PUTNAM
ARIZONA
TAX EXEMPT
INCOME FUND
[GRAPHIC OMITTED:
art work]
ANNUAL REPORT
May 31, 1995
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PERFORMANCE HIGHLIGHTS
o "The gap is narrowing between Treasury and municipal yields, making munis
look increasingly attractive."
-- The Wall Street Journal, May 19, 1995.
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FISCAL 1995 RESULTS AT A GLANCE
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CLASS A CLASS B
TOTAL RETURN: NAV POP NAV CDSC
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9 months ended May 31, 1995
(change in value during
period plus reinvested
distributions) 6.45% 1.40% 5.99% 0.99%
SHARE VALUE: NAV POP NAV
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August 31, 1994 $8.84 $9.28 $8.83
May 31, 1995 9.01 9.46 9.00
DISTRIBUTIONS: NO. INCOME CAPITAL GAINS(1) TOTAL
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Class A 9 $0.375197 -- $0.375197
Class B 9 0.337401 -- 0.337401
CURRENT RETURN: NAV POP NAV
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End of period
Current dividend rate(2) 5.50% 5.23% 4.93%
Taxable equivalent(3) 9.65 9.17 8.65
Current 30-day SEC yield(4) 5.28 5.02 4.62
Taxable equivalent(3) 9.26 8.80 8.10
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Performance data represent past results, will differ for each share
class and is no indication of future performance. For performance over
longer periods, see page 9. POP assumes 4.75% maximum sales charge for
class A shares. CDSC for class B shares assumes 5% maximum contingent
deferred sales charge. (1)Capital gains, if any, are taxable for
federal and, in most cases, state tax purposes. For some investors,
investment income may also be subject to the federal alternative
minimum tax. Investment income may be subject to state and local taxes.
(2)Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period. (3)Assumes maximum combined 42.98%
federal and state tax rate. Results for investors subject to lower tax
rates would not be as advantageous. (4)Based only on investment income,
calculated using SEC guidelines.
<PAGE>
FROM THE CHAIRMAN
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Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
You may not have noticed, but this annual report for Putnam Arizona Tax Exempt
Income Fund has arrived somewhat earlier than usual. Putnam Management has
decided to realign many of its tax-exempt bond funds' fiscal years so they have
common fiscal year ends.
Your fund was among those affected by this change. In the future its fiscal year
will end on May 31, instead of August 31, as in the past. Consequently, this
report covers a fiscal period of only nine months, instead of a full fiscal
year.
The change should provide savings for your fund in the future. It will allow us
to take advantage of economies of scale in financial reporting, accounting,
literature production, and the like.
We are also pleased to announce the appointment of Howard Manning as your fund's
manager. Howard, who has been with Putnam since 1986, has 13 years of investment
experience.
In the report that follows, Howard reviews performance during this abbreviated
period, then offers some insights on prospects for the months ahead.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
July 17, 1995
<PAGE>
REPORT FROM THE FUND MANAGER
HOWARD MANNING
At the close of Putnam Arizona Tax Exempt Income Fund's fiscal year on May
31, 1995, it appeared the Federal Reserve Board bouncer had temporarily
thrown the U.S. Treasury market out of the 1995 bond-market party. Evidence
at the time, however, suggested the municipal bond market had the potential
to celebrate long into the night. Now, the Fed's lowering of a key interest
rate has not only reignited fixed-income markets, it has served to reinforce
our optimism about the municipal bond market.
Your fund has prospered along with the market. Calendar year-to-date, the
fund's class A shares have returned 10.07% at net asset value (NAV). And, in
a dramatic reversal from its negative returns in 1994, the fund's class A
shares posted an 7.62% return at NAV for the one-year period ended May 31,
1995.
o BONDS COAST TO STRONG FIRST-QUARTER FINISH
The first five months of 1995 encompassed one of the bond market's most
impressive rallies in recent memory. Investors were already beginning to
anticipate the end of the Fed's interest-rate tightening cycle and there were
early signs that the economy would proceed to grow at a slow but steady pace
with inflation remaining low.
The municipal bond market showed its resilience when market players began
buying despite concerns about investors' confidence following the
announcement of the Orange County, California bankruptcy in December. In
fact, for the first quarter of calendar 1995, municipal bond yields -- which
move in the opposite direction from their prices -- fell more than 90 basis
points (nine-tenths of one percentage point). This, however, was where
municipal bonds and other fixed-income securities went their separate ways.
<PAGE>
o FLAT-TAX CONCERNS CREATE OPPORTUNITY
In late April, investors' fears of the effects of the current flat-tax
proposal now being considered by Congress jarred the municipal bond market
out of its dramatic recovery. A flat tax, which is one of many tax-reform
proposals being considered by congressional committees, would deprive
municipal bonds of their exclusivity as a tax-exempt investment.
