PUTNAM
ARIZONA
TAX EXEMPT
INCOME FUND
[GRAPHIC OMITTED: art work]
SEMIANNUAL REPORT
February 28, 1995
[logo: BOSTON - LONDON - TOKYO]
<PAGE>
PERFORMANCE HIGHLIGHTS
o "A survey regarding capital spending plans for new plant and equipment
indicates Arizona firms expect the new year to be substantially better than
1994."
-- Dr. Harold Fearon, Arizona State University*
o "We do not expect the tight supply of Arizona municipal bonds to abate in the
near future. This means we must be that much more vigilant and innovative in
our portfolio management."
-- Howard Manning, fund manager
o Performance should always be considered in light of a fund's investment
strategy. Putnam Arizona Tax Exempt Income Fund is designed for investors
seeking a high level of current income free from federal and Arizona state
income taxes, consistent with preservation of capital.
SEMIANNUAL RESULTS AT A GLANCE
CLASS A CLASS B
TOTAL RETURN: NAV POP NAV CDSC
- --------------------------------------------------------------
6 months ended February 28, 1995
(change in value during
period plus reinvested
distributions) 2.29% -2.56% 1.99% -2.98%
SHARE VALUE: NAV POP NAV
- --------------------------------------------------------------
8/31/94 $8.84 $9.28 $8.83
2/28/95 8.78 9.22 8.77
DISTRIBUTIONS: NO. INCOME TOTAL
- --------------------------------------------------------------
Class A 6 $0.250035 $0.250035
Class B 6 $0.225236 $0.225236
CURRENT RETURN: NAV POP NAV
- --------------------------------------------------------------
End of period
Current dividend rate<F2> 5.79% 5.51% 5.22%
Taxable equivalent<F3> 10.30 9.80 9.28
Current 30-day SEC yield<F4> 5.64% 5.37% 4.99
Taxable equivalent<F3> 10.03 9.55 8.87
Performance data represent past results and will differ for each share class.
For performance over longer periods, see page 8. POP assumes 4.75% maximum sales
charge for class A shares. CDSC for class B shares assumes 5% maximum
contingent deferred sales charge. <F1>Capital gains, if any, are taxable for
federal and, in most cases, state tax purposes. For some investors, investment
income may also be subject to the federal alternative minimum tax. Investment
income may be subject to state and local taxes. <F2>Income portion of most
recent distribution, annualized and divided by NAV or POP at end of period.
<F3>Assumes maximum combined 43.77% federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous. <F4>Based
only on investment income, calculated using SEC guidelines.
*Dr. Fearon is director of the Center for Advanced Purchasing Studies, an
affiliate of the Seidman Research Institute in the College of Business at ASU.
<PAGE>
FROM THE CHAIRMAN
Dear Shareholder:
[GRAPHIC OMITTED: photo of George Putnam]
(C) Karsh, Ottawa
After a year and a half of some of the most volatile performance on record,
municipal bonds may be headed for happier days. This outlook should come as
welcome news to shareholders of Putnam Arizona Tax Exempt Income Fund.
As the fund reached the first half of its current fiscal year on February 28,
1995, tax-free income investors were displaying perceptible signs of optimism.
For one thing, they seemed to have more confidence in the Federal Reserve
Board's ability to control inflation. For another, they interpreted February's
low volume of new issues as a sign that scarcity would begin to push prices
higher.
Fund Manager Howard Manning has been positioning the portfolio not only in
response to the market's volatility, but also in anticipation of the brighter
mood that now seems to be emerging. In the report that follows, Howard discusses
the fund's first-half performance and what he sees in store for the remainder of
fiscal 1995.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
April 19, 1995
<PAGE>
REPORT FROM THE FUND MANAGER
HOWARD MANNING
California's recent woes -- earthquakes, mud slides, floods, and riots -- seem
to translate into Arizona's gains. Each new challenge serves to convince more
people and businesses to emigrate from California and other states, raining
green down on the Painted Desert and strengthening Arizona's already healthy
state economy. It's no wonder that Arizona Business reported at 1994's close,
"All economic indicators were in the positive column for the fifth month in a
row."*
The strength of your state's economy has had a beneficial effect on its
municipal bond market, and Putnam Arizona Tax Exempt Income Fund is being
managed to take full advantage of it. Recent bond market turbulence, however,
has not entirely dissipated. Over the full semiannual period ended February 28,
1995, performance results reflected the hostile bond environment that prevailed
for much of 1994; 2.29% and 1.99% for class A and class B shares, respectively,
at net asset value.
More recently, our efforts, combined with a generally healthier environment for
fixed-income investments, contributed to significant gains. In just the first
two months of calendar 1995, the fund's total return was up 5.77% and 5.68% for
class A and class B shares, again, both at net asset value.
o RIDING OUT THE STORM
During the last three months of 1994, interest rates continued to rise.
Certain sectors of the municipal market, such as lower-rated higher-yielding
bonds, were hit harder than others. We see a number of reasons for this
relative underperformance. First, market volatility tends to propel investors
toward investment-grade bonds. This "flight to quality" reduces demand for
lower-rated bonds and, consequently, also reduces their liquidity. This
exacerbated the initial decline.
Your fund's objective is to seek tax-free income -- consistent, of course,
with capital preservation -- so, on occasion, we will
*Arizona Business, February 1994, Volume 42, Number 2, p. 10. Arizona State
College of Business Center for Business Research.
<PAGE>
concentrate a portion of the portfolio in carefully chosen lower-rated
securities in order to take advantage of their attractive yields. (Any such
shifts are limited to 25% of the porfolio by the fund's prospectus.) The last
quarter of 1994 was one such occasion. During this period, the fund had a
higher than usual weighting in lower-rated hospital bonds. As a result, the
sector's weakness dampened fund performance.
