67 29.64 31.50 29.50 33.80 29.47
Annual average 6.29 5.33 5.63 5.31 6.00 5.30
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10 years 64.57 57.24 54.18 54.18 59.86 54.69
Annual average 5.11 4.63 4.42 4.42 4.80 4.46
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Annual average
(life of fund) 6.03 5.72 5.30 5.30 5.67 5.44
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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 4.50% and 3.25%, respectively (which
for class A shares does not reflect a reduction in sales charges that
went into effect on April 1, 2005; if this reduction had been in place
for all periods indicated, returns would have been higher). 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.
For a portion of the period, this fund limited expenses, without which
returns would have been lower.
A 2% short-term trading fee may be applied to shares exchanged or sold
within 5 days of purchase.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
($9,550 after sales charge)
Cumulative total return, 5/31/95 to 5/31/05
Fund's class A shares Lehman Municipal
at POP Bond Index
5/31/95 9,550 10,000
5/31/96 9,813 10,457
5/31/97 10,869 11,323
5/31/98 11,676 12,385
5/31/99 11,987 12,964
5/31/00 11,744 12,852
5/31/01 12,933 14,413
5/31/02 13,743 15,351
5/31/03 14,875 16,941
5/31/04 14,647 16,935
5/31/05 $15,724 $18,285
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 $15,418, and no contingent deferred sales
charges would apply. A $10,000 investment in the fund's class M shares
would have been valued at $15,986 ($15,469 at public offering price).
See first page of performance section for performance calculation
method.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/05
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Lehman Lipper Michigan
Municipal Municipal Debt Funds
Bond Index category average*
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1 year 7.97% 6.58%
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5 years 42.27 35.94
Annual average 7.31 6.33
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10 years 82.85 66.56
Annual average 6.22 5.22
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Annual average
(life of fund) 7.05 6.39
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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 5/31/05, there were 37, 36,
and 29 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/05
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Class A Class B Class M
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Distributions (number) 12 12 12
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Income 1 $0.339237 $0.280296 $0.312197
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Capital gains 1 -- -- --
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Total $0.339237 $0.280296 $0.312197
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Share value: NAV POP NAV NAV POP
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5/31/04 $8.86 $9.28 $8.85 $8.86 $9.16
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5/31/05 9.11 9.46* 9.10 9.11 9.42
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Current return (end of period)
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Current dividend rate 2 3.64% 3.51% 3.00% 3.35% 3.24%
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Taxable equivalent 3 5.83 5.62 4.80 5.36 5.19
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Current 30-day SEC yield 4 2.98 2.87 2.34 2.68 2.59
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Taxable equivalent 3 4.77 4.59 3.75 4.29 4.15
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* Reflects a reduction in sales charges that took effect on April 1,
2005.
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 37.54% federal and state combined tax rate for 2005.
Results for investors subject to lower tax rates would not be as
advantageous.
4 Based only on investment income, calculated using SEC guidelines.
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TOTAL RETURN FOR PERIODS ENDED 6/30/05 (MOST RECENT CALENDAR QUARTER)
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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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1 year 6.83% 2.02% 6.27% 1.27% 6.62% 3.15%
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5 years 33.11 27.16 29.00 27.00 31.26 26.93
Annual average 5.89 4.92 5.22 4.90 5.59 4.89
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10 years 67.31 59.77 57.09 57.09 62.67 57.35
Annual average 5.28 4.80 4.62 4.62 4.99 4.64
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Annual average
(life of fund) 6.03 5.72 5.30 5.30 5.67 5.45
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Understanding your
fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. In the most
recent six-month period, your fund limited these expenses; had it not
done so, expenses would have been higher. Using the information below,
you can estimate how these expenses affect your investment and compare
them with the expenses of other funds. You may also pay one-time
transaction expenses, including sales charges (loads) and redemption
fees, which are not shown in this section and would have resulted in
higher total expenses. For more information, see your fund's prospectus
or talk to your financial advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000
investment in Putnam Michigan Tax Exempt Income Fund from December 1,
2004, to May 31, 2005. It also shows how much a $1,000 investment would
be worth at the close of the period, assuming actual returns and
expenses.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 5/31/05
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Class A Class B Class M
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Expenses paid per
$1,000* $4.61 $7.89 $6.12
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Ending value (after
expenses) $1,030.70 $1,027.40 $1,029.10
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* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended 5/31/05.
The expense ratio may differ for each share class (see the table at the
bottom of this page). Expenses are calculated by multiplying the expense
ratio by the average account value for the period; then multiplying the
result by the number of days in the period; and then dividing that
result by the number of days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended May
31, 2005, use the calculation method below. To find the value of your
investment on December 1, 2004, go to www.putnaminvestments.com and log
on to your account. Click on the "Transaction History" tab in your Daily
Statement and enter 12/01/2004 in both the "from" and "to" fields.
Alternatively, call Putnam at 1-800-225-1581.
- -----------------------------------------------------------------------------
HOW TO CALCULATE THE EXPENSES YOU PAID
- -----------------------------------------------------------------------------
Total
Value of your Expenses paid expenses
investment on 12/1/04 [DIV] $1,000 X per $1,000 = paid
- -----------------------------------------------------------------------------
Example Based on a $10,000 investment in class A shares of your fund.
- -----------------------------------------------------------------------------
$10,000 [DIV] $1,000 X $4.61 (see table above) = $46.10
- -----------------------------------------------------------------------------
Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines
to help investors assess fund expenses. Per these guidelines, the table
below shows your fund's expenses based on a $1,000 investment, assuming
a hypothetical 5% annualized return. You can use this information to
compare the ongoing expenses (but not transaction expenses or total
costs) of investing in the fund with those of other funds. All mutual
fund shareholder reports will provide this information to help you make
this comparison. Please note that you cannot use this information to
estimate your actual ending account balance and expenses paid during the
period.
- -----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 5/31/05
- -----------------------------------------------------------------------------
Class A Class B Class M
- -----------------------------------------------------------------------------
Expenses paid per
$1,000* $4.58 $7.85 $6.09
- -----------------------------------------------------------------------------
Ending value (after
expenses) $1,020.39 $1,017.15 $1,018.90
- -----------------------------------------------------------------------------
* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended 5/31/05.
The expense ratio may differ for each share class (see the table at the
bottom of this page). Expenses are calculated by multiplying the expense
ratio by the average account value for the period; then multiplying the
result by the number of days in the period; and then dividing that
result by the number of days in the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with the average of its peer
group, as defined by Lipper, an independent fund-rating agency that
ranks funds relative to others that Lipper considers to have similar
investment styles or objectives. The expense ratio for each share class
shown below indicates how much of your fund's net assets have been used
to pay ongoing expenses during the period.
- -----------------------------------------------------------------------
EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
- -----------------------------------------------------------------------
Class A Class B Class M
- -----------------------------------------------------------------------
Your fund's annualized
expense ratio+ 0.91% 1.56% 1.21%
- -----------------------------------------------------------------------
Average annualized expense
ratio for Lipper peer
group++ 0.94% 1.59% 1.24%
- -----------------------------------------------------------------------
+ For the fund's most recent fiscal half year; may differ from expense
ratios based on one-year data in the financial highlights.
++ Simple average of the expenses of all front-end load funds in the
fund's Lipper peer group, calculated in accordance with Lipper's
standard method for comparing fund expenses (excluding 12b-1 fees and
without giving effect to any expense offset and brokerage service
arrangements that may reduce fund expenses). This average reflects each
fund's expenses for its most recent fiscal year available to Lipper as
of 3/31/05. To facilitate comparison, Putnam has adjusted this average
to reflect the 12b-1 fees carried by each class of shares. The peer
group may include funds that are significantly smaller or larger than
the fund, which may limit the comparability of the fund's expenses to
the simple average, which typically is higher than the asset-weighted
average.
Understanding your fund's
portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries,
economies, and markets. Portfolio turnover is a measure of how often a
fund's managers buy and sell securities for your fund. A portfolio
turnover of 100%, for example, means that the managers sold and replaced
securities valued at 100% of a fund's assets within a one-year period.
Funds with high turnover may be more likely to generate capital gains
and dividends that must be distributed to shareholders as taxable
income. High turnover may also cause a fund to pay more brokerage
commissions and other transaction costs, which may detract from
performance.
Funds that invest in bonds or other fixed-income instruments may have
higher turnover than funds that invest only in stocks. Short-term bond
funds tend to have higher turnover than longer-term bond funds, because
shorter-term bonds will mature or be sold more frequently than
longer-term bonds. You can use the table below to compare your fund's
turnover with the average turnover for funds in its Lipper category.
- ------------------------------------------------------------------------------
TURNOVER COMPARISONS
percentage of holdings that change every year
- ------------------------------------------------------------------------------
2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------
Putnam Michigan Tax
Exempt Income Fund 18% 10% 24% 21% 14%
- ------------------------------------------------------------------------------
Lipper Michigan Municipal
Debt Funds category
average 17% 17% 30% 20% 29%
- ------------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on May 31. Turnover data for the fund's Lipper
category is calculated based on the average of the turnover of each fund
in the category for its fiscal year ended during the indicated year.