In our opinion, the market reacted to the perceived effects of the flat-tax
rhetoric and not to any hard facts. By May, investors were starting to look
beyond the flat tax to the likelihood of a more broad-based income tax
revision in the distant future. In fact, a report in The Wall Street Journal
(May 5, 1995) suggested that the short-term downturn in the market was not
grounded in reality and it had actually created more possibilities than it
quashed. "(Tax-law changes) are far off in the future -- 1997 at the earliest
-- and that overhauling the current tax system is a far more difficult task
than many investors now believe. As a result...there's a buying opportunity
in municipals."
[GRAPHIC OMITTED: line chart:
YIELD RATIO: MUNICIPAL BOND YIELDS AS A PERCENTAGE OF U.S. TREASURY BONDS
Legend reads: It is usually considered a buying signal when municipal bonds
yield between 78% and 82% of Treasurys
X-axis reads (left to right) 11/94 through 5/95 in monthly increments.
Y-axis reads (top to bottom) 85%, 80, and 75.
Plot points (bi-weekly) from November 30, 1994 through May 31, 1995 are:
84.2, 84, 82.5, 82.2, 80.7, 79.2, 78.9, 79.2, 79.9, 78.5, 80.5, 82.9 & 84.9.
Caption reads: Chart shows the yield of an average 30-year general obligation
bond versus the yield of an average 30-year U.S. Treasury bond plotted
biweekly. Treasury bonds are backed by the full faith and credit of the U.S.
government. Source: Bloomberg.]
<PAGE>
What kind of value has this created? Analysts evaluate municipal bonds in
relation to taxable Treasury bonds with similar maturities. By this
reasoning, municipal bonds are as undervalued as they were when the bond
market began to turn in November of 1994, albeit at much lower yields. On
November 30, 1994, the average 30-year AAA-general obligation bond was
yielding 84.2% of the average 30-year Treasury bond. Similarly, on May 31,
1995, that ratio stood at 84.9% (See chart on page 5). In other words, the
municipal bond market's failure to participate in the full extent of the
appreciation in other fixed-income securities leaves the potential that it
could make up this ground. There can, of course, be no guarantees of this
result.
o SUPPLY/DEMAND DYNAMICS STILL ATTRACTIVE
The supply and demand imbalance we discussed last year has contributed to the
recent strength of municipal bonds. Independent analysts expect issuance of
new municipal bonds to shrink to $125 billion this year from $150 billion
last year and $300 billion in 1993. According to The Bond Buyer, an industry
periodical, the volume of new issues year-to-date is at the lowest level
since 1990. In fact, issuance in Arizona is off more than 40%.
The summer months are also a traditional time for bonds to mature or be
called in. This July, about $80 billion is expected to flood the market as
many municipal bonds come due or are called by issuers. Should falling
interest rates persist, additional refunding could push more cash into the
market.
o HEALTH CARE ASSETS DECREASE SLIGHTLY BUT REMAIN A PRIORITY
Since the beginning of this period, the fund's largest holding, hospitals and
health care systems, has decreased from 24% to 21% of assets. Credit risk
from hospital bonds, however, is less with 12% in insured bonds and 9% in
uninsured bonds.
While health-care bonds generally provide a good deal of income, they have,
at times, lagged other types of municipal bonds in terms of total return. We
have attempted to make up for this by using careful credit research to
evaluate the issuers of what we believe to be undervalued bonds.
<PAGE>
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS* showing:
Hospital/Healthcare 21.0%; Utilities 12.7%; Water & Sewerage 11.4%;
and Housing 10.0%. Footnote reads:
*Based on net assets on 5/31/95. Holdings will vary over time.]
One issuer we have invested in is the Pinal County Industrial Development
Authority. We believe the hospital that supports their revenue bonds, Casa
Grande Regional Medical Center, could be in the right place at the right
time. Located between Phoenix and Tucson, it is the only medical facility in
a rapidly growing area of Arizona.
o PREREFUNDED ISSUES CONTRIBUTE TO SOLID PERFORMANCE
Depending on a bond issuer's interest rate outlook, additional bonds may be
issued and sold in order to eliminate older, higher-cost debt. In this
situation, known as a refunding, the proceeds of the new issue are invested
in AAA-rated government securities. This investment is used to establish an
account that will pay interest and principal on the outstanding issue. Should
the outstanding debt be retired prior to maturity, it is known in bond
parlance as being "prerefunded to the first call date." Owning prerefunded
debt is beneficial to a portfolio because it immediately improves the credit
quality of the bonds, which, in turn, may increase their value.
One example of this was the Arizona Health Facilities Authority's revenue
bonds issued on behalf of the St. Luke's Health System. These bonds had a Ba
credit rating from Moody's, a major credit rating agency, and from Putnam's
analysts. Thus, they were considered "speculative" in terms of credit
quality. Following a prerefunding, however, we were able to sell them at a
substantial profit.