In-depth research is an essential part of Putnam's investment selection
process, and we generally have a long-term perspective in mind when we choose
portfolio holdings. Thus, when these hospital bonds began to underperform the
general market, we wanted to make sure the price declines were not a result
of credit problems. We sent analysts to visit and investigate all of the
hospitals whose obligations were held in the portfolio. They reported that
the hospitals were in fine shape, still represented solid investment
opportunities, and were probably being undervalued by the market. Reassured
that the bonds represented value and that the price declines were most likely
a short-term phenomenon, we have maintained these positions.
o ANTICIPATING -- AND PROFITING FROM -- MARKET UPTURNS
Toward the end of calendar 1994, market sentiment was very negative. In fact,
we felt it was too negative. Our fundamental research indicated the market's
pessimism had eroded prices to unprecedented levels, and it appeared to us
that the market was, consequently, due for a correction. We began
repositioning a significant portion of fund assets in order to benefit from
[GRAPHIC OMITTED: showing TOP INDUSTRY SECTORS* Hospitals and health care
24.0%; Utilities, water and sewer 20.2%; Housing 9.2%; Transportation 7.0%;
Metals 4.9%]
*Based on net assets on 2/28/95.
<PAGE>
an anticipated turnaround. The subsequent rally caught many investors by
surprise, but since we had already prepared for the change in direction, the
fund's NAV responded vigorously.
In a market rally, when yields decline and prices rise, the greatest gains
can often be derived from bonds with relatively long maturities and lower
coupons (discount bonds). With this in mind, we reevaluated the fund's
holdings of Guam and Virgin Islands airport bonds, as well as Puerto Rico
issues. These bonds had higher coupons than new-issue coupon rates and call
provisions that would enable the issuers to retire them in the near future.
Both of these characteristics meant that these securities had little price
appreciation left. We traded out of these bonds and bought lower-coupon
discount bonds with greater potential for appreciation.
We also sold a large portion of the fund's industrial revenue bond holdings,
realizing attractive gains, and have reinvested the cash with an eye toward
improving the portfolio's overall credit quality.
o LOOKING AHEAD
The rally we had the foresight to join may now be losing steam. We believe
the economy is currently stronger than the market consensus realizes.
Therefore, we are becoming somewhat more defensive and consider it prudent to
prepare the portfolio to withstand any further increases in interest rates.
We will continue to upgrade the portfolio's credit quality in order to
benefit from an anticipated flight to quality should the market decline
again.
We will also continue to manage the fund's duration actively. Duration is a
measure of how much the fund's value is expected to move with each percentage
point shift in interest rates. In other words, it is a measure of potential
volatility. Since our outlook is for higher interest rates and lower bond
prices in the near future, we will employ strategies designed to shorten the
fund's duration and to decrease the impact of market declines.
The supply of new-issue municipal bonds has contracted dramatically over the
past year, and the trend is continuing in
<PAGE>
[GRAPHIC OMITTED: showing TOP 10 ISSUERS (2/28/95):
-----------------------------------------------------------------------------
Arizona Health Facilities Authority Hospital Systems revenue bonds
-----------------------------------------------------------------------------
Salt River Project, Agricultural Improvement and Power District Electric
System, IFB
-----------------------------------------------------------------------------
Commonwealth of Puerto Rico
-----------------------------------------------------------------------------
Tucson Airport Authority Special Facilities revenue bonds
-----------------------------------------------------------------------------
Gila County, Industrial Development Authority pollution control revenue
bonds
-----------------------------------------------------------------------------
Sierra Vista Industrial Development Authority Hospital revenue bonds
-----------------------------------------------------------------------------
Navajo Country, Pollution Control Corporation revenue bonds
-----------------------------------------------------------------------------
Phoenix, Civic Improvement Corporation waste water system lease revenue
bonds
-----------------------------------------------------------------------------
Maricopa Country, Industrial Development Authority Hospital Facility revenue
bonds
-----------------------------------------------------------------------------
Phoenix Civic Improvement System water revenue bonds]
These issuers represent 45.1% Of the fund's assets. Portfolio holdings will
vary in future.
1995. Arizona's municipal bond supply is dwindling even more than the
national trend. The state's prosperity has resulted in overflowing tax
coffers for local governments, which means there is little need for
additional financing efforts. With new municipal-bond issuance extremely low
and outstanding issues continuing to be called early, Arizona tax-exempt
bonds are scarce. Furthermore, as companies like Intel and Motorola expand
their Arizona operations, and new businesses continue to move in -- Fox
Animation of California, for example, is among the newest arrivals -- the
state's burgeoning economy should continue to support attractive municipal
bond prices.
Your fund's investment strategies are formulated and executed with the intent
to maximize your investment's total performance, both in terms of tax-free
income and total return. By employing active asset management, innovative
investment strategies, and thorough credit research, we will seek to make the
most of whatever direction the state's bond market should take over the rest
of fiscal 1995.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 2/28/95, there is no guarantee the fund will continue to hold
these securities in the future.
<PAGE>
PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's performance.
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 back into the fund. We show total return in two ways: on a
cumulative long-term basis and on average how the fund might have grown each
year over varying periods. For comparative purposes, we show how the fund
performed relative to appropriate indexes and benchmarks.