Fiscal years vary across funds in the Lipper category, which may limit
the comparability of the fund's portfolio turnover rate to the Lipper
average. Comparative data for 2005 is based on information available as
of 3/31/05.
Risk comparison
This risk comparison is designed to help you understand how your fund
compares with other funds. The comparison utilizes a risk measure
developed by Morningstar, an independent fund-rating agency. This risk
measure is referred to as the fund's Overall Morningstar Risk.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 0.14
Municipal bond
fund average 0.20
0% INCREASING RISK 100%
Your fund's Overall Morningstar Risk is shown alongside that of the
average fund in its broad asset class, as determined by Morningstar. The
risk bar broadens the comparison by translating the fund's Overall
Morningstar Risk into a percentile, which is based on the fund's ranking
among all funds rated by Morningstar as of June 30, 2005. A higher
Overall Morningstar Risk generally indicates that a fund's monthly
returns have varied more widely.
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those
measures are weighted and averaged to produce the fund's Overall
Morningstar Risk. The information shown is provided for the fund's class
A shares only; information for other classes may vary. Overall
Morningstar Risk is based on historical data and does not indicate
future results. Morningstar does not purport to measure the risk
associated with a current investment in a fund, either on an absolute
basis or on a relative basis. Low Overall Morningstar Risk does not mean
that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein
(1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate,
complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information.
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. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
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 4.50% maximum sales charge for class A
shares (since reduced to 3.75%) 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 Global High Yield Index is an unmanaged index of global
high-yield fixed-income securities.
Lehman Aggregate Bond Index is an unmanaged index of U.S.
investment-grade fixed-income securities.
Lehman Intermediate Government Bond Index is an unmanaged index of U.S.
Treasury and agency securities 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 equity securities from developed countries in Western Europe,
the Far East, and Australasia.
Russell 2000 Index is an unmanaged index of the 2,000 smallest companies
in 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 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.
Trustee approval of management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of
each fund and, as required by law, determines annually whether to
approve the continuance of each fund's management contract with Putnam
Management. In this regard the Board of Trustees, with the assistance of
its Contract Committee consisting solely of Independent Trustees,
requests and evaluates all information it deems reasonably necessary in
the circumstances. Over the course of several months beginning in March
and ending in June of 2004, the Contract Committee reviewed the
information provided by Putnam Management and other information
developed with the assistance of the Board's independent counsel and
independent staff. The Contract Committee reviewed and discussed key
aspects of this information with all of the Independent Trustees. Upon
completion of this review, the Contract Committee recommended and the
Independent Trustees approved the continuance of your fund's contract,
effective July 1, 2004.
This approval was based on the following conclusions:
* That the fee schedule currently in effect for your fund represents
reasonable compensation in light of the nature and quality of the
services being provided to the fund, the fees paid by competitive funds
and the costs incurred by Putnam Management in providing such service,
and
* That such fee schedule represents an appropriate sharing between fund
shareholders and Putnam Management of such economies of scale as may
exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all
information provided to the Trustees and were not the result of any
single factor. Some of the factors that figured particularly in the
Trustees' deliberations are described below.
Model fee schedules and categories; total expenses
The Trustees, working in cooperation with Putnam Management, have
developed and implemented a series of model fee schedules for the Putnam
funds designed to ensure that each fund's management fee is consistent
with the fees for similar funds in the Putnam complex and compares
favorably with fees paid by competitive funds sponsored by other advisors.
The Trustees reviewed the model fee schedule currently in effect for the
fund, including fee levels and breakpoints, and the assignment of the fund
to a particular fee category under this structure. The Trustees also
reviewed comparative fee and expense information for competitive funds.
The Trustees concluded that no changes should be made in the fund's
current fee schedule at this time. The Trustees noted that expense ratios
for a number of Putnam funds had been increasing recently as a result of
declining net assets and the natural operation of fee breakpoints. They
noted that such expense ratio increases were currently being controlled by
expense limitations implemented in January 2004. They also noted that the
competitive landscape regarding mutual fund fees may be changing as a
result of fee reductions accepted by various other fund groups in
connection with recent regulatory settlements and greater focus on fees
and expenses in the mutual fund industry generally. The Trustees indicated
an intention to monitor these developments closely.
Economies of scale
As noted above, the Trustees concluded that the fee schedule currently
in effect for your fund represents an appropriate sharing of economies
of scale at current asset levels. The Trustees indicated their intention
to continue their ongoing consideration of economies of scale and in
particular to consider further the possible operation of such economies
in the event that a significant recovery in the equity markets or net
fund sales were to raise asset levels substantially above current
levels. In this regard, the Trustees noted that they had reviewed data
relating to the substantial increase in asset levels of the Putnam funds
that occurred during the years leading up to the market peak in 2000,
the subsequent decline in assets and the resulting impact on revenues
and expenses of Putnam Management. The Trustees also noted that recent
declines in net assets in many Putnam funds, together with significant
changes in the cost structure of Putnam Management have altered the
economics of Putnam Management's business in significant ways. The
Trustees concluded that they would monitor these changes carefully and
evaluate the resulting impact on Putnam Management's economics and the
sharing of economies of scale between the parties.
Investment performance
The quality of the investment process provided by Putnam Management
represented a major factor in the Trustees' evaluation of the quality of
services provided by Putnam Management under the Management Contracts.
The Trustees recognized that a high quality investment process -- as
measured by the experience and skills of the individuals assigned to the
management of fund portfolios, the resources made available to such
personnel, and in general the ability of Putnam Management to attract
and retain high-quality personnel -- does not guarantee favorable
investment results for every fund in every time period. The Trustees
considered the investment performance of each fund over multiple time
periods and considered information comparing the fund's performance with
various benchmarks and with the performance of competitive funds. The
Trustees noted the satisfactory investment performance of many Putnam
funds.
They also noted the disappointing investment performance of certain
funds in recent years and continued to discuss with senior management of
Putnam Management the factors contributing to such under-performance and
actions being taken to improve performance. The Trustees recognized
that, in recent years, Putnam Management has made significant changes in
its investment personnel and processes and in the fund product line in
an effort to address areas of underperformance. The Trustees indicated
their intention to continue to monitor performance trends to assess the
effectiveness of these changes and to evaluate whether additional
remedial changes are warranted. As a general matter, the Trustees
concluded that consultation between the Trustees and Putnam Management
represents the most effective way to address investment performance
problems. The Trustees believe that investors in the Putnam funds and
their financial advisors have, as a general matter, effectively placed
their trust in the Putnam organization, under the supervision of the
funds' Trustees, to make appropriate decisions regarding the management
of the funds. The Trustees believe that the termination of the
Management Contract and engagement of a new investment adviser for
under-performing funds, with all the attendant disruptions, would not
serve the interests of fund shareholders at this time and would not
necessarily provide any greater assurance of improved investment
performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam
Management may receive in connection with the services it provides under
the Management Contract with your fund. These include principally
benefits related to brokerage and soft-dollar allocations, which pertain
mainly to funds investing in equity securities. The Trustees believe
that soft-dollar credits and other potential benefits associated with
the allocation of fund brokerage represent assets of the funds that
should be used for the benefit of fund shareholders. The Trustees noted
recent trends in the allocation of fund brokerage, including commission
costs, the allocation of brokerage to firms that provide research
services to Putnam Management, and the sources and application of
available soft-dollar credits. Effective December 31, 2003, reflecting a
decision made by the Trustees earlier that year, Putnam Management
ceased allocating brokerage in connection with the sale of fund shares.
In addition, in preparing its budget for commission allocations in 2004,
Putnam Management voluntarily reduced substantially the allocation of
brokerage commissions to acquire research services from third-party
service providers. In light of evolving best practices in the mutual
fund industry, the Trustees concluded that this practice should be
further curtailed and possibly eliminated in the near future. The
Trustees indicated that they would continue to monitor the allocation of
the funds' brokerage to ensure that the principle of "best price and
execution" remains paramount in the portfolio trading process.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of the annual contract
reviews included information regarding fees charged by Putnam Management
and its affiliates to institutional clients such as defined benefit
pension plans and college endowments. This information included
comparison of such fees with fees charged to the Putnam funds, as well
as a detailed assessment of the differences in the services provided to
these two types of clients. The Trustees devoted special attention to
these issues and reviewed recent articles by critics of mutual fund
fees, articles by the ICI defending such fee differences, and relevant
guidance provided by decisions of the courts. The Trustees observed, in
this regard, that the differences in fee rates between institutional
clients and mutual funds are by no means uniform when examined by
individual asset sectors, suggesting that differences in the pricing of
investment management services to these types of clients reflects to a
substantial degree historical competitive forces operating in separate
market places. In reaching their conclusions, the Trustees considered
the fact that fee rates across all asset sectors are higher on average
for mutual funds than for institutional clients, and also considered the
differences between the services that Putnam provides to the Putnam
funds and those that it provides to institutional clients of the firm.