<PAGE>
The same may be true for another issuer, the Sierra Vista Industrial
Development Authority. Based on credit quality and the current interest-rate
environment, these hospital revenue bonds, used to fund the Sierra Vista
Community Hospital, have the potential, in our opinion, to be the subject of
a prerefunding within the next 6-12 months. Even if this does not come to
pass, we still believe these bonds add value to the fund's portfolio.
o A PROMISING FUTURE
The healthy state economy we reported on in the fund's semi annual report
continues to be the major reason for our optimism about the state's municipal
bond market. A major business influx and an increasing tax base can only
benefit Arizona bonds.
Although the direction of the broader bond market for the remainder of
calendar 1995 is anyone's guess, we believe the municipal bond market, and
particularly Arizona, will continue to hold promise for investors seeking
tax-free income.
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 5/31/95, there is no guarantee the fund will continue to hold
these securities in the future. Past performance is no guarantee of future
results.
<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.
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.
TOTAL RETURN FOR PERIODS ENDED 5/31/95
LEHMAN BROS.
CLASS A CLASS B MUNICIPAL
NAV POP NAV CDSC BOND INDEX CPI
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9 months 6.45% 1.40% 5.99% 0.99% 7.43% 2.15%
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1 year 7.62 2.53 6.88 1.88 9.11 3.19
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3 years 22.12 16.34 -- -- 25.18 8.95
Annual average 6.89 5.17 -- -- 7.77 2.90
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Life of class A 39.06 32.52 -- -- 41.82 13.08
Annual average 7.89 6.70 -- -- 8.38 2.87
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Life of class B -- -- 5.61 1.77 9.97 5.40
Annual average -- -- 2.94 0.94 5.18 2.84
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TOTAL RETURN FOR PERIODS ENDED 6/30/95
(Most recent calendar quarter)
CLASS A CLASS B
NAV POP NAV CDSC
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1 year 6.87% 1.77% 6.15% 1.15%
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3 years 18.39 12.73 -- --
Annual average 5.79 4.08 -- --
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Life of class A 37.16 30.71 -- --
Annual average 7.41 6.25 -- --
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Life of class B -- -- 4.13 0.36
Annual average -- -- 2.09 0.18
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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 commenced operations of class B shares. Performance data
represent past results, will differ for each share class, and is no indication
of future performance. 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>
[GRAPHIC OMITTED: line chart GROWTH OF A $10,000 INVESTMENT
X-axis reads (left to right) 1/30/91 8/30/91 8/30/92 8/30/93 8/30/94 & 5/31/95
Y-axis reads (top to bottom) $19,400 through 9,400 in $1,000 decrements
Legend reads: Cumulative total return of a $10,000 investment since 1/30/91
A white line represents "Fund's class A shares at POP" total of $13,251
(see plot points below: "Fund")
A black line represents "Lehman Bros. Municipal Bond Index" total of $14,182
(see plot points below: "Lehman")
A grey line represents "Consumer Price Index" total of $11,308
(see plot points below: "CPI")
Date "Fund" "Lehman" "CPI"
1/30/91 9525 10000 10000
8/30/91 9841 10569 10149
8/30/92 10851 11749 10468
8/30/93 12128 13183 10758
8/30/94 12313 13201 11070
5/31/95 13251 14182 11308
Caption reads: Past performance is no assurance of future results. A $10,000
investment in the fund's class B shares at inception on (7/15/93) would have
been valued at $10,561 on 5/31/95 ($10,177 with a redemption at the end of the
period). Past performance is not indicative of future results.]
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial shares 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.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the municipal
bond market. The index does not take into account brokerage commissions or other
costs, may include bonds different from those in the fund, and may pose
different risks than the fund.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
For the nine months ended May 31, 1995
To the Trustees and Shareholders of
Putnam Arizona Tax Exempt Income Fund
We have audited the accompanying statement of assets and liabilities of Putnam
Arizona Tax Exempt Income Fund, including the portfolio of investments owned, as
of May 31, 1995, the related statement of operations for the nine months then
ended, the statement of changes in net assets for the nine months then ended and
for the year ended August 31, 1994, and the "Financial Highlights" for each of
the periods indicated therein. These financial statements and "Financial
Highlights" are the responsibility of the fund's management. Our responsibility
is to express an opinion on these financial statements and "Financial
Highlights" based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and "Financial
Highlights" are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and "Financial Highlights" referred to
above present fairly, in all material respects, the financial position of Putnam
Arizona Tax Exempt Fund as of May 31, 1995, the results of its operations for
the nine months then ended, the changes in its net assets for the nine months
then ended and for the year ended August 31, 1994, and the "Financial
Highlights" for each of the periods indicated therein, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 17, 1995
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
May 31, 1995
KEY TO ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
GNMA Coll. -- Government National Mortgage Association Collateralized
IFB -- Inverse Floating Bonds
MBIA -- Municipal Bond Investors Assurance Corp.
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (96.8%)<F1>
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ARIZONA (88.4%)
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<C> <S> <C> <C>
AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
$1,965,000 Prerefunded (St. Luke's Hosp. Syst.),
Ser. A, 10 1/8s, 11/1/15 AAA $ 2,050,969
1,975,000 (Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB 2,093,500
1,500,000 (Phoenix Mem. Hosp.), 8 1/8s, 6/1/12 BBB 1,588,125
1,185,000 AZ State Muni. Fing. COP Rev. Bonds
Ser. 4, FGIC, 5 1/2s, 8/1/19 AAA 1,140,563
1,500,000 AZ State Student Loan Acquisition Auth.