TOTAL RETURN FOR PERIODS ENDED FEBRUARY 28, 1995
LEHMAN BROS. CONSUMER
CLASS A CLASS B MUNICIPAL PRICE
NAV POP NAV CDSC BOND INDEX INDEX
6 months 2.29% -2.56% 1.99% -2.98% 2.81% 1.28%
1 year -0.08 -4.78 -0.67 -5.39 1.88 2.86
3 years 20.07 14.36 -- -- 22.33 8.87
Annual average 6.29 4.57 -- -- 6.95 2.87
Life of class A 33.62 27.34 -- -- 35.71 12.11
Annual average 7.34 6.09 -- -- 7.75 2.83
Life of class B -- -- 1.62 -2.11 5.23 4.50
Annual average -- -- 0.99 -1.30 3.18 2.74
TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1995
(Most recent calendar quarter)
CLASS A CLASS B
NAV POP NAV CDSC
1 year 5.70% 0.70% 4.98% -0.01%
3 years 21.32 15.52 -- --
Annual average 6.65 4.93 -- --
Life of class A 35.15 28.79 -- --
Annual average 7.49 6.26 -- --
Life of class B -- -- 2.75 -1.02
Annual average -- -- 1.60 -0.60
Fund performance data do not take into account any adjustment for taxes payable
on reinvested distributions or, for class A shares, distribution fees prior to
implementation of the class A distribution plan in 1993. The fund began
operations on 1/30/91 offering shares now known as class A shares. Effective
7/15/93, the fund began offering class B shares. Performance data represent past
results and will differ for each share class. Investment returns and principal
value will fluctuate so an investor's shares, when sold, may be worth more or
less than their original cost.
<PAGE>
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including any
initial or contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 4.75% sales charge for class A 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 class B CDSC no longer applies.
COMPARATIVE BENCHMARKS
THE LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index does not take into account brokerage commissions or other
costs, may include bonds different from those in the fund, and may pose
different risks than the fund.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
<PAGE>
RELATIVE RISK/REWARD POTENTIAL OF PUTNAM FUNDS
These illustrations provide a simplified guide to the risk/reward potential for
funds within each category of the Putnam Family of Funds and are not intended as
investment advice. Your investment advisor can help you evaluate your risk
tolerance.
These rankings are relative only to Putnam funds and should not be compared to
other investments. There is no guarantee that one Putnam fund will be less
volatile than another, since each fund has its own investment risks. That's why
it is essential to read the fund's prospectus before investing.
PUTNAM GROWTH FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to "Higher
Risk/Higher Reward Potential" of the following: Investors; Diversified
Equity(1); Global Growth(1); Vista; Natural Resources; Health Sciences;
Voyager; Overseas Growth(1); Europe Growth(1); New Opportunities(2); OTC
Emerging Growth(2); Asia Pacific Growth(1)]
PUTNAM GROWTH AND INCOME FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to "Higher
Risk/Higher Reward Potential" of the following: Managed Income; Utilities Growth
and Income; George Putnam; Convertible Income-Growth; Equity Income; Fund for
Growth and Income; Putnam Growth and Income Fund II; Dividend Growth]
PUTNAM INCOME FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to "Higher
Risk/Higher Reward Potential" of the following: Money Market(4); Adjustable
Rate U.S. Gov't.(3); Balanced Gov't.(3); U.S. Gov't. Income(3); American
Gov't. Income(3); Federal Income(3); Diversified Income(1),(3),(5); Income;
Preferred Income; Global Gov't.(1),(5); High Yield(5); High Yield
Advantage(5)]
PUTNAM TAX-FREE FUNDS (6)
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to "Higher
Risk/Higher Reward Potential" of the following: Tax Exempt Money Market(4);
Intermediate Tax Exempt; Tax-Free Insured(7); Tax Exempt Income; Single-state
tax-free funds*; Municipal Income; Tax-Free High Yield(5)]
<PAGE>
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments. The
three portfolios are:
o PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO
o PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO
o PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO
Please call your financial advisor -- or Putnam at 1-800-225-1581 -- to
obtain a prospectus for any Putnam fund. The prospectus contains more
complete information, including risk considerations, charges, and expenses.
Read it carefully before you invest or send money.
(1) Foreign investments are subject to certain risks, such as currency
fluctuations and political developments, that are not present with domestic
investments.
(2) This fund invests all or a portion of its assets in small to medium-sized
companies, which increases the risk of price fluctuations.
(3) While U.S. government backing of individual securities does not insure your
principal, which will fluctuate, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal.
(4) The fund is managed to maintain a steady price of $1.00 per share, although
there is no assurance this price can be maintained in the future.
(5) The lower credit ratings of high-yield corporate and municipal bonds
reflect a greater possibility that adverse changes in the economy or their
issuers may affect their ability to pay principal and interest on the
bonds.
(6) Income may be subject to state and local taxes. Capital gains, if any, are
taxable for federal and, in most cases, state purposes.
(7) Bond insurance does not guarantee principal or protect against changes in
market price.
* State tax-free funds available for Arizona, California, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, and
Pennsylvania. Not available in all states.
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
February 28, 1995 (unaudited)
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (101.9%)<F1>
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ARIZONA (89.1%)
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C>
AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds,
$1,965,000 (St. Luke's Hosp. Syst.), Ser. A, 10 1/8s, 11/1/15 Ba $ 2,073,075
1,975,000 (Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB 2,061,406
1,500,000 (Phoenix Mem. Hosp.), 8 1/8s, 6/1/12 BBB 1,563,750
3,340,000 (St. Luke's Hlth. Syst.), 7 1/4s, 11/1/14 AAA 3,828,475
1,500,000 AZ State Student Loan Acquisition Auth. Rev. Bonds,
Ser. B, 6.6s, 5/1/10 A 1,503,750
2,500,000 AZ State Trans. Board Hwy. Rev. Bonds,
Ser. A, 6 1/2s, 7/1/11 Aaa 2,712,500
2,140,000 Avondale, Muni. Dev. Corp. Facs. Rev. Bonds,
American Municipal Bond Assurance Corp.