Settlement of regulatory charges related to market timing
Finally, in reaching their conclusions, the Trustees considered all
matters pertinent to the administrative charges filed against Putnam
Management by the SEC and the Commonwealth of Massachusetts in October
2003 relating to market timing, the firm's settlement of those charges,
and the conclusions and recommendations of the Trustees' Audit and
Pricing Committee based on its review of these matters. The Trustees
considered the actions taken by the owner of Putnam Management and its
new senior management to terminate or discipline the individuals
involved, to implement new compliance systems, to indemnify the funds
against all costs and liabilities related to these matters, and
otherwise to ensure that the interests of the funds and their
shareholders are fully protected. The Trustees noted that, in addition
to the settlements of the regulatory charges which will provide
comprehensive restitution for any losses suffered by shareholders, the
new senior management of Putnam Management has moved aggressively to
control expense ratios of funds affected by market timing, to reduce
charges to new investors, to improve disclosure of fees and expenses,
and to emphasize the paramount role of investment performance in
achieving shareholders' investment goals.
Other information for shareholders
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.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
The fund will file a complete schedule of its portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form
N-Q. Shareholders may obtain the fund's Forms N-Q on the SEC's Web site
at www.sec.gov. In addition, the fund's Forms N-Q may be reviewed and
copied at the SEC's public reference room in Washington, D.C. You may
call the SEC at 1-800-SEC-0330 for information about the SEC's Web site
or the operation of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Report of Independent Registered Public Accounting Firm,
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 the fund's net investment gain or loss, 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 Registered Public Accounting Firm
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 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, 2005, and the
results of its operations, the changes in its net assets and the
financial highlights for each of 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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, 2005, by correspondence
with the custodian and brokers, provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 7, 2005
The fund's portfolio
May 31, 2005
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
Q-SBLF Qualified School Board Loan Fund
U.S. Govt. Coll. U.S. Government Collateralized
VRDN Variable Rate Demand Notes
Municipal bonds and notes (97.7%) (a)
Principal amount Rating (RAT) Value
Michigan (91.7%)
- -------------------------------------------------------------------------------
$1,000,000 Chippewa Valley, Schools G.O. Bonds
(School Bldg. & Site), FSA, Q-SBLF,
5.00%, 5/1/07 Aaa $1,039,310
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 1,525,710
2,155,000 Detroit, Swr. Disp. Rev. Bonds,
Ser. C, FSA, 5s, 7/1/08 Aaa 2,284,020
5,700,000 Detroit, Swr. Disp. VRDN, Ser. B,
FSA, 2.97s, 7/1/33 VMIG1 5,700,000
2,480,000 Detroit, Wtr. Supply Syst.
Rev. Bonds (Sr. Lien), Ser. A, MBIA,
5 1/4s, 7/1/19 Aaa 2,715,402
3,065,000 Detroit/Wayne Cnty., Stad. Auth.
Rev. Bonds, FGIC, 5 1/4s, 2/1/27 Aaa 3,223,859
1,000,000 Dickinson Cnty., Econ. Dev. Corp.
Rev. Bonds, 5 3/4s, 6/1/16 Baa2 1,085,530
Ecorse, Pub. School Dist. G.O.
Bonds, FSA, Q-SBLF
1,700,000 5s, 5/1/13 Aaa 1,887,238
1,650,000 5s, 5/1/12 Aaa 1,820,957
Flint, Hosp. Auth. Rev. Bonds
(Hurley Med. Ctr.), Ser. A
630,000 6s, 7/1/06 Baa3 639,809
1,000,000 5 3/8s, 7/1/20 Baa3 999,440
675,000 Garden City, Hosp. Fin. Auth.
Rev. Bonds (Garden City Hosp. OB
Group), Ser. A, 5 3/4s, 9/1/17 Ba2 649,134
2,000,000 Gibraltar, School Dist. G.O. Bonds
(School Bldg. & Site), FGIC, 5s,
5/1/21 Aaa 2,153,280
1,000,000 Grand Rapids, Hsg. Fin. Auth.
Rev. Bonds, Ser. A, FNMA Coll.,
7 5/8s, 9/1/23 AAA 1,000,000
2,000,000 Greater Detroit, Resource Recvy.
Auth. Rev. Bonds, Ser. A, AMBAC,
6 1/4s, 12/13/06 Aaa 2,099,700
1,925,000 Gull Lake Cmnty., School Dist. G.O.
Bonds (School Bldg. & Site), FSA,
Q-SBLF, 5s, 5/1/26 Aaa 2,054,649
2,190,000 Harper Creek, Cmnty. School Dist.
G.O. Bonds, Q-SBLF, 5 1/8s, 5/1/31 Aa2 2,289,163
1,500,000 Hartland, Cons. School Dist. G.O.
Bonds, FGIC, 6s, 5/1/18 Aaa 1,698,900
1,000,000 Huron, School Dist. G.O. Bonds, FSA,
5 5/8s, 5/1/15 Aaa 1,115,370
7,000,000 Kalamazoo, Hosp. Fin. Auth. Fac.
Rev. Bonds, FGIC, 5.244s, 6/1/11 Aaa 7,146,860
1,450,000 Kent, Hosp. Fin. Auth. Rev. Bonds
(Spectrum Hlth.), Ser. A, MBIA,
5 1/2s, 1/15/16 AAA 1,603,222
1,035,000 Lansing, Bldg. Auth. G.O. Bonds,
Ser. A, MBIA, 5 3/8s, 6/1/20 Aaa 1,147,235
3,000,000 Livonia, Pub. School Dist. G.O.
Bonds, Ser. A, MBIA, 5s, 5/1/22 Aaa 3,232,260
800,000 Manistee, Area School Dist. G.O.
Bonds, FGIC, 5 3/4s, 5/1/19 Aaa 881,216
MI Higher Ed. Fac. Auth. Rev. Bonds
1,000,000 (Ltd. Oblig.-Hope College), Ser. A,
5.55s, 4/1/24 BBB 1,083,670
250,000 (Kalamazoo College), 5s, 12/1/20 A1 262,910
1,000,000 MI Muni. Bond Auth. Rev. Bonds
(Drinking Wtr. Revolving Fund),
5 1/2s, 10/1/18 Aaa 1,106,920
MI State Bldg. Auth. Rev. Bonds
5,750,000 Ser. I, AMBAC, 6 1/2s, 10/1/07 (SEG) Aaa 6,219,143
1,815,000 (Fac. Program), Ser. I, 4 3/4s,
10/15/25 Aa3 1,854,422
2,380,000 MI State Comprehensive Trans.
Rev. Bonds, Ser. B, FSA, 5 1/4s,
5/15/20 Aaa 2,672,383
MI State Hosp. Fin. Auth. Rev. Bonds
1,000,000 (Oakwood Hosp.), Ser. A, 6s, 4/1/22 A2 1,103,520
1,000,000 (Holland Cmnty. Hosp.), Ser. A,
FGIC, 5 3/4s, 1/1/21 A2 1,097,800
650,000 (Sparrow Hosp.), 5 1/2s, 11/15/21 A1 703,801
1,000,000 (Oakwood Oblig. Group), 5 1/2s,
11/1/17 A2 1,097,970
1,000,000 (Chelsea Cmnty. Hosp.), 5 3/8s,
5/15/19 BBB 1,021,510
MI State Hsg. Dev. Auth. Ltd. Oblig.
Rev. Bonds (Parkway Meadows), FSA
1,085,000 4s, 10/15/12 Aaa 1,120,631
1,045,000 4s, 10/15/11 Aaa 1,086,664
2,000,000 MI State South Central Pwr. Agcy.
Rev. Bonds, AMBAC, 5s, 11/1/09 Aaa 2,156,340
1,150,000 MI State Strategic Fund Ltd.
Rev. Bonds (Ford Motor Co.), Ser. A,
7.1s, 2/1/06 Baa3 1,170,700
1,000,000 MI State Strategic Fund Solid Waste
Disp. Mandatory Put Bonds (Waste
Mgt., Inc.), 4.2s, 12/1/05 BBB 1,002,230
MI State Strategic Fund Solid Waste
Disp. Rev. Bonds
300,000 (Genesee Pwr. Station), 7 1/2s,
1/1/21 B/P 288,006
700,000 (SD Warren Co.), Ser. C, 7 3/8s,
1/15/22 BB/P 736,260
1,250,000 MI State Strategic Fund, Ltd.
Mandatory Put Bonds (Dow Chemical),
3.8s, 6/1/06 A3 1,256,313
MI State Strategic Fund, Ltd.
Rev. Bonds
1,500,000 (Detroit Edison Co.), AMBAC, 7s,
5/1/21 Aaa 2,002,560
3,000,000 (Worthington Armstrong Venture),
U.S. Govt. Coll., 5 3/4s, 10/1/22 AAA/P 3,491,250
420,000 (Detroit Edison Poll. Control),
5.65s, 9/1/29 A3 444,368
5,000,000 (Detroit Edison Co.), Ser. A, MBIA,
5.55s, 9/1/29 Aaa 5,359,600
1,000,000 (Detroit Edison Co.), AMBAC, 4.85s,
9/1/30 Aaa 1,062,970
850,000 Midland Cnty., Econ. Dev. Corp.