Rev. Bonds, Ser. B, 6.6s, 5/1/10 AA 1,575,000
2,500,000 AZ State Trans. Board Hwy. Rev. Bonds
Ser. A, 6 1/2s, 7/1/11 Aaa 2,768,750
2,140,000 Avondale, Muni. Dev. Corp. Facs. Rev. Bonds
AMBAC 8.85s, 7/1/13 AAA 2,190,568
1,100,000 Chandler, Street & Hwy. Rev. Bonds
MBIA, 8s, 7/1/11 AAA 1,388,750
Chandler, G.O. Bonds
1,450,000 FGIC, 8s, 7/1/10 AAA 1,758,125
500,000 FGIC, 7s, 7/1/12 AAA 551,250
Chandler, Wtr. & Swr. Rev. Bonds
2,150,000 FGIC, 8s, 7/1/14 AAA 2,588,063
750,000 FGIC, 7s, 7/1/12 AAA 826,875
750,000 Cochise Cnty., U. School Dist. No. 68 Rev. Bonds
FGIC, 7 1/2s, 7/1/09 AAA 900,000
6,880,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds
Ser. 85, 8.9s, 7/1/06 Baa 7,516,400
Gilbert, G.O. Bonds
2,500,000 Ser. C, MBIA, 5 1/2s, 7/1/23 AAA 2,381,250
1,105,000 Ser. C, MBIA, 5 1/2s, 7/1/22 AAA 1,067,706
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds
FGIC, 6 1/2s, 7/1/22 AAA 1,062,500
1,000,000 Glendale Indl. Dev. Auth. Edl. Fac. Rev. Bonds
7 1/8s, 7/1/20 AAA 1,117,500
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ARIZONA (continued)
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$2,700,000 Maricopa Cnty., Indl. Dev. Auth. Hlth. Fac. IFB
MBIA, 6.722s, 7/1/13 AAA $ 2,639,250
Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds
3,500,000 (Samaritan Hlth. Svcs.), Ser. A, MBIA, 7s, 12/1/16 AAA 4,086,250
2,500,000 (Samaritan Hlth. Svc. Hosp.-B2), MBIA, 2.8s,
12/1/08 A 2,500,000
600,000 (John C. Lincoln Hosp.), FSA, 7 1/2s, 12/1/13 AAA 670,500
1,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg.
Rev. Bonds, (Laguna Point Apt. Project), 6 3/4s, 7/1/19 A 1,695,050
1,000,000 Maricopa Cnty., Indl. Dev. Auth. Rev. Bonds
(Catholic Hlth. Care) Ser. A, MBIA, 5s, 7/1/15 AAA 908,750
2,080,000 Maricopa Cnty., Indl. Dev. Auth. Single Fam. Mtge.
Rev. Bonds, Ser. A, 7 1/2s, 8/1/12 AA 2,186,600
2,000,000 Maricopa Cnty., School Dist. No 028 Rev. Bonds
(Kyrene Elem.), Ser. C, FGIC, zero %, 1/1/11 AAA 815,000
Maricopa Cnty., Unified School Dist. No 80
Rev. Bonds (Chandler), MBIA,
500,000 zero %, 7/1/11 AAA 196,250
1,000,000 zero %, 7/1/09 AAA 446,250
750,000 Mohave Cnty., Indl. Dev. Auth. Hosp. Syst.
Rev. Bonds, (Env. Inc. & Phoenix Hosp. & Med. Ctr.),
6 3/4s, 7/1/08 BAA 770,625
3,000,000 Mohave Cnty., Indl. Dev. Auth. Indl. Dev. Rev. Bonds
(Citizens Utilities Co.) Ser. B, AMBAC, 5.8s, 11/15/28 AAA 2,981,250
1,485,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds, (Cooper Ridge Apts.) FHA, 7 3/8s, 4/1/32 AAA 1,594,519
Navajo Cnty., Poll. Cntrl. Corp. Rev. Bonds
2,000,000 (Public Svc. Co.), Ser. A, 5 7/8s, 8/15/28 Baa 1,945,000
1,000,000 (AZ Pub. Svc. Co.), Ser. A, AMBAC, 5 1/2s, 8/15/28 AAA 952,500
3,200,000 Phoenix Az Civic Impt. Corp. Rev. Bonds
(New City Hall Project) 5.1s, 7/1/28 AA 2,880,000
1,600,000 Phoenix Hsg. Fin. Corp. Mtg. Rev. Bonds
Ser. A, MBIA, 6.9s, 1/1/23 AAA 1,656,000
1,500,000 Phoenix Wtr. Sys. Rev. Bonds 5 1/2s, 7/1/22 AA 1,447,500
Phoenix, Civic Impt. Corp. Wtr. Syst. Rev. Bonds
2,500,000 5 1/2s, 7/1/24 AA 2,400,000
4,800,000 FGIC, 5 1/2s, 7/1/24 AAA 4,572,000
1,000,000 Phoenix, Civic Impt. Corp. Wastewater Syst.