(AMBAC) 8.85s, 7/1/13 AAA 2,212,225
1,450,000 Chandler General Obligation (G.O.) Bonds,
Financial Guaranty Insurance Co. (FGIC), 8s, 7/1/10 AAA 1,725,500
1,100,000 Chandler Street & Hwy. Rev. Bonds,
Municipal Bond Insurance Association (MBIA),
8s, 7/1/11 AAA 1,339,250
2,150,000 Chandler Wtr. & Swr. Rev. Bonds,
FGIC, 8s, 7/1/14 AAA 2,528,938
500,000 Chandler, G.O. Bonds,
FGIC, 7s, 7/1/12 AAA 535,000
750,000 Chandler, Wtr. & Swr. Rev. Bonds,
FGIC, 7s, 7/1/12 AAA 802,500
750,000 Cochise Cnty., U. School Dist. No. 68 Rev. Bonds,
FGIC, 7 1/2s, 7/1/09 AAA 874,688
6,880,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds,
Ser. 85, 8.9s, 7/1/06 Baa 7,482,000
Gilbert, G.O. Bonds, Ser. C, MBIA,
2,500,000 5 1/2s, 7/1/23 AAA 2,243,750
1,105,000 5 1/2s, 7/1/22 AAA 1,019,363
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds,
FGIC, 6 1/2s, 7/1/22 AAA 1,032,500
1,000,000 Glendale Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
7 1/8s, 7/1/20 AAA 1,073,750
Maricopa Cnty. Indl. Dev. Auth. Rev. Bonds,
(Catholic Hlth. Care) MBIA,
2,700,000 IFB 7.752s, 7/1/13 AAA 2,450,250
1,000,000 5s, 7/1/15 AAA 867,500
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ARIZONA (continued)
- --------------------------------------------------------------------------------------------
Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac. Rev. Bonds
600,000 (John C. Lincoln Hosp.), Financial Security Assurance
(FSA), 7 1/2s, 12/1/13 AAA 660,750
3,500,000 (Samaritan Hlth. Svcs.), Ser. A, MBIA, 7s, 12/1/16 AAA 3,911,250
1,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg. Rev.
Bonds (Laguna Point Apt. Project), 6 3/4s, 7/1/19 A 1,661,650
2,080,000 Maricopa Cnty., Indl. Dev. Auth. Single Fam. Mtge.
Rev. Bonds, Ser. A 7 1/2s, 8/1/12 AA 2,132,000
Mohave Cnty., Indl. Dev. Auth. Hosp. Syst. Rev. Bonds
(Env. Inc. & Phoenix Hosp. & Med. Ctr.),
500,000 7s, 7/1/16 Baa 476,250
2,000,000 6 3/4s, 7/1/08 BAA 1,985,000
1,490,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds, Federal Housing Authority (FHA),
7 3/8s, 4/1/32 AAA 1,575,675
7,000,000 Navajo Cnty., Poll. Cntl. Corp. Rev. Bonds,
(Public Svc. Co.), Ser. A, 5 7/8s, 8/15/28 Baa 6,177,500
3,200,000 Phoenix Az Civic Impt. Corp. Rev. Bonds,
(New City Hall Project) 5.1s, 7/1/28 AA 2,704,000
4,800,000 Phoenix Civic Impt.Corp. Wtr. Sys. Rev. Bonds,
FGIC, 5 1/2s, 7/1/24 AAA 4,380,000
1,750,000 Phoenix G.O. Bonds,
Ser. B, 5 1/2s, 7/1/16 AA 1,614,375
1,600,000 Phoenix Hsg. Fin. Corp. Mtg. Rev. Bonds,
Ser. A, MBIA, 6.9s, 1/1/23 AAA 1,634,000
1,500,000 Phoenix Wtr. Sys. Rev. Bonds,
5 1/2s, 7/1/22 AA 1,385,625
1,600,000 Phoenix Civic Impt Corp. Arpt. Rev. Bonds,
7.8s, 7/1/03 AAA 1,712,000
Phoenix, Civic Impt. Corp. Wastewater Syst.
Lease Rev. Bonds,
1,000,000 6 1/8s, 7/1/23 A 1,071,250
6,000,000 4 3/4s, 7/1/23 A 4,785,000
1,000,000 Phoenix, G.O. Bonds,
6 3/8s, 7/1/13 AA 1,018,750
Phoenix, Indl. Dev. Auth. Mtge. Rev. Bonds,
(Chris Ridge Village Project), FHA,
2,150,000 6.8s, 11/1/25 AAA 2,179,563
400,000 6 3/4s, 11/1/12 AAA 408,500
955,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Christian Care Retirement Apts.)
Ser. A, 10 1/4s, 1/1/18 B/P 1,006,331
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds
FGIC, 7 1/2s, 7/1/08 AAA 1,161,250
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ARIZONA (continued)
- --------------------------------------------------------------------------------------------
Pinal Cnty., Certificate of Participation (COP)
750,000 7.9s, 6/1/01 BBB 780,938
2,000,000 6 1/2s, 6/1/09 AA 2,027,500
Pinal Cnty., Indl. Dev. Auth. Rev. Bonds,
(Casa Grande Regl. Med. Ctr.),
2,000,000 9s, 12/1/13 BB/P 2,077,500
2,000,000 Ser. A, 8 1/8s, 12/1/22 BB/P 2,077,500
Salt River Agricultural Impt. & Pwr. Dist. Elec. Syst.
Rev. Bonds, Ser. D, 1/1/30
3,000,000 IFB, 8.624s, 1/1/19 (acquired 3/16/93,
cost $3,015,719) <F3> A 2,673,750
7,000,000 Ser. D, 5s, 1/1/30 AA 5,792,500
4,000,000 Scottsdale Ind. Dev. Auth. Rev. Bonds,
(First Mtge. Westminster Village), Ser. A
8 1/4s, 6/1/15 BB/P 4,040,000
2,250,000 Scottsdale, G.O. Bonds,
5 1/2s, 7/1/14 AA 2,106,563
1,000,000 Sedona, COP 7.2s, 4/1/12 BBB/P 1,002,500
Sierra Vista Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp. Project),
1,800,000 8 3/4s, 12/1/16 BB/P 1,919,250
1,995,000 8 1/2s, 12/1/21 BBB/P 2,134,650
2,800,000 8 1/2s, 12/1/14 BBB/P 2,894,500
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev. Bonds
8 1/2s, 6/1/05 BBB 1,113,750
1,365,000 Tucson & Pima Cntys., Indl. Dev. Auths. Single Fam.