Rev. Bonds, 6 7/8s, 7/23/09 Ba3 892,177
1,350,000 Mount Clemens Cmnty. School Dist.
Rev. Bonds (School Bldg. & Site),
Q-SBLF, 5 1/2s, 5/1/18 Aa2 1,525,311
1,600,000 Otsego, Pub. School Dist. G.O. Bonds
(School Bldg. & Site), FSA, Q-SBLF,
5s, 5/1/27 Aaa 1,699,168
1,060,000 Oxford Area Cmnty., School Dist.
G.O. Bonds, FSA, Q-SBLF, 5s, 5/1/25 Aaa 1,134,666
1,000,000 Pennfield, School Dist. G.O. Bonds
(School Bldg. and Site), FGIC, 5s,
5/1/26 Aaa 1,067,350
2,000,000 Plymouth-Canton Cmnty., School Dist.
G.O. Bonds, FGIC, Q-SBLF, 5s, 5/1/28 Aaa 2,127,020
1,500,000 Pontiac Tax Increment Finance
Authority Rev. Bonds, 6 3/8s, 6/1/31 BB+ 1,554,555
1,400,000 Rochester Cmnty. School Dist. G.O.
Bonds, Ser. II, Q-SBLF, 5 1/2s,
5/1/21 Aa2 1,540,938
1,015,000 Romulus, Township Cmnty. Schools
G.O. Bonds, Q-SBLF, 5s, 5/1/11 Aa2 1,108,654
1,000,000 Royal Oak, Hosp. Fin. Auth.
Rev. Bonds (William Beaumont Hosp.),
Ser. M, MBIA, 5 1/4s, 11/15/35 Aaa 1,050,700
2,500,000 Southfield, Pub. Schools G.O. Bonds,
Ser. B, FSA, 5s, 5/1/14 Aaa 2,784,875
1,000,000 St, Clair Cnty., G.O. Bonds, AMBAC,
5s, 4/1/21 Aaa 1,076,020
1,370,000 Warren Cons. School Dist. G.O.
Bonds, Q-SBLF, 5s, 5/1/12 Aa2 1,505,726
2,980,000 Waterford, Econ. Dev. Corp.
Rev. Bonds (Canterbury Hlth.), 6s,
1/1/39 B-/P 2,434,690
2,000,000 Wayland, Unified School Dist.
Rev. Bonds, FGIC, Q-SBLF, 8s, 5/1/10 Aaa 2,343,840
2,405,000 Wayne Cnty., Bldg. Auth. G.O. Bonds,
Ser. A, MBIA, 6s, 6/1/08 Aaa 2,525,755
West Bloomfield, School Dist. G.O.
Bonds (School Bldg. & Site)
1,000,000 MBIA, 5 5/8s, 5/1/16 Aaa 1,113,680
1,325,000 FSA, 5s, 5/1/24 Aaa 1,421,407
1,120,000 Western MI U. Rev. Bonds, AMBAC, 5s,
7/15/10 Aaa 1,216,622
1,000,000 Western Township Util. G.O. Bonds,
MBIA, 5 1/4s, 1/1/07 Aaa 1,036,590
2,000,000 Whitmore Lake, Pub. School Dist.
G.O. Bonds, FGIC, Q-SBLF, 5s, 5/1/28 Aaa 2,114,960
1,240,000 Ypsilanti, School Dist. G.O. Bonds,
FGIC, 5 3/8s, 5/1/26 Aaa 1,297,796
1,425,000 Zeeland, Pub. Schools G.O. Bonds
(School Bldg. & Site), MBIA, 5s,
5/1/27 Aaa 1,518,779
--------------
125,485,484
Puerto Rico (6.0%)
- -------------------------------------------------------------------------------
655,000 Children's Trust Fund Tobacco
Settlement Rev. Bonds, 5 3/8s,
5/15/33 BBB 662,316
2,500,000 Cmnwlth. of PR, G.O. Bonds (Pub.
Impt.), MBIA, 5 3/4s, 7/1/26 Aaa 2,796,525
3,000,000 PR Elec. Pwr. Auth. Rev. Bonds,
Ser. HH, FSA, 5 1/4s, 7/1/29 Aaa 3,254,250
1,400,000 PR Indl. Tourist Edl. Med. & Env.
Control Fac. Rev. Bonds (Cogen.
Fac.-AES), 6 5/8s, 6/1/26 Baa3 1,537,032
--------------
8,250,123
- -------------------------------------------------------------------------------
Total Investments
(cost $128,258,996) $133,735,607
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $136,825,713.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at May 31, 2005 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, 2005. Securities rated by Putnam are indicated by
"/P". Ratings are not covered by the Report of Independent Registered
Public Accounting Firm. Security ratings are defined in the Statement of
Additional Information.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at May 31,
2005.
The rates shown on VRDN's and Mandatory Put Bonds are the current
interest rates at May 31, 2005.
The dates shown on Mandatory Put Bonds are the next mandatory put dates.
The fund had the following industry group concentrations greater than
10% at May 31, 2005 (as a percentage of
net assets):
Health care 14.3%
Utilities 12.4
The fund had the following insurance concentrations greater than 10% at
May 31, 2005 (as a percentage of net assets):
FSA 22.7%
MBIA 18.7
FGIC 18.4
AMBAC 11.6
Futures contracts outstanding at May 31, 2005
Number of Expiration Unrealized
contracts Value date depreciation
- ------------------------------------------------------------------------------------------
U.S. Treasury Note
10 yr (Short) 32 $3,624,500 Sep-05 $(15,837)
- ------------------------------------------------------------------------------------------
Interest rate swap contracts outstanding at May 31, 2005
Notional Termination Unrealized
amount date appreciation
- ------------------------------------------------------------------------------------------------------
Agreement with Citigroup Financial Products, Inc.
dated February 7, 2005 to receive quarterly
the notional amount multiplied by 3.935%
and pay quarterly the notional amount
multiplied by the USD-Muni-BMA-Rate. $1,000,000 8/10/30 $10,285
Agreement with Merrill Lynch International
dated February 7, 2005 to pay quarterly the
notional amount multiplied by 3.125% and
receive quarterly the notional amount
multiplied by the USD-Muni-BMA-Rate. 8,000,000 8/10/09 7,809
- ------------------------------------------------------------------------------------------------------
$18,094
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
May 31, 2005
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (Note 1):
- -------------------------------------------------------------------------------
Unaffiliated issuers (identified cost $128,258,996) $133,735,607
- -------------------------------------------------------------------------------
Cash 2,297,398
- -------------------------------------------------------------------------------
Interest and other receivables 1,417,486
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 16,605
- -------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 18,094
- -------------------------------------------------------------------------------
Total assets 137,485,190
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 263,399
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 86,834
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 173,037
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 1,153
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 32,574
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,162
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 56,166
- -------------------------------------------------------------------------------
Payable for variation margin (Note 1) 14,000
- -------------------------------------------------------------------------------
Other accrued expenses 30,152
- -------------------------------------------------------------------------------
Total liabilities 659,477
- -------------------------------------------------------------------------------
Net assets $136,825,713
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) $133,265,036
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 122,049
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,040,240)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,478,868
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $136,825,713
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($109,105,439 divided by 11,979,527 shares) $9.11
- -------------------------------------------------------------------------------
Offering price per class A share (100/96.25 of $9.11)* $9.46
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($26,377,697 divided by 2,898,937 shares)** $9.10
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,342,577 divided by 147,396 shares) $9.11
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.11)*** $9.42
- -------------------------------------------------------------------------------
* On single retail sales of less than $100,000. On sales of $100,000 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, 2005
Interest income: $6,699,442
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 712,918
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 111,573
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 63,220
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 15,137
- -------------------------------------------------------------------------------
Administrative services (Note 2) 18,595
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 223,612
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 247,869
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 6,932
- -------------------------------------------------------------------------------
Other 107,726
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 5) 4,326
- -------------------------------------------------------------------------------
Costs assumed by Manager (Notes 2 and 5) (4,326)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (17,489)
- -------------------------------------------------------------------------------
Total expenses 1,490,093
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (82,358)
- -------------------------------------------------------------------------------
Net expenses 1,407,735
- -------------------------------------------------------------------------------
Net investment income 5,291,707
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,481,108
- -------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (56,490)
- -------------------------------------------------------------------------------
Net realized loss on swap contracts (Note 1) (1,694)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures
contracts and swap contracts during the year 2,426,186
- -------------------------------------------------------------------------------
Net gain on investments 3,849,110
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $9,140,817
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Year ended May 31
Decrease in net assets 2005 2004
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $5,291,707 $6,807,240
- -------------------------------------------------------------------------------
Net realized gain (loss) on investments 1,422,924 (22,039)
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 2,426,186 (7,532,979)
- -------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 9,140,817 (747,778)
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (4,215,320) (5,356,150)
- -------------------------------------------------------------------------------
Class B (911,210) (1,302,027)
- -------------------------------------------------------------------------------
Class M (48,057) (65,732)
- -------------------------------------------------------------------------------
Redemption fees (Note 1) 2 --
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (17,195,235) (34,383,705)
- -------------------------------------------------------------------------------
Total decrease in net assets (13,229,003) (41,855,392)
Net assets
- -------------------------------------------------------------------------------
Beginning of year 150,054,716 191,910,108
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $122,049 and
distributions in excess of net investment
income of $4,679, respectively) $136,825,713 $150,054,716
- -------------------------------------------------------------------------------
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 Year ended May 31
operating performance 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.86 $9.26 $8.95 $8.83 $8.38
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .35 (c) .37 (c) .38 .43 .45
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 (.40) .32 .12 .45
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .59 (.03) .70 .55 .90
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.34) (.37) (.39) (.43) (.45)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.34) (.37) (.39) (.43) (.45)
- ---------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (d) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.11 $8.86 $9.26 $8.95 $8.83
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.74 (.34) 8.03 6.39 10.95
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $109,105 $116,485 $146,255 $142,706 $130,071
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .91 (c) .90 (c) .89 .87 .87
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.85 (c) 4.12 (c) 4.23 4.82 5.18
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.35 9.90 24.48 20.71 14.46
- ---------------------------------------------------------------------------------------------------------------------------------
(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) Reflects an involuntary contractual expense limitation in effect
during the period. As a result of such limitation, the expenses of the
fund for the periods ended May 31, 2005 and May 31, 2004, reflect a
reduction of 0.01% and less than 0.01%, respectively, of average net
assets for class A shares (Note 2).