Prerefunded Lease Rev. Bonds, 6 1/8s, 7/1/23 AAA 1,101,250
Phoenix, G.O. Bonds
1,000,000 6 3/8s, 7/1/13 AA 1,048,750
1,750,000 Ser. B, 5 1/2s, 7/1/16 AA 1,701,875
2,150,000 Phoenix, Indl. Dev. Auth. Mtge. Rev. Bonds
(Chris Ridge Village Project), FHA, 6.8s, 11/1/25 AAA 2,217,188
955,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Christian Care Retirement Apts.), Ser. A, 10 1/4s,
1/1/18 BB/P 1,011,106
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
ARIZONA (continued)
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$1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds
FGIC, 7 1/2s, 7/1/08 AAA $ 1,188,750
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,080,000
Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
2,000,000 (Casa Grande Regl. Med. Ctr.), 9s, 12/1/13 BB/P 2,075,000
2,000,000 (Casa Grande Regl. Med. Ctr.), Ser. A, 8 1/8s,
12/1/22 BB/P 2,125,000
3,000,000 Salt River, Project Agric. Impt. & Pwr. Dist. Elec.
Syst. IFB 6.637s, 1/1/19
(acquired 3/16/93, cost $3,015,719) <F4> A 3,011,250
Salt River, Project Agric. Impt. & Pwr. Dist. Elec.
Syst. Rev. Bonds (Salt River Project)
3,150,000 Ser. C, 5 1/2s, 1/1/28 AA 3,000,375
3,500,000 Ser. B, MBIA, 5 1/4s, 1/1/19 AAA 3,281,250
5,000,000 Ser. D, 5s, 1/1/30 AA 4,406,250
2,250,000 Scottsdale, G.O. Bonds, 5 1/2s, 7/1/14 AA 2,174,063
1,000,000 Scottsdale Indl. Dev. Auth. Hosp. Rev. Bonds
(Scottsdale Memorial Hosp.), AMBAC, 5 1/4s, 9/1/18 AAA 927,500
4,000,000 Scottsdale Ind. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village), Ser. A, 8 1/4s,
6/1/15 BB/P 4,150,000
1,000,000 Sedona, COP, 7.2s, 4/1/12 BBB/P 1,011,250
Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp. Project)
1,800,000 8 3/4s, 12/1/16 BBB 1,932,750
1,995,000 8 1/2s, 12/1/21 BBB/P 2,167,069
2,800,000 8 1/4s, 12/1/14 BBB/P 2,968,000
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev. Bonds
8 1/2s, 6/1/05 BBB 1,128,750
1,365,000 Tucson & Pima Cntys., Indl. Dev. Auths. Single Fam.
Mtge. Rev. Bonds, 9 3/8s, 2/1/14 BB 1,405,950
6,750,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 7,762,500
3,000,000 Tucson, G.O. Bonds, Ser. A, 5 3/8s, 7/1/20 AA 2,853,750
910,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), 7.4s, 7/1/26 AAA 956,638
1,500,000 Tucson, Street & Hwy. User Rev. Bonds
Ser. B, 9 1/4s, 7/1/05 A 1,993,125
Tucson, Wtr. Rev. Bonds
300,000 Ser. D, FGIC, 9 3/4s, 7/1/10 AAA 430,500
1,500,000 6 1/2s, 7/1/16 A 1,575,000
1,000,000 U. of AZ, COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A 1,060,000
1,450,000 U. of AZ, Med. Ctr. Corp. Hosp., Rev. Bonds
MBIA, 6 7/8s, 7/1/21 AAA 1,640,313
U. of AZ, Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,112,500
1,000,000 6 1/4s, 6/1/11 AA 1,042,500
1,475,000 U. of Arizona Medical Ctr. MBIA, 5s, 7/1/21 AAA 1,333,031
------------
$139,782,421
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS<F2> VALUE
PUERTO RICO (8.4%)
- --------------------------------------------------------------------------------------------
$2,500,000 Cmnwlth. of Puerto Rico, Aqueduct & Swr.
Auth. Rev. Bonds, Ser. A, 7 7/8s, 7/1/16 Baa $ 2,746,875
Cmnwlth. of Puerto Rico, Hwy. & Trans. Auth.
Rev. Bonds, Ser. X,
2,500,000 5 1/4s, 7/1/21 A 2,262,500
1,000,000 5s, 7/1/22 A 870,000
2,000,000 PR Cmnwlth. G. O. Bonds, AMBAC, 5 1/2s, 7/1/13 AAA 1,985,000
1,375,000 PR Pub. Bldgs. Auth., Gtd. Edl. & Hlth. Fac. Prerefunded
Rev. Bonds, Ser. H, 7 7/8s, 7/1/16 AAA 1,505,622
2,000,000 Puerto Rico, Hsg. Fin. Corp. Single Fam. Mtge. IFB
GNMA, 8.585s, 8/4/25 AAA 2,155,000
1,500,000 Puerto Rico, Pub. Bldg. Auth. Gtd. Ed. & Hlth. Fac.