Mtge. Rev. Bonds 9 3/8s, 2/1/14 BB 1,404,244
6,750,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 7,635,938
725,000 Tucson, COP 6 3/8s,7/1/09 AA 728,625
910,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), 7.4s, 7/1/26 AAA 948,675
1,500,000 Tucson, Street & Hwy. User Rev. Bonds
Ser. B, 9 1/4s, 7/1/05 A 1,931,250
Tucson, Wtr. Rev. Bonds
300,000 Ser. D, FGIC, 9 3/4s, 7/1/10 AAA 417,375
1,500,000 6 1/2s, 7/1/16 A 1,550,625
2,500,000 Ser. A, 5 3/4s, 7/1/18 A 2,396,875
1,000,000 U. of AZ, COP
(Telecommunications Syst.), 6 1/2s, 7/15/12 A 1,032,500
1,450,000 U. of AZ, Med. Ctr. Corp. Hosp., Rev. Bonds,
MBIA, 6 7/8s, 7/1/21 AAA 1,607,688
U. of AZ, Rev. Bonds,
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,095,000
1,000,000 6 1/4s, 6/1/11 AA 1,017,500
------------
135,978,085
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
PUERTO RICO (12.6%)
- --------------------------------------------------------------------------------------------
2,500,000 Cmnwlth. Puerto Rico Hwy. & Trans. Auth. Rev. Bonds
Ser. X, 5 1/4s, 7/1/21 A $ 2,181,250
Cmnwlth. of Puerto Rico, Aqueduct & Swr. Auth.
Rev. Bonds
300,000 Ser. A, 7.9s, 7/1/07 Baa 329,250
2,500,000 Ser. A, 7 7/8s, 7/1/17 Baa 2,721,875
Cmnwlth. of Puerto Rico, G.O.
2,700,000 IFB, MBIA, 8.91s, 7/1/08 AAA 2,750,625
1,500,000 6s, 7/1/22 A 1,468,125
1,000,000 Ser. X, 5s, 7/1/22 A 840,000
2,700,000 MBIA, 3.9s, 7/1/08 AAA 2,700,000
Puerto Rico Hwy. & Trans. Auth.
1,000,000 Variable Rate Note VRDN 2.2s, 7/1/99 VMIG1 1,000,000
2,000,000 IFB Government National Mortgage Association
9.692s, 8/4/25 AAA 2,052,500
Puerto Rico, Pub. Bldg. Auth. Gtd. Ed. & Hlth. Fac.
Rev. Bonds,
1,375,000 Ser. H, 7 7/8s, 7/1/16 AAA 1,497,031
1,500,000 Ser. L, 6 7/8s, 7/1/21 AAA 1,685,622
------------
19,226,278
- --------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES (cost $152,156,420) $155,204,363
------------
PUT OPTIONS PURCHASED (0.2%) (cost $477,024)
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- --------------------------------------------------------------------------------------------
268,000 U.S. Treasury Bond Futures March 95/103 $ 286,760
------------
TOTAL INVESTMENTS (cost $152,633,444)<F4> $155,491,123
<FN>
<F1> Percentages indicated are based on net assets of $152,614,098, which
correspond to a net asset value per class A share and class B share of
$8.78 and $8.77, respectively.
<F2> The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at February 28, 1995 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 February
28, 1995. Securities rated by Putnam are indicated by "/P" and are not
publicly rated.
The rates shown on Variable Rate Demand Notes (VRDN), Inverse Floating
Bonds (IFB) and linked Floaters Annuties which are securities paying
variable interest rates that vary inversely to changes in market interest
rates are the current interest rates at February 28, 1995, which are
subject to change based on the terms of the security.
<F3> Restricted excluding 144A securities, as to public resale. At the date of
acquisition these securities were valued at cost. There were no outstanding
unrestricted securities of the same class as those held. Total market value
of restricted securities owned at February 28, 1995 was $2,673,750 or 1.8%
of net assets.
<F4> The aggregate identified cost on a tax cost basis is $152,638,174 resulting
in gross unrealized appreciation and depreciation of $5,343,947 and
$2,490,998 respectively, or net unrealized appreciation of $2,852,949.