(d) Amount represents less than $0.01 per share.
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 Year ended May 31
operating performance 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.85 $9.25 $8.94 $8.83 $8.36
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .29 (c) .31 (c) .33 .37 .39
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 (.40) .31 .12 .48
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .53 (.09) .64 .49 .87
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.28) (.31) (.33) (.38) (.40)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.28) (.31) (.33) (.38) (.40)
- ---------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (d) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.10 $8.85 $9.25 $8.94 $8.83
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.06 (1.00) 7.33 5.58 10.50
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $26,378 $32,165 $43,632 $43,308 $45,406
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.56 (c) 1.55 (c) 1.54 1.52 1.52
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.20 (c) 3.47 (c) 3.58 4.17 4.53
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.35 9.90 24.48 20.71 14.46
- ---------------------------------------------------------------------------------------------------------------------------------
(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) Reflects an involuntary contractual expense limitation in effect
during the period. As a result of such limitation, the expenses of the
fund for the periods ended May 31, 2005 and May 31, 2004, reflect a
reduction of 0.01% and less than 0.01%, respectively, of average net
assets for class B shares (Note 2).
(d) Amount represents less than $0.01 per share.
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 Year ended May 31
operating performance 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $8.86 $9.26 $8.95 $8.83 $8.37
- ---------------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income .32 (c) .35 (c) .36 .40 .43
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .24 (.41) .32 .13 .46
- ---------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .56 (.06) .68 .53 .89
- ---------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.31) (.34) (.37) (.41) (.43)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions (.31) (.34) (.37) (.41) (.43)
- ---------------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (d) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.11 $8.86 $9.26 $8.95 $8.83
- ---------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 6.41 (.65) 7.70 6.07 10.75
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,343 $1,404 $2,023 $2,852 $2,320
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.21 (c) 1.20 (c) 1.19 1.17 1.17
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.54 (c) 3.82 (c) 3.93 4.53 4.88
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 18.35 9.90 24.48 20.71 14.46
- ---------------------------------------------------------------------------------------------------------------------------------
(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) Reflects an involuntary contractual expense limitation in effect
during the period. As a result of such limitation, the expenses of the
fund for the periods ended May 31, 2005 and May 31, 2004, reflect a
reduction of 0.01% and less than 0.01%, respectively, of average net
assets for class M shares (Note 2).
(d) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
May 31, 2005
Note 1
Significant accounting policies
Putnam Michigan Tax Exempt Income Fund (the "fund"), a Massachusetts
business trust, 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 and class M
shares are sold with a maximum front-end sales charge of 3.75% and
3.25%, respectively, and do not pay contingent deferred sales charges.
Prior to April 1, 2005, the maximum front-end sales charge for class A
shares was 4.50%. Class B shares, which convert to class A shares after
approximately eight years, do not pay a front-end sales charge, and are
subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. The expenses for class A, class B
and class M shares may differ based on each class' distribution fee,
which is identified in Note 2.
A 2.00% redemption fee may apply to any shares that are redeemed (either
by selling or exchang ing into another fund) within 5 days of purchase.
The redemption fee is accounted for as an addition to paid-in-capital.
Investment income, realized and unrealized gains and losses and expenses
of the fund are borne pro-rata based on the relative net assets of each
class to the total net assets of the fund, except that each class bears
expenses unique to that class (including the distribution fees
applicable to such classes). 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.
In the normal course of business, the fund enters into contracts that
may include agreements to indemnify another party under given
circumstances. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be, but have not
yet been, made against the fund. However, the fund expects the risk of
material loss to be remote.
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. Other investments 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. Risks may exceed amounts recognized on the statement
of assets and liabilities. 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. If a written call
option is exercised, the premium originally received is recorded as an
addition to sales proceeds. If a written put option is exercised, the
premium originally received is recorded as a reduction to the cost of
investments.
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, if any,
are listed after the fund's portfolio.
D) Interest rate swap contracts The fund may enter into interest rate
swap contracts, which are arrangements between two parties to exchange
cash flows based on a notional principal amount, to manage the fund's
exposure to interest rates. Interest rate swap contracts are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss. Payments received or made
are recorded as realized gains or loss. The fund could be exposed to
credit or market risk due to unfavorable changes in the fluctuation of
interest rates or if the counterparty defaults on its obligation to
perform. Risk of loss may exceed amounts recognized on the statement of
assets and liabilities. Interest rate swap contracts outstanding at
period end, if any, are listed after the fund's portfolio.
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 of 1986 (the "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 Code, 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, 2005, the fund had a capital loss carryover of $1,600,925
available to the extent allowed by the Code to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------
$1,383,779 May 31, 2009
217,146 May 31, 2012
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, unrealized and realized gains
and losses on certain futures contracts, market discount 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,
2005, the fund reclassified $9,608 to increase undistributed net
investment income with an increase to accumulated net realized losses of
$9,608.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $6,218,861
Unrealized depreciation (742,249)
------------
Net unrealized appreciation 5,476,612
Undistributed tax exempt
income 374,200
Undistributed ordinary income 10,212
Capital loss carryforward (1,600,925)
Cost for federal income
tax purposes $128,258,995
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.
Putnam Management has agreed to waive fees and reimburse expenses of the
fund through May 31, 2006 to the extent necessary to ensure that the
fund's expenses do not exceed the average expenses of the front-end load
funds viewed by Lipper Inc. as having the same investment classification
or objective as the fund. The expense reimbursement is based on a
comparison of the fund's expenses with the average annualized operating
expenses of the funds in its Lipper peer group for each calendar quarter
during the fund's last fiscal year, excluding 12b-1 fees and without
giving effect to any expense offset and brokerage service arrangements
that may reduce fund expenses.
For the year ended May 31, 2005, Putnam Management waived $17,489 of its
management fee from the fund.
For the period ended May 31, 2005, Putnam Management has assumed $4,326
of legal, shareholder servicing and communication, audit and Trustee
fees incurred by the fund in connection with certain legal and
regulatory matters (including those described in Note 5).
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. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the year ended May 31, 2005, the fund paid
PFTC $172,324 for these services.
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, 2005, the
fund's expenses were reduced by $82,358 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $634, as a quarterly retainer, 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. George
Putnam III also receives the foregoing fees for his services as Trustee.
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 Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
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 in distributing shares of the fund. The Plans
provide for payments by the fund to Putnam Retail Management at an
annual rate of 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 rate of 0.85%
and 0.50% for class B and class M shares. For class A shares, the annual
payment rate will equal the weighted average of (i) 0.20% on the net
assets of the fund attributable to class A shares purchased and paid for
prior to April 1, 2005 and (ii) 0.25% on all other net assets of the
fund attributable to class A shares.
For the year ended May 31, 2005, Putnam Retail Management, acting as
underwriter, received net commissions of $2,019 and $43 from the sale of
class A and class M shares, respectively, and received $54,841 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,
2005, Putnam Retail Management, acting as underwriter, received no
monies on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 2005, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $24,356,868 and $45,493,338, respectively. There were no
purchases or sales of U.S. government securities.