Prerefunded Rev. Bonds, Ser. L, 6 7/8s, 7/1/21 AAA 1,730,625
$ 13,255,622
------------
TOTAL INVESTMENTS (cost $145,934,549) <F3> $153,038,043
- --------------------------------------------------------------------------------------------
<FN>
<F1> Percentages indicated are based on net assets of $158,136,683, which corresponds to a
net asset value per class A and class B share of $9.01 and $9.00 respectively.
<F2> The Moody's or Standard & Poor's ratings indicated are believed to be the most recent
ratings available at May 31, 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 May 31,
1995. Securities rated by Putnam are indicated by "/P" and are not publicly rated.
Ratings are not covered by the Report of Independent Accountants.
<F3> The aggregate identified cost for federal income tax purposes is $145,939,279,
resulting in gross unrealized appreciation and depreciation of $7,683,400 and $584,636,
respectively, or net unrealized appreciation of $7,098,764.
<F4> Restricted as to public resale. At the date of acquisition these securities were valued
at cost. There were no outstanding securities of the same class as those held. Total
market value of restricted securities owned at May 31, 1995 was $3,011,250 or 2.0% of
net assets.
<PAGE>
The fund had the following insurance concentrations greater than 10% of net assets at
May 31, 1995.
MBIA 14.9%
The fund had the following industry group concentrations greater than 10% of net assets
at May 31, 1995.
Hospitals/Health Care 21.0%
Utilities 12.7
Water & Sewerage 11.4
The rates shown on VRDNs and IFBs, which are securities paying variable interest rates
that vary inversely to changes in the market interest rates, are the current interest
rates at May 31, 1995, which are subject to change based on the terms of the security.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1995
ASSETS
- -------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value
(identified cost $145,934,549) (Note 1) $153,038,043
- -------------------------------------------------------------------------------
Cash 101,255
- -------------------------------------------------------------------------------
Interest receivable 3,824,399
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 436,245
- -------------------------------------------------------------------------------
Receivable for securities sold 4,618,748
- -------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 8,331
- -------------------------------------------------------------------------------
TOTAL ASSETS 162,027,021
LIABILITIES
- -------------------------------------------------------------------------------
Distributions payable to shareholders 207,887
- -------------------------------------------------------------------------------
Payable for securities purchased 2,922,125
- -------------------------------------------------------------------------------
Payable for written call options closed 216,000
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 186,390
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 234,320
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 159
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 24,786
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,496
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 60,299
- -------------------------------------------------------------------------------
Other accrued expenses 36,876
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 3,890,338
- -------------------------------------------------------------------------------
NET ASSETS $158,136,683
REPRESENTED BY
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $157,268,516
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 106,796
- -------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions,
futures contracts and written options (Note 1) (6,342,123)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,103,494
- -------------------------------------------------------------------------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES
OUTSTANDING $158,136,683
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- -------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($136,598,193 divided by 15,166,568 shares) $9.01
- -------------------------------------------------------------------------------
Offering price per share (100/95.25 of $9.01)* $9.46
- -------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($21,538,490 divided by 2,394,416 shares)+ $9.00
- -------------------------------------------------------------------------------
*On single retail sales of less than $25,000. On sales of $25,000 or more and
on group sales the offering price is reduced.
+Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
Nine months ended May 31, 1995
- -------------------------------------------------------------------------------
TAX EXEMPT INTEREST INCOME $7,790,831
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 683,508
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 52,454
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,981
- -------------------------------------------------------------------------------
Reports to shareholders 37,095
- -------------------------------------------------------------------------------
Auditing 16,475
- -------------------------------------------------------------------------------
Legal 18,415
- -------------------------------------------------------------------------------
Administrative services (Note 2) 6,233
- -------------------------------------------------------------------------------
Postage 6,326
- -------------------------------------------------------------------------------
Registration fees 3,271
- -------------------------------------------------------------------------------
Distribution Fees (Note 2)
- -------------------------------------------------------------------------------
Class A 199,364
- -------------------------------------------------------------------------------
Class B 114,668
- -------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 7,892
- -------------------------------------------------------------------------------
Other 4,065
- -------------------------------------------------------------------------------
TOTAL EXPENSES 1,155,747
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 6,635,084
- -------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (3,272,033)
- -------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (673,978)
- -------------------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (33,026)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 6,447,029
- -------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 2,467,992
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $9,103,076
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
MAY 31 AUGUST 31
1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
- ----------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------
Net investment income $ 6,635,084 $ 8,770,368
- ----------------------------------------------------------------------------------------
Net realized loss on investments, written options,
and futures contracts (3,979,037) (1,813,591)
- ----------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 6,447,029 (9,114,262)
- ----------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 9,103,076 (2,157,485)
- ----------------------------------------------------------------------------------------
Distributions to shareholders from:
- ----------------------------------------------------------------------------------------
Net investment income
- ----------------------------------------------------------------------------------------
Class A (5,840,450) (8,146,391)
- ----------------------------------------------------------------------------------------
Class B (700,347) (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) (3,622,742) 22,235,036
- ----------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,060,463) 10,919,678
NET ASSETS
- ----------------------------------------------------------------------------------------
Beginning of period 159,197,146 148,277,468
- ----------------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment
income and distributions in excess of net investment
income of $106,796 and $(5,215), respectively) $158,136,683 $159,197,146
- ----------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the year)
<TABLE>
<CAPTION>
FOR THE FOR THE PERIOD FOR THE FOR THE PERIOD
NINE JULY 15, 1993 NINE JANUARY 30, 1991
MONTHS (COMMENCEMENT MONTHS (COMMENCEMENT OF
ENDED YEAR ENDED OF OPERATIONS) ENDED OPERATIONS) TO
MAY 31 AUGUST 31 TO AUGUST 31 MAY 31 YEAR ENDED AUGUST 31 AUGUST 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995<F1> 1994 1993 1995<F1> 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $8.83 $9.47 $9.39 $8.84 $9.47 $9.07 $8.66 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .34 .45 .11 .38 .51 .54<F2> .57<F2> .33<F2>
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.61) .03 .17 (.61) .47 .42 .16
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .51 (.16) .14 .55 (.10) 1.01 .99 .49
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (.34) (.45) (.06) (.38) (.50) (.55) (.57) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- -- -- -- -- (.06) (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- (.03) -- -- (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.34) (.48) (.06) (.38) (.53) (.61) (.58) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.00 $8.83 $9.47 $9.01 $8.84 $9.47 $9.07 $8.66
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) <F3> 5.99<F4> (1.80) 1.45<F4> 6.45<F4> (1.07) 11.54 11.85 5.84<F4>
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $21,538 $16,247 $2,974 $136,598 $142,950 $145,304 $88,566 $46,902
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average
net assets (%) 1.19<F4> 1.60 .19<F4> .70<F4> .97 .89 .58<F2> .16<F2><F4>
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.89<F4> 4.82 .43<F4> 4.42<F4> 5.55 5.82 6.34<F2> 3.91<F2><F4>
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.48<F4> 34.68 5.72 51.48<F4> 34.68 5.72 31.84 12.46<F4>
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> The fiscal year end has advanced from August 31 to May 31.
<F2> 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.
<F3> Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
<F4> Not annualized.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
May 31, 1995
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 Investment Management, Inc., ("Putnam Management") the
fund's manager, a wholly owned subsidiary of Putnam Investments, Inc., believes
is consistent with preservation of capital by investing primarily in a portfolio
of Arizona tax exempt securities.
The fund offers both class A and class B shares. 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. 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 FUTURES The fund may purchase and sell financial futures contracts to hedge
against changes in the values of tax-exempt municipal securities the fund owns
or expects to purchase.
A futures contract is an agreement between two parties to buy or sell units of a
particular index or a certain amount of a U.S. Government security at a set
price on a future date.
Upon entering into such a contract the fund is required to pledge to the broker
an amount of cash or securities equal to the minimum "initial margin"
requirements of the futures. Pursuant to the contract, the fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
"variation margin"
<PAGE>
and are recorded by the fund as unrealized gains or losses. 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.
The potential risk to the fund is that the change in value of futures contracts
primarily corresponds with the value of underlying instruments which may not
correspond to the change in value of the hedged instruments. In addition, there
is a risk that the fund may not be able to close out its futures positions due
to an illiquid secondary market.
D OPTION ACCOUNTING PRINCIPLES The fund may, to the extent consistent with its
investment objective and policies, seek to increase its current returns by
writing covered call and put options on securities it owns or in 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 an 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 option 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 closing purchase
transaction exceeds the premium received when the option was written) without
regard to an 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. If a written put option is exercised, the amount of 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.
The 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. The fund may buy call options to
hedge against an increase in the price of the 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
<PAGE>
decreased by the premium originally paid. The risk associated with purchasing
options is limited to the premium originally paid.
E FEDERAL TAXES It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid imposition
of any excise tax under Section 4982 of the Internal Revenue Code of 1986.
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. At May 31, 1995 the fund had a capital loss carryover of
approximately $1,952,000 which may be available to offset future realized
capital gains to the extent provided by regulations. This amount will expire on
May 31, 2003.
F 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. These differences include the treatment of post-October
losses, dividends payable, loss deferrals and market discount. Reclassifications
are made to the fund's capital accounts at the close of the fund's fiscal year
to reflect income and gains available for distribution (or available capital
loss carryovers) under income tax regulations.
For the nine months ended May 31, 1995, the fund reclassified $17,724 to
increase undistributed net investment income, $10,332 to increase accumulated
net realized losses, and $7,392 to decrease paid-in-capital.