</FN>
<PAGE>
WRITTEN CALL OPTIONS ON TREASURY NOTE FUTURES
(Premium received $317,382)
NUMBER OF EXPIRATION DATE/
CONTRACTS STRIKE PRICE VALUE
- --------------------------------------------------------------------------------------------
142,000 U.S. Treasury Bond Futures May 95/102 $359,260
16,000 U.S. Treasury Bonds Futures March 95/103 18,500
--------
$377,760
</TABLE>
The Fund had the following industry group concentrations greater than 10% on
February 28, 1995 (as a percentage of net assets):
Hospitals / Health Care 24.0%
Water & Sewerage 20.2
The fund had the following insurance concentrations greater than 10% on February
28,1995, as a percentage of net assets:
MBIA 13.4%
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1995 (Unaudited)
<S> <C>
ASSETS
- --------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $152,633,444 ) (Note 1) $155,491,123
- --------------------------------------------------------------------------------------
Cash 831,404
- --------------------------------------------------------------------------------------
Interest receivable 2,231,077
- --------------------------------------------------------------------------------------
Receivable for shares of the fund sold 303,079
- --------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 11,020
- --------------------------------------------------------------------------------------
TOTAL ASSETS 158,867,703
LIABILITIES
- --------------------------------------------------------------------------------------
Distributions payable to shareholders 144,757
- --------------------------------------------------------------------------------------
Payable for securities purchased 4,389,736
- --------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,030,250
- --------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 219,531
- --------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 3,350
- --------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 8,898
- --------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 111
- --------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 55,844
- --------------------------------------------------------------------------------------
Written options outstanding at value (premium received $317,382) 377,760
- --------------------------------------------------------------------------------------
Other accrued expenses 23,371
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,253,608
- --------------------------------------------------------------------------------------
NET ASSETS $152,614,095
- --------------------------------------------------------------------------------------
REPRESENTED BY
- --------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $155,635,152
- --------------------------------------------------------------------------------------
Undistributed net investment income 77,586
- --------------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions,
futures and options (5,895,944)
- --------------------------------------------------------------------------------------
Net unrealized appreciation of investments, futures and options 2,797,301
- --------------------------------------------------------------------------------------
TOTAL--REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES OUTSTANDING $152,614,095
- --------------------------------------------------------------------------------------
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- --------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($133,866,580 divided by 15,240,757 shares) $8.78
- --------------------------------------------------------------------------------------
Offering price per share (100/95.25 of $8.78) <F1> $9.22
- --------------------------------------------------------------------------------------
Net asset value and redemption price of class B shares
($18,747,516 divided by 2,136,534 shares) <F2> $8.77
- --------------------------------------------------------------------------------------
<FN>
<F1> On single retail sales of less than $25,000. On sales of $25,000 or more
and on group sales the offering price is reduced.
<F2> Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six months ended February 28, 1995 (Unaudited)
<S> <C>
TAX EXEMPT INTEREST INCOME $5,225,050
- ----------------------------------------------------------------------------
EXPENSES:
- ----------------------------------------------------------------------------
Compensation of Manager (Note 2) 448,871
- ----------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 44,818
- ----------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,316
- ----------------------------------------------------------------------------
Reports to shareholders 5,455
- ----------------------------------------------------------------------------
Auditing 10,166
- ----------------------------------------------------------------------------
Legal 12,299
- ----------------------------------------------------------------------------
Administrative services (Note 2) 2,603
- ----------------------------------------------------------------------------
Postage 496
- ----------------------------------------------------------------------------
Registration fees 12,397
- ----------------------------------------------------------------------------
Distribution Fees (Note 2)
- ----------------------------------------------------------------------------
Class A 132,826
- ----------------------------------------------------------------------------
Class B 71,390
- ----------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 5,203
- ----------------------------------------------------------------------------
Other 4,134
- ----------------------------------------------------------------------------
TOTAL EXPENSES 756,974
- ----------------------------------------------------------------------------
NET INVESTMENT INCOME 4,468,076
- ----------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (3,498,522)
- ----------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (6,730)
- ----------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (37,938)
- ----------------------------------------------------------------------------
Net unrealized appreciation of investments and
options during the period 2,140,836
- ----------------------------------------------------------------------------
NET LOSS ON INVESTMENTS (1,402,354)
- ----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,065,722
- ----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statments.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28 AUGUST 31
1995* 1994
- --------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
- --------------------------------------------------------------------------------------
OPERATIONS:
- --------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income $ 4,468,076 $ 8,770,368
- --------------------------------------------------------------------------------------
Net realized loss on investments (3,498,522) (1,808,569)
- --------------------------------------------------------------------------------------
Net realized loss on futures contracts (6,730) (5,022)
- --------------------------------------------------------------------------------------
Net realized loss on written options (37,938) --
- --------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments,
futures, and options 2,140,836 (9,114,262)
- --------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 3,065,722 (2,157,485)
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
- --------------------------------------------------------------------------------------
Net investment income
- --------------------------------------------------------------------------------------
Class A (3,937,695) (8,146,391)
- --------------------------------------------------------------------------------------
Class B (447,580) (518,597)
- --------------------------------------------------------------------------------------
In excess of net realized gain on investments
- --------------------------------------------------------------------------------------
Class A -- (474,505)
- --------------------------------------------------------------------------------------
Class B -- (18,380)
- --------------------------------------------------------------------------------------
Increase (decrease) from capital share transactions (Note 4) (5,263,498) 22,235,036
- --------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (6,583,051) 10,919,678
NET ASSETS
- --------------------------------------------------------------------------------------
Beginning of period 159,197,146 148,277,468
- --------------------------------------------------------------------------------------
END OF PERIOD (including undistributed and distributions
in excess of net investment income of $77,586 and
5,215, respectively) $152,614,095 $159,197,146
- --------------------------------------------------------------------------------------
<FN>
* Unaudited
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD
JULY 15, 1993
SIX MONTHS (COMMENCEMENT SIX MONTHS
ENDED YEAR ENDED OF OPERATIONS) ENDED
FEBRUARY 28 AUGUST 31 TO AUGUST 31 FEBRUARY 28
-------------------------------------------------------------
1995* 1994 1993 1995*
-------------------------------------------------------------
Class B
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $8.83 $9.47 $9.39 $8.84
- ----------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .23 .45 .11 .26
Net realized and unrealized gain (loss)
on investments (.06) (.61) .03 (.07)
- ----------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .17 (.16) .14 .19
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (.23) (.45) (.06) (.25)
Net realized gain on investments -- -- -- --
- ----------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- (.03) -- --
- ----------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.23) (.48) (.06) (.25)
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.77 $8.83 $9.47 $8.78
- ----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) 1.99(c) (1.80) 1.45(c) 2.29(c)
- ----------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $18,748 $16,247 $2,974 $133,867
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) 1.31(c) 1.60 .19(c) .42(c)
Ratio of net Investment income to average
assets (%) 4.43(c) 4.82 .43(c) 2.72(c)
Portfolio turnover (%) 33.64(c) 34.68 5.72(c) 33.64(c)
- ----------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
[FINANCIAL HIGHLIGHTS (continued)
(For a share outstanding throughout the period)]
FOR THE PERIOD
JANUARY 30, 1991
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED AUGUST 31 TO AUGUST 31
-----------------------------------------------------------
1994 1993 1992 1991
-----------------------------------------------------------
Class A
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $9.47 $9.07 $8.66 $8.50
- -----------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .51 .54(a) .57(a) .33(a)
Net realized and unrealized gain (loss)
on investments (.61) .47 .42 .16
- -----------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (.10) 1.01 .99 .49
- -----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (.50) (.55) (.57) (.33)
Net realized gain on investments -- (.06) (.01) --
- -----------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments (.03) -- -- --
- -----------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.53) (.61) (.58) (.33)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.84 $9.47 $9.07 $8.66
- -----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) (1.07) 11.54 11.85 5.84(c)
- -----------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $142,950 $145,304 $88,566 $46,902
- -----------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) .97 .89 .58(a) .16(a)(c)
Ratio of net Investment income to average
assets (%) 5.55 5.82 6.34(a) 3.91(a)(c)
Portfolio turnover (%) 34.68 5.72 31.84 12.46(c)
- -----------------------------------------------------------------------------------------------------------
<FN>
* Unaudited.