Note 4
Capital shares
At May 31, 2005, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 2005
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 644,947 $5,827,995
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 319,820 2,885,007
- ----------------------------------------------------------------
964,767 8,713,002
Shares repurchased (2,130,610) (19,188,965)
- ----------------------------------------------------------------
Net decrease (1,165,843) $(10,475,963)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 1,079,595 $9,793,106
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 405,926 3,683,254
- ----------------------------------------------------------------
1,485,521 13,476,360
Shares repurchased (4,139,537) (37,510,747)
- ----------------------------------------------------------------
Net decrease (2,654,016) $(24,034,387)
- ----------------------------------------------------------------
Year ended May 31, 2005
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 59,493 $534,101
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 69,842 633,420
- ----------------------------------------------------------------
129,335 1,167,521
Shares repurchased (863,928) (7,787,655)
- ----------------------------------------------------------------
Net decrease (734,593) $(6,620,134)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 136,998 $1,244,800
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 99,345 900,733
- ----------------------------------------------------------------
236,343 2,145,533
Shares repurchased (1,320,716) (11,952,810)
- ----------------------------------------------------------------
Net decrease (1,084,373) $(9,807,277)
- ----------------------------------------------------------------
Year ended May 31, 2005
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 3,946 $35,702
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,858 34,809
- ----------------------------------------------------------------
7,804 70,511
Shares repurchased (18,863) (169,649)
- ----------------------------------------------------------------
Net decrease (11,059) $(99,138)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 11,513 $103,700
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 5,319 48,262
- ----------------------------------------------------------------
16,832 151,962
Shares repurchased (76,816) (694,003)
- ----------------------------------------------------------------
Net decrease (59,984) $(542,041)
- ----------------------------------------------------------------
Note 5
Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and
Exchange Commission and the Massachusetts Securities Division settling
charges connected with excessive short-term trading by Putnam employees
and, in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans.
Pursuant to these settlement agreements, Putnam Management will pay a
total of $193.5 million in penalties and restitution, with $153.5
million being paid to shareholders and the funds. The restitution amount
will be allocated to shareholders pursuant to a plan developed by an
independent consultant, with payments to shareholders following approval
of the plan by the SEC and the Massachusetts Securities Division.
The Securities and Exchange Commission's and Massachusetts Securities
Division'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 will bear any costs incurred by
Putnam funds in connection with these lawsuits. 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.
Putnam Investments has recorded a charge of $30 million for the
estimated cost that it believes will be necessary to address issues
relating to the calculation of certain amounts paid by the Putnam mutual
funds in previous years. The previous payments were cost reimbursements
by the Putnam funds to Putnam for transfer agent services relating to
defined contribution operations. Putnam currently anticipates that any
payments made by Putnam related to this issue will be paid to the Putnam
funds. Review of this issue is ongoing.
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 2006 will show the tax status of
all distributions paid to your account in calendar 2005.
Results of November 11, 2004 and January 10, 2005 shareholder meetings
(Unaudited)
A special meeting of shareholders of the fund was held on November 11,
2004. At that meeting consideration of certain proposals was adjourned
to a final meeting held on January 10, 2005.
November 11, 2004 meeting
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes Votes
For Withheld
- ----------------------------------------------------------------
Jameson A. Baxter 10,220,391 250,907
Charles B. Curtis 10,214,649 256,649
Myra R. Drucker 10,214,624 256,674
Charles E. Haldeman, Jr. 10,214,064 257,234
John A. Hill 10,208,884 262,414
Ronald J. Jackson* 10,213,523 257,775
Paul L. Joskow 10,210,999 260,299
Elizabeth T. Kennan 10,211,523 259,775
John H. Mullin, III 10,209,713 261,585
Robert E. Patterson 10,214,046 257,252
George Putnam, III 10,212,976 258,322
A.J.C. Smith+ 10,179,227 292,071
W. Thomas Stephens 10,219,322 251,976
Richard B. Worley 10,214,077 257,221
A proposal to amend fund's fundamental investment restriction with respect
to borrowing to allow the fund the investment flexibility permitted by the
Investment Company Act was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
7,266,351 510,398 2,694,549
* Mr. Jackson retired from the Board of Trustees on June 10, 2005.
+ Mr. Smith resigned from the Board of Trustees on January 14, 2005.
All tabulations are rounded to nearest whole number.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans to enhance the fund's ability to participate in an
interfund borrowing and lending program was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
7,274,700 484,957 2,711,641
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments to enhance the fund's ability to
invest in registered investment companies such as Putnam Prime Money
Market was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
7,413,438 326,399 2,731,461
January 10, 2005 meeting
A proposal to amend the fund's Agreement and Declaration of Trust to
permit the fund to satisfy redemption requests other than in cash was
defeated as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
7,321,902 427,836 2,726,600
All tabulations are rounded to nearest whole number.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
Ms. Baxter is the President of Baxter Associates, Inc., a private
investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta
Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a
steel service corporation), the Mutual Fund Directors Forum, Advocate
Health Care and BoardSource, formerly the National Center for Nonprofit
Boards. She is Chairman Emeritus of the Board of Trustees, Mount Holyoke
College, having served as Chairman for five years and as a board member
for thirteen years. Until 2002, Ms. Baxter was a Director of Intermatic
Corporation (a manufacturer of energy control products).
Ms. Baxter has 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 Corporation.
She is a graduate of Mount Holyoke College.
Charles B. Curtis (4/27/40), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear
Threat Initiative (a private foundation dealing with national security
issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the
Trustee Advisory Council of the Applied Physics Laboratory, Johns
Hopkins University. Until 2003, Mr. Curtis was a member of the Electric
Power Research Institute Advisory Council and the University of Chicago
Board of Governors for Argonne National 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. (a fossil energy research and development support
company).
From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan &
Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr.
Curtis was Deputy Secretary of Energy. He served as Chairman of the
Federal Energy Regulatory Commission from 1977 to 1981 and has held
positions on the staff of the U.S. House of Representatives, the U.S.
Treasury Department, and the SEC.
Myra R. Drucker (1/16/48), Trustee since 2004
Ms. Drucker is a Vice Chair of the Board of Trustees of Sarah Lawrence
College, a Trustee of Commonfund (a not-for-profit firm specializing in
asset management for educational endowments and foundations) and a member
of the Investment Committee of the Kresge Foundation (a charitable trust).
She is also an ex-officio member of the New York Stock Exchange (NYSE)
Pension Managers Advisory Committee, having served as Chair for seven
years and a member of the Executive Committee of the Committee on
Investment of Employee Benefit Assets. She is Chair of the Advisory Board
of Hamilton Lane Advisors (an investment management firm) and a member of
the Advisory Board of RCM (an investment management firm). Until August
31, 2004, Ms. Drucker was Managing Director and a member of the Board of
Directors of General Motors Asset Management and Chief Investment Officer
of General Motors Trust Bank. Ms. Drucker also served as a member of the
NYSE Corporate Accountability and Listing Standards Committee and the
NYSE/NASD IPO Advisory Committee.
Prior to joining General Motors Asset Management in 2001, Ms. Drucker
held various executive positions in the investment management industry.
Ms. Drucker served as Chief Investment Officer of Xerox Corporation (a
technology and service company in the document industry), where she was
responsible for the investment of the company's pension assets. Ms.
Drucker was also Staff Vice President and Director of Trust Investments
for International Paper (a paper, paper distribution, packaging and
forest products company) and previously served as Manager of Trust
Investments for Xerox Corporation. Ms. Drucker received a B.A. degree in
Literature and Psychology from Sarah Lawrence College and pursued
graduate studies in economics, statistics and portfolio theory at Temple
University.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity
buyout firm that specializes in energy investments in the diversified
worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil
Company and various private companies controlled by First Reserve
Corporation, as well as a Trustee of TH Lee, Putnam Investment Trust (a
closed-end investment company advised by an affiliate of Putnam
Management). He is also a Trustee of Sarah Lawrence College. Until 2005,
he was a Director of Continuum Health Partners of New York.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held
executive positions in investment banking and investment management with
several firms and with the federal government, including Deputy
Associate Director of the Office of Management and Budget and Deputy
Director of the Federal Energy Administration. He is active in various
business associations, including the Economic Club of New York, and
lectures on energy issues in the United States and Europe. Mr. Hill
holds a B.A. degree in Economics from Southern Methodist University and
pursued graduate studies there as a Woodrow Wilson Fellow.
Paul L. Joskow (6/30/47), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and
Management, and Director of the Center for Energy and Environmental
Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid Transco (a UK-based
holding company with interests in electric and gas transmission and
distribution and telecommunications infrastructure) and TransCanada
Corporation (an energy company focused on natural gas transmission and
power services). Prior to February 2005, he served on the board of the
Whitehead Institute for Biomedical Research (a non-profit research
institution) and has been President of the Yale University Council
since 1993. Prior to February 2002, he was a Director of State Farm
Indemnity Company (an automobile insurance company), and, prior to March
2000, he was a Director of New England Electric System (a public utility
holding company).
Dr. Joskow has published five books and numerous articles on topics in
industrial organization, government regulation of industry, and
competition policy. He is active in industry restructuring,
environmental, energy, competition and privatization policies -- serving
as an advisor to governments and corporations worldwide. Dr. Joskow
holds a Ph.D. and M. Phil from Yale University and a B.A. from Cornell
University.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and
cattle breeding). She is President Emeritus of Mount Holyoke College.