G AMORTIZATION OF BOND PREMIUM AND ACCRETION OF BOND DISCOUNT Any premium
resulting from the purchase of securities in excess of maturity value is
amortized using the yield to maturity 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.
H UNAMORTIZED ORGANIZATION EXPENSES Expenses incurred by the fund in connection
with its organization, its registration with the Securities and 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 Management 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 any excess over $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.
<PAGE>
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. The aggregate amount of all such reimbursements is
determined annually by the Trustees.
Trustees of the fund receive an annual Trustee's fee of $700 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 nine months ended May 31, 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 .20% and 0.85%
of the average net assets attributable to class A and class B shares
respectively.
For the nine months ended May 31, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $15,552 from the sale of class A shares
and $48,101 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 as part of an investment of $1 million or more. For
the nine months ended May 31, 1995, Putnam Mutual Funds Corp., acting as
underwriter received $200 on class A redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the nine months ended May 31, 1995, purchases and sales of investment
securities other than short-term municipal obligations aggregated $76,308,763,
and $83,714,164, respectively. Purchases and sales of short-term municipal
obligations aggregated $11,800,000 and $13,700,000 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 nine months
ended May 31, 1995.
CONTRACT PREMIUMS
AMOUNTS RECEIVED
- ----------------------------------------------------------------------------
Contracts outstanding at beginning of period -- $ --
Options opened 18,700,016 379,229
Options expired 18,700,016 379,229
Options closed -- --
- ----------------------------------------------------------------------------
WRITTEN OPTIONS OUTSTANDING AT END OF PERIOD -- $ --
- ----------------------------------------------------------------------------
<PAGE>
NOTE 4
CAPITAL SHARES
At May 31, 1995, there was an unlimited number of shares of beneficial interest
authorized, divided into two classes, class A and class B capital stock.
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31 YEAR ENDED AUGUST 31
--------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,316,331 $11,401,930 3,092,943 $28,751,671
Shares issued in connection
with reinvestment of
distributions 309,532 2,664,890 464,189 4,269,836
- ----------------------------------------------------------------------------------
1,625,863 14,066,820 3,557,132 33,021,507
Shares repurchased (2,631,078) (22,501,834) (2,730,191) (24,893,724)
- ----------------------------------------------------------------------------------
NET INCREASE (DECREASE) (1,005,215) $(8,435,014) 826,941 $ 8,127,783
- ----------------------------------------------------------------------------------
NINE MONTHS ENDED MAY 31 YEAR ENDED AUGUST 31
--------------------------------------------------
1995 1994
- ----------------------------------------------------------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------
Shares sold 733,286 $6,313,926 1,640,165 $15,144,133
Shares issued in connection
with reinvestment of
distributions 41,782 360,443 31,774 288,584
- ----------------------------------------------------------------------------------
775,068 6,674,369 1,671,939 15,432,717
Shares repurchased (219,915) (1,862,097) (146,633) (1,325,464)
- ----------------------------------------------------------------------------------
NET INCREASE 555,153 $4,812,272 1,525,306 $14,107,253
- ----------------------------------------------------------------------------------
</TABLE>
TAX INFORMATION
The fund has designated all dividends paid during the fiscal period as
exempt-interest dividends. Thus, 100% of the fund's distributions are exempt
from federal income tax. For residents of Arizona, 100% of the fund's
distributions are also exempt from Arizona state income tax. The Form 1099 you
receive in January 1996 will show the tax status of any taxable distributions
paid to your account in calendar 1995.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER OFFICERS
Putnam Investment George Putnam
Management, Inc. President
One Post Office Square
Boston, MA 02109 Charles E. Porter
Executive Vice President
MARKETING SERVICES
Putnam Mutual Funds Corp. Patricia C. Flaherty
One Post Office Square Senior Vice President
Boston, MA 02109
John R. Verani
CUSTODIAN Vice President
Putnam Fiduciary Trust Company
Lawrence J. Lasser
LEGAL COUNSEL Vice President
Ropes & Gray
Gordon H. Silver
INDEPENDENT ACCOUNTANTS Vice President
Coopers & Lybrand L.L.P.
Gary N. Coburn
TRUSTEES Vice President
George Putnam, Chairman
James E. Erickson
William F. Pounds, Vice Chairman Vice President
Jameson Adkins Baxter Howard K. Manning
Vice President and Fund Manager
Hans H. Estin
William N. Shiebler
John A. Hill Vice President
Elizabeth T. Kennan Paul M. O'Neil
Vice President
Lawrence J. Lasser
John D. Hughes
Robert E. Patterson Vice President and Treasurer
Donald S. Perkins Beverly Marcus
Clerk and Assistant Treasurer
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
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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[LOGO: PUTNAM INVESTMENTS] ------------
Bulk Rate
THE PUTNAM FUNDS U.S. Postage
One Post Office Square PAID
Boston, Massachusetts 02109 Putnam
Investments
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18988-855/235