(a) Reflects expense limitation. As a result of these limitations, net
investment income of the fund for the year ended August 31, 1992 and the
period ended August 31, 1991, reflect expense reductions of $0.03 and
$0.05 per share, respectively.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Not annualized.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
February 28, 1995 (unaudited)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a non-diversified, open-end management investment company. The fund seeks as
high a level of current income exempt from federal income tax and Arizona state
income tax as Putnam Management believes is consistent with preservation of
capital by investing primarily in a portfolio of Arizona tax exempt securities.
The fund offers both Class A and Class B shares. The fund commenced its public
offering of Class B shares on July 15, 1993. Class A shares are sold with a
maximum front-end sales charge of 4.75%. Class B shares do not pay a front-end
sales charge, but pay a higher ongoing distribution fee than Class A shares, and
may be subject to a contingent deferred sales charge, if those shares are
redeemed within six years of purchase. In addition, the Trustees declare
separate dividends on each class of shares. Expenses of the fund are borne
pro-rata by the holders of both classes of shares, except that each class bears
expenses unique to that class (including the distribution fees applicable to
such class and votes as a class only with respect to its own distribution plan
or other matters on which a class) vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the net
assets of the fund, if the fund were liquidated. In addition, the Trustees
declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
A SECURITY VALUATION Tax-exempt bonds and notes are stated on the basis of
valuations provided by a pricing service, approved by the Trustees, which uses
information with respect to transactions in bonds, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining value. The fair value of restricted securities is
determined by the Manager following procedures approved by the Trustees, and
such valuations and procedures are reviewed periodically by the Trustee.
B SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed).
Interest income is recorded on the accrual basis.
C OPTION ACCOUNTING PRINCIPLES Each fund may seek to increase its current return
by writing covered call and put options on securities it owns or which it may
invest. When a fund writes a call or put option, an amount equal to the premium
received by the fund is included in the fund's "Statement of assets and
liabilities" as an asset and the equivalent liability. The amount of the
liability is subsequently "marked-to-market" to reflect the current market value
of an option written. The current market value of an options
<PAGE>
is the last sale price or, in the absence of a sale, the last offering price. If
an option expires on its stipulated expiration date, or if the fund enters into
a closing purchase transaction, the fund realizes a gain (or loss if the cost of
a closing purchase transaction exceeds the premium received when the option was
written) without regard to any unrealized gain or loss on the underlying
security and the liability related to such option is extinguished. If a written
call option is exercised, the fund realizes a gain or loss from the sale of the
underlying security and the proceeds of the sale are increased by the premium
originally received reduces the cost of the security that the fund purchases
upon exercise of the option.
The risk in writing a call option is that the fund relinquishes the opportunity
to profit if the market price of the underlying security increases and the
option is exercised. In writing a put option, the fund assumes the risk of
incurring a loss if the market price of the underlying security decreases and
the option is exercised. In addition, there is the risk the fund may not be able
to enter into a closing transaction because of an illiquid secondary market.
Each fund may also, to the extent consistent with its investment objectives and
policies, buy put options to protect its portfolio holdings in an underlying
security against a decline in market value. A fund may buy a call options to
hedge against an increase in the price of securities that the fund ultimately
wants to buy. These funds may also buy and sell combinations of put and call
options on the same underlying security to earn additional income. The premium
paid by a fund for the purchase of a put or call option is included in the
fund's "Statement of assets and liabilities" as an investment and is
subsequently "marked-to-market" to reflect the current market value of the
option.
If an option the fund has purchased expires on the stipulated expiration date,
the fund realizes a loss in the amount of the cost of the option. If the fund
enters into a closing sale transaction, the fund realizes a gain or loss,
depending on whether proceeds from the closing sale transaction are greater or
less than the cost of the option. If the fund exercises a call option, the cost
of securities acquired by exercising the call is increased by the premium paid
to buy the call. If the fund exercises a put option, it realizes a gain or loss
from the sale of the underlying security and the proceeds from such sale are
decreased by the premium originally paid. The risk associated with purchasing
options is limited to the premium originally paid.
D FEDERAL TAXES It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid imposition
of any excise tax under Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on income, capital gains
or unrealized appreciation of securities held and excise tax on income and
capital gains.
E DISTRIBUTIONS TO SHAREHOLDERS Income dividends are declared daily by the fund
and are distributed monthly. Capital gains distributions, if any, are recorded
on the ex-dividend date and paid annually.
The amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. Reclassifications are made to the fund's capital accounts
as necessary so that
<PAGE>
they reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations.