Dr. Kennan served as Chairman and is now Lead Director of Northeast
Utilities. Until 2005, she was a Director of Talbots, Inc. She has
served as Director on a number of other boards, including Bell Atlantic,
Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance and
Kentucky Home Life Insurance. She is a Trustee of the National Trust for
Historic Preservation, of Centre College and of Midway College in
Midway, Kentucky. She is also a member of The Trustees of Reservations.
Dr. Kennan has served on the oversight committee of the Folger
Shakespeare Library, as President of Five Colleges Incorporated, as a
Trustee of Notre Dame University and is active in various educational
and civic associations.
As a member of the faculty of Catholic University for twelve years,
until 1978, Dr. Kennan directed the post-doctoral program in Patristic
and Medieval Studies, taught history and published numerous articles.
Dr. Kennan holds a Ph.D. from the University of Washington in Seattle,
an M.S. from St. Hilda's College at Oxford University and an A.B. from
Mount Holyoke College. She holds several honorary doctorates.
John H. Mullin, III (6/15/41), Trustee since 1997
Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).
Mr. Mullin serves as a Director of The Liberty Corporation (a
broadcasting company), Progress Energy, Inc. (a utility company,
formerly known as Carolina Power & Light) and Sonoco Products, Inc. (a
packaging company). Mr. Mullin is Trustee Emeritus of The National
Humanities Center and Washington & Lee University, where he served as
Chairman of the Investment Committee. Prior to May 2001, he was a
Director of Graphic Packaging International Corp. Prior to February
2004, he was a Director of Alex Brown Realty, Inc.
Mr. Mullin is also a past Director of Adolph Coors Company; ACX
Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.;
Fisher-Price, Inc.; and The Ryland Group, Inc. Mr. Mullin is a graduate
of Washington & Lee University and The Wharton Graduate School,
University of Pennsylvania.
Robert E. Patterson (3/15/45), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc. (a private equity firm investing in commercial
real estate).
Mr. Patterson serves as Chairman Emeritus and Trustee of the Joslin
Diabetes Center and as a Director of Brandywine Trust Group, LLC. Prior
to June 2003, he was a Trustee of Sea Education Association. Prior to
December 2001, he was President and Trustee of Cabot Industrial Trust (a
publicly traded real estate investment trust). Prior to February 1998,
he was Executive Vice President and Director of Acquisitions of Cabot
Partners Limited Partnership (a registered investment adviser involved
in institutional real estate investments). Prior to 1990, he served as
Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc.
(the predecessor company of Cabot Partners).
Mr. Patterson practiced law and held various positions in state
government and was the founding Executive Director of the Massachusetts
Industrial Finance Agency. Mr. Patterson is a graduate of Harvard
College and Harvard Law School.
W. Thomas Stephens (9/2/42), Trustee since 1997
Mr. Stephens is Chairman and Chief Executive Officer of Boise Cascade,
L.L.C. (a paper, forest products and timberland assets company).
Mr. Stephens serves as a Director of TransCanada Pipelines Limited.
Until 2004, Mr. Stephens was a Director of Xcel Energy Incorporated (a
public utility company), Qwest Communications, and Norske Canada, Inc.
(a paper manufacturer). Until 2003, Mr. Stephens was a Director of
Mail-Well, Inc. (a diversified printing company). He served as Chairman
of Mail-Well until 2001 and as CEO of MacMillan- Bloedel, Ltd. (a forest
products company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of
Johns Manville Corporation. He holds B.S. and M.S. degrees from the
University of Arkansas.
Richard B. Worley (11/15/45), Trustee since 2004
Mr. Worley is Managing Partner of Permit Capital, LLC, an investment
management firm.
Mr. Worley serves on the Executive Committee of the University of
Pennsylvania Medical Center, is a Trustee of The Robert Wood Johnson
Foundation (a philanthropic organization devoted to health care issues)
and is a Director of The Colonial Williamsburg Foundation (a historical
preservation organization). Mr. Worley also serves on the investment
committees of Mount Holyoke College and World Wildlife Fund (a wildlife
conservation organization).
Prior to joining Permit Capital LLC in 2002, Mr. Worley served as Chief
Strategic Officer of Morgan Stanley Investment Management. He previously
served as President, Chief Executive Officer and Chief Investment
Officer of Morgan Stanley Dean Witter Investment Management and as a
Managing Director of Morgan Stanley, a financial services firm. Mr.
Worley also was the Chairman of Miller Anderson & Sherrerd, an
investment management firm.
Mr. Worley holds a B.S. degree from University of Tennessee and pursued
graduate studies in economics at the University of Texas.
Charles E. Haldeman, Jr.* (10/29/48), Trustee since 2004
Mr. Haldeman is President and Chief Executive Officer of Putnam, LLC
("Putnam Investments"). He is a member of Putnam Investments' Executive
Board of Directors and Advisory Council. Prior to November 2003, Mr.
Haldeman served as Co-Head of Putnam Investments' Investment Division.
Prior to joining Putnam Investments in 2002, Mr. Haldeman held executive
positions in the investment management industry. He previously served as
Chief Executive Officer of Delaware Investments and President & Chief
Operating Officer of United Asset Management. Mr. Haldeman was also a
partner and director of Cooke & Bieler, Inc. (an investment management
firm).
Mr. Haldeman currently serves as a Trustee of Dartmouth College and as
Emeritus Trustee of Abington Memorial Hospital. He is a graduate of
Dartmouth College, Harvard Law School and Harvard Business School. Mr.
Haldeman is also a Chartered Financial Analyst (CFA) charterholder.
George Putnam, III* (8/10/51), Trustee since 1984 and President
since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of
financial advisory and other research services), and of New Generation
Advisers, Inc. (a registered investment advisor to private funds). Mr.
Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered
investment adviser). He is a Trustee of St. Mark's School, Shore Country
Day School, and until 2002 was a Trustee of the Sea Education
Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert
LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a
graduate of Harvard College, Harvard Business School and Harvard Law
School.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of May 31, 2005, there were 108 Putnam Funds. All Trustees serve as
Trustees of all Putnam funds.
Each Trustee serves for an indefinite term, until his or her
resignation, retirement at age 72, 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. Haldeman and Putnam III are deemed "interested persons" by
virtue of their positions as officers of the fund, Putnam Management or
Putnam Retail Management and as shareholders of Marsh & McLennan
Companies, Inc. Mr. Putnam, III is the President of your fund and each
of the other Putnam funds. Mr. Haldeman is President and Chief Executive
Officer of Putnam Investments.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Associate Treasurer and Principal
Executive Officer
Since 1989
Jonathan S. Horwitz (6/4/55)
Senior Vice President and Treasurer
Since 2004
Prior to 2004, Managing Director,
Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Senior Managing Director, Putnam Investments. Prior to July
2001, Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Daniel T. Gallagher (2/27/62)
Senior Vice President, Staff Counsel and Compliance Liaison
Since 2004
Prior to 2004, Associate, Ropes & Gray LLP; prior to 2000,
Law Clerk, Massachusetts Supreme Judicial Court
Francis J. McNamara, III (8/19/55)
Vice President and Chief Legal Officer
Since 2004
Senior Managing Director, Putnam Investments, Putnam
Management and Putnam Retail Management. Prior to 2004,
General Counsel, State Street Research & Management
Company
James P. Pappas (2/24/53)
Vice President
Since 2004
Managing Director, Putnam Investments and Putnam Management.
During 2002, Chief Operating Officer, Atalanta/Sosnoff
Management Corporation; prior to 2001, President and Chief
Executive Officer, UAM Investment Services, Inc.
Richard S. Robie, III (3/30/60)
Vice President
Since 2004
Senior Managing Director, Putnam Investments, Putnam
Management and Putnam Retail Management. Prior to 2003,
Senior Vice President, United Asset Management Corporation
Charles A. Ruys de Perez (10/17/57)
Vice President and Chief Compliance Officer
Since 2004
Managing Director, Putnam Investments
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
Judith Cohen (6/7/45)
Vice President, Clerk and Assistant Treasurer
Since 1993
The address of each Officer is One Post Office Square,
Boston, MA 02109.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual
funds. Investors should carefully 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
Floating Rate Income Fund
Global Income Trust*
High Yield Advantage Fund*+
High Yield Trust*
Income Fund
Limited Duration Government
Income Fund++
Money Market Fund[SECTION MARK]
U.S. Government Income Trust
* A 1% redemption fee on total assets redeemed or exchanged
between 6 and 90 days of purchase may be imposed for all
share classes of these funds.
+ Closed to new investors.
++ Formerly Putnam Intermediate U.S. Government Income Fund.
[SECTION MARK] 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 fund seeks to
preserve your investment at $1.00 per share, it is possible
to lose money by investing in the fund.
The Putnam family of funds
Tax-free Income Funds
AMT-Free Insured Municipal Fund**
Tax Exempt Income Fund
Tax Exempt Money Market Fund
Tax-Free High Yield Fund
State tax-free income funds:
Arizona, California, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania
Asset Allocation Portfolios
Putnam Asset Allocation Portfolios--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
Putnam RetirementReady[REGISTRATION MARK] Funds
Putnam RetirementReady Funds -- ten investment portfolios that
offer diversification among stocks, bonds, and money market
instruments and adjust to become more conservative over time
based on a target date for withdrawing assets.
The ten funds:
Putnam RetirementReady 2050 Fund
Putnam RetirementReady 2045 Fund
Putnam RetirementReady 2040 Fund
Putnam RetirementReady 2035 Fund
Putnam RetirementReady 2030 Fund
Putnam RetirementReady 2025 Fund
Putnam RetirementReady 2020 Fund
Putnam RetirementReady 2015 Fund
Putnam RetirementReady 2010 Fund
Putnam RetirementReady Maturity Fund
** Formerly Putnam Tax-Free Insured Fund.
With the exception of money market funds, a 2% redemption
fee may be applied to shares exchanged or sold within
5 days of purchase.
Check your account balances and the most recent
month-end 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
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
W. Thomas Stephens
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President, Associate
Treasurer and Principal Executive
Officer
Jonathan S. Horwitz
Senior Vice President and Treasurer
Steven D. Krichmar
Vice President and
Principal Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Daniel T. Gallagher
Senior Vice President, Staff
Counsel and Compliance Liaison
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
Francis J. McNamara, III
Vice President and Chief Legal Officer
Charles A. Ruys de Perez
Vice President and Chief
Compliance Officer
Judith Cohen
Vice President, 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, the most recent copy
of Putnam's Quarterly Performance Summary, and Putnam's Quarterly
Ranking Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should carefully consider the
investment objective, risks, charges, and expenses of a fund, which are
described in its prospectus. For this and other information or to
request a prospectus, call 1-800-225-1581 toll free. Please read the
prospectus carefully before investing. 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.
AN048-225861 7/05
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
(a) All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
(c) In July 2004, Putnam Investment Management, LLC, the Fund's investment
manager, Putnam Retail Management Limited Partnership, the Fund's principal
underwriter, and Putnam Investments Limited, the sub-manager for a portion
of the assets of certain funds as determined by Putnam Management from time
to time, adopted several amendments to their Code of Ethics. Some of these
amendments were adopted as a result of Putnam Investment Management's
partial settlement order with the SEC on November 13, 2003. Insofar as such
Code of Ethics applies to the Fund's principal executive officer, principal
financial officer and principal accounting officer, the amendments provided
for the following: (i) a 90-day blackout period for all shares of Putnam
open-end funds (except for money market funds) purchased or sold (including
exchanges into or out of a fund) by Putnam employees and certain family
members; (ii) a one-year holding period for all access persons that operates
in the same manner as the 90-day rule; (iii) delivery by Putnam employees to
the Code of Ethics Administrator of both quarterly account statements for
all brokerage accounts (irrespective of activity in the accounts) and
account statements for any Putnam funds not held at Putnam or for any funds
sub-advised by Putnam; (iv) a prohibition of Putnam employees from making
more than 25 trades in individual securities in their personal accounts in
any given quarter; (v) the extension of the existing prohibition of access
persons from a purchase and sale or sale and purchase of an individual
security within 60 days to include trading based on tax-lot election; (vi)
the inclusion of trades in Marsh & McLennan Companies, Inc. (ultimate parent
company of Putnam Investment Management) securities in pre-clearance and
reporting requirements; (vii) a prohibition of limit and good-until-canceled
orders as inconsistent with the requirements of daily pre-clearance; (viii)
new limits and procedures for accounts managed by outside managers and
brokers, in order for trading in such accounts to be exempt from
pre-clearance requirements; (ix) a new gift and entertainment policy that
imposes a reporting obligation on all meals and entertainment and new limits
on non-meal entertainment; (x) a number of alternatives for the reporting of
irregular activity.
In December 2004, additional amendments to the Code of Ethics were adopted.
Insofar as such Code of Ethics applies to the Fund's principal executive
officer, principal financial officer and principal accounting officer, the
amendments provided for the following: (i) implementation of minimum
monetary sanctions for violations of the Code; (ii) expansion of the
definition of "access person" under the Code include all Putnam employees
with access to non-public information regarding Putnam-managed mutual fund
portfolio holdings; (iii) lengthening the period during which access persons
are required to complete quarterly reports; (iv) reducing the maximum number
of trades than can be made by Putnam employees in their personal accounts in
any calendar quarter from 25 trades to 10 trades; and (v) lengthening the
required holding period for securities by access persons from 60 days to 90
days.
In March 2005, additional amendments to the Code of Ethics were adopted,
that went into effect on April 1, 2005. Insofar as such Code of Ethics
applies to the Fund's principal executive officer, principal financial
officer and principal accounting officer, the amendments (i) prohibit Putnam
employees and their immediate family members from having any direct or
indirect personal financial interest in companies that do business with
Putnam (excluding investment holdings in public companies that are not
material to the employee), unless such interest is disclosed and approved by
the Code of Ethics Officer; (ii) prohibit Putnam employees from using Putnam
assets, letterhead or other resources in making political or campaign
contributions, solicitations or endorsements;(iii) require Putnam employees
to obtain pre-clearance of personal political or campaign contributions or
other gifts to government officials or political candidates in certain
jurisdictions and to officials or candidates with whom Putnam has or is
seeking to establish a business relationship and (iv) require Putnam
employees to obtain pre-approval from Putnam's Director of Government
Relations prior to engaging in lobbying activities.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson, Mr. Stephens and Mr. Worley qualify as "audit
committee financial experts" (as such term has been defined by the
Regulations) based on their review of their pertinent experience and
education. Certain other Trustees, although not on the Audit and Pricing
Committee, would also qualify as "audit committee financial experts."
The SEC has stated that the designation or identification of a person as
an audit committee financial expert pursuant to this Item 3 of Form N-CSR
does not impose on such person any duties, obligations or liability that
are greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
The following table presents fees billed in each of the last two fiscal
years for services rendered to the fund by the fund's independent auditors:
Audit Audit-Related Tax All Other
Fiscal year ended Fees Fees Fees Fees
- ----------------- ---------- ------------- ------- ---------
May 31, 2005 $38,567* $-- $6,459 $9
May 31, 2004 $34,732 * $-- $5,925 $30
* Includes fees of $ 4 and $ 62 billed by the fund's independent auditor to
the fund for audit procedures necessitated by regulatory and litigation
matters for the fiscal years ended May 31, 2005 and May 31, 2004,
respectively. These fees were reimbursed to the fund by Putnam.
For the fiscal years ended May 31, 2005 and May 31, 2004, the fund's
independent auditors billed aggregate non-audit fees in the amounts of $
188,581 and $ 136,445 respectively, to the fund, Putnam Management and any
entity controlling, controlled by or under common control with Putnam
Management that provides ongoing services to the fund.
Audit Fees represents fees billed for the fund's last two fiscal years.
Audit-Related Fees represents fees billed in the fund's last two fiscal
years for services traditionally performed by the fund's auditor, including
accounting consultation for proposed transactions or concerning financial
accounting and reporting standards and other audit or attest services not
required by statute or regulation.
Tax Fees represent fees billed in the fund's last two fiscal years for tax
compliance, tax planning and tax advice services. Tax planning and tax
advice services include assistance with tax audits, employee benefit plans
and requests for rulings or technical advice from taxing authorities.
All Other Fees Fees represent fees billed for services relating to an
analysis of recordkeeping fees and fund expense processing.
Pre-Approval Policies of the Audit and Pricing Committee. The Audit and
Pricing Committee of the Putnam funds has determined that, as a matter of
policy, all work performed for the funds by the funds' independent auditors
will be pre-approved by the Committee and will generally not be subject to
pre-approval procedures.
Under certain circumstances, the Audit and Pricing Committee believes that
it may be appropriate for Putnam Investment Management, LLC ("Putnam
Management") and certain of its affiliates to engage the services of the
funds' independent auditors, but only after prior approval by the Committee.
Such requests are required to be submitted in writing to the Committee and
explain, among other things, the nature of the proposed engagement, the
estimated fees, and why this work must be performed by that particular audit
firm. The Committee will review the proposed engagement at its next
meeting.
Since May 6, 2003, all work performed by the independent auditors for the
funds, Putnam Management and any entity controlling, controlled by or under
common control with Putnam Management that provides ongoing services to the
fund was pre-approved by the Committee or a member of the Committee pursuant
to the pre-approval policies discussed above. Prior to that date, the
Committee had a general policy to pre-approve the independent auditor's
engagements for non-audit services with the funds, Putnam Management and any
entity controlling, controlled by or under common control with Putnam
Management that provides ongoing services to the fund.
The following table presents fees billed by the fund's principal auditor for
services required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X.
Audit-Related Tax All Other Total Non-
Fiscal year ended Fees Fees Fees Audit Fees
- ----------------- ------------- ---- --------- ----------
May 31, 2005 $-- $-- $-- $--
May 31, 2004 $-- $-- $-- $--
Item 5. Audit Committee: Not applicable
- -------------------------
Item 6. Schedule of Investments: Not applicable
- --------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal
financial officer 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, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the registrant
in this report 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 11. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(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
and 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 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and 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/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: July 28, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: July 28, 2005