F AMORTIZATION OF BOND PREMIUM AND ACCRETION OF BOND DISCOUNT Any premium
resulting from the purchase of securities in excess of maturity value is
amortized using the effective yield method for bonds issued. The premium in
excess of the call price, if any, is amortized to the call date; thereafter, the
remaining excess premium is amortized to maturity. Discount on zero-coupon bonds
is accreted according to the effective yield method.
G UNAMORTIZED ORGANIZATION EXPENSES Expenses incurred by the fund in connection
with its organization, its registration with the Securities & Exchange
Commission and with various states, and the initial public offering of its Class
A shares aggregated $44,979. These expenses are being amortized over a five-year
period based on current and projected net asset levels.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Investment Management, Inc., the fund's Manager, a
wholly-owned subsidiary of Putnam Investments, Inc., for management and
investment advisory services is paid quarterly based on the average net assets
of the fund for the quarter. Such fee is based on the following annual rates:
0.6% of the first $500 million of average net assets, 0.5% of the next $500
million, 0.45% of the next $500 million, 0.4% of the next $1.5 billion. Subject
to reduction in any year by the amount of certain brokerage commissions and fees
(less expenses) received by affiliates of the Manager on the fund's portfolio
transactions.
The fund also reimburses the Manager for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative
services to the fund.
Trustees of the fund receive an annual Trustee's fee of $710 and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of the Manager and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary Trust Company
(PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent
functions are provided by Putnam Investor Services, a division of PFTC.
Investor servicing and custodian fees reported in the Statement of Operations
for the six months ended February 28, 1995, have been reduced by credits allowed
by PFTC.
The fund has adopted distribution plans (the "Plans") with respect to its class
A shares and class B shares pursuant to Rule 12b-1 under the Investment Company
Act of 1940. The purpose of the Plans is to compensate Putnam Mutual Funds
Corp., a wholly-owned subsidiary of Putnam Investments Inc., for services
provided and expenses incurred by it in distributing shares of the fund. The
Trustees have approved payment by the fund at an annual rate of 0.20% and 0.85%
of the average net assets attributable to class A and class B shares
respectively.
For the year ended February 28, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $39,944 from the sale of class A shares
and $3,672 in contingent deferred sales charges from redemptions of class B
shares. A deferred sales charge of up to 1% is assessed on certain redemptions
of class A shares purchased
<PAGE>
as part of an investment of $1 million or more. For the year ended February 28,
1995, Putnam Mutual Funds Corp., acting as underwriter received $1,639 on class
A redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the six months ended February 28, 1995, purchases and sales of investment
securities other than short-term municipal obligations aggregated $53,353,730,
and $49,419,919, respectively. Purchases and sales of short-term municipal
obligations aggregated $8,000,000, and $12,419,919, respectively. In determining
the net gain or loss on securities sold, the cost of securities has been
determined on the identified cost basis.
The following is a summary of written options activity during the six months
ended February 28, 1995.
PREMIUMS
RECEIVED
- ------------------------------------
Contracts outstanding
at beginning of year $ --
Options opened 379,229
Options expired --
Options closed 61,847
- ------------------------------------
WRITTEN OPTIONS OUTSTANDING
AT END OF YEAR $ 317,382
- ------------------------------------
NOTE 4
CAPITAL SHARES
At August 31, 1994, there was an unlimited number of shares of beneficial
interest authorized, divided into two classes, Class A and Class B capital
stock. Transaction in capital shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28 YEAR ENDED AUGUST 31
1995 1994
CLASS A SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 811,722 $6,915,403 3,092,943 $28,751,671
Shares issued in connection with
reinvestment of distributions 217,270 1,843,983 464,189 4,269,836
1,028,992 8,759,386 3,557,132 33,021,507
Shares repurchased (1,960,018) (16,544,878) (2,730,191) (24,893,724)
NET INCREASE (931,026) $(7,785,492) 826,941 $ 8,127,783
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28 YEAR ENDED AUGUST 31
1995 1994
CLASS B SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Shares sold 466,855 $3,948,606 1,640,165 $15,144,133
Shares issued in connection with
reinvestment of distributions 27,420 232,766 31,774 288,584
494,275 4,181,372 1,671,939 15,432,717
Shares repurchased (197,004) (1,659,378) (146,633) (1,325,464)
NET DECREASE 297,271 $2,521,994 1,525,306 $14,107,253
</TABLE>
<PAGE>
OUR COMMITMENT TO QUALITY SERVICE
o CHOOSE AWARD-WINNING SERVICE.
Putnam Investor Services has won the DALBAR Quality Tested Service Seal for
the past five years, through 1994. DALBAR, an independent research firm, ran
more than 12,000 tests of 38 shareholder service components. In every
category, Putnam outperformed the industry standard.
o HELP YOUR INVESTMENT GROW.
Set up a systematic program for investing with as little as $25 a month from
a Putnam fund or from your checking or savings account.*
o SWITCH FUNDS EASILY.
You can move money from one account to another within the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
o ACCESS YOUR MONEY QUICKLY.
You can get checks sent regularly or redeem shares any business day at the
then-current net asset value, which may be more or less than their original
cost.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a helpful
Putnam representative.
o To make an additional investment in this or any other Putnam fund, contact
your financial advisor or call our toll-free number: 1-800-225-1581.
*Regular investing, of course, does not guarantee a profit or protect against
a loss in a declining market. Investors should consider their ability to
continue purchasing shares during periods of low price levels.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Howard K. Manning
Vice President and Fund Manager
William N. Shiebler
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Arizona Tax Exempt
Income Fund. It may also be used as sales literature when preceded or
accompanied by the current prospectus, which gives details of sales charges,
investment objectives, and operating policies of the fund, and the most recent
Putnam Quarterly Performance Summary.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
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THE PUTNAM FUNDS
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