Putnam
Arizona
Tax Exempt
Income
Fund
ANNUAL REPORT
May 31, 1996
{LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "The many shareholders who are reinvesting their dividends have been
enjoying quite a buying opportunity lately. By reinvesting, they are
taking advantage of currently lower share prices, adding more shares to
their accounts than would have been possible during 1995's rally. They
are also in a better position to benefit from any rise in the bond
market. And with the highly favorable fundamentals of the Arizona
municipal market combined with receding flat-tax fears, we believe an
investment in Putnam Arizona Tax Exempt Income Fund is a sound one
indeed."
-- Howard Manning, Fund Manager
* "In recent years, the fund's returns have been in line with the
average Arizona fund, while its yield has been impressive. It is worth
consideration by Arizona investors seeking tax-free income."
-- Value Line Mutual Fund Survey, March 19, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
17 Financial statements
From the Chairman
(copyright) Karsh, Ottawa
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
Dear Shareholder:
One of the fascinating things about market watching is that you can
never tell what's going to trigger a defining event. Often what seems
like a defining event one moment is history the next. Who would have
guessed, for example, that a flat-tax proposal would swirl out of the
presidential primary election campaign to douse the municipal bond
market, only to blow away just as the rest of the bond market was
stumbling on statistics suggesting that inflation might flare up?
These were some of the challenges facing Fund Manager Howard Manning
during Putnam Arizona Tax Exempt Income Fund's fiscal year, which ended
May 31, 1996. Howard handled them with his usual aplomb as the results
on the following pages reveal.
Besides having the luxury of leaving the day-to-day details to Howard,
shareholders with a long-term investment perspective have the added
advantage of being able to let such events run their course without
undue concern.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Manager
Howard K. Manning
Like most other fixed-income investments, Putnam Arizona Tax Exempt
Income Fund began fiscal 1996 on a positive note. The Federal Reserve
Board had stopped raising interest rates, the inflation outlook was
benign, and the economy appeared headed for a much-desired "soft
landing." The beginning of fiscal 1997, however, presents a much less
hospitable environment. Over the past few months, evidence of stronger-
deflating bond prices in virtually every sector of the fixed-income
universe. Fortunately the prices of tax-exempt bonds have fared better
than those of taxables since the beginning of the year mainly because of
receding flat-tax fears. In fact, since December 1995, municipal yields
have fallen from approximately 89% of comparable Treasury bonds to 83%
as of late May.
By emphasizing bonds that we believe are the most structurally favorable
given current market condition and by selecting issues that stand to
benefit from a stronger state economy, we have been able to keep your
fund's losses to a minimum. The fund closed fiscal 1996 with a total
return of 3.38% at net asset value and -1.54% at public offering price.
Results for class B and class M shares can be found on pages 9 and 10 of
this report.
* DURATION MANAGEMENT AND BOND STRUCTURE PLAY VITAL ROLES
Throughout the fiscal year, we have carefully and consistently managed
your fund's duration to reflect interest-rate trends and the market's
changing mood. Duration, as you may know, is a measure of the
portfolio's price sensitivity to interest-rate changes. Typically a bond
fund with longer duration offers greater price appreciation potential
when rates are declining than a fund with shorter duration. The reverse
holds true in a rising-rate environment.
Since interest rates were on the decline for the greater part of the
fiscal year, we kept the portfolio's duration substantially longer than
did many competing municipal bond funds, allowing the fund to
participate fully in the broad market's rally. We accomplished this by
emphasizing long-term securities that were not likely to be called away
by their issuers in the low interest-rate environment, such as discount-
coupon bonds -- those selling at prices below par value -- and zero-
coupon bonds. This aggressive approach proved quite effective for the
first three quarters of the fiscal year.
The recent backup in interest rates and the market's turbulence,
however, have prompted us to take a more defensive stance. To enhance
the stability of the fund's net asset value, we have further heightened
our attention to managing the duration. In fact, throughout the past
four months, the duration has vacillated between 6.5 and 9 years as we
sought to trade out of bonds whose coupon, maturity, or market
characteristics are not conducive to the current environment. Instead we
purchased municipal securities that we believe offer a better balance of
income and market risk.
For example, we have aggressively removed from the portfolio many
longer-maturity discount-coupon bonds and redeployed assets into
noncallable intermediate-term bonds. The scarcity of bonds in the
Arizona municipal market makes the noncallable aspect of these bonds
particularly important to us, even though investing in noncallable bonds
is usually a lower priority in rising-rate environments. Because the
market characteristics of these bonds are simply too compelling to
ignore, we have offset their slightly long durations by employing the
use of financial futures, contracts based on an underlying debt
instrument, such as Treasury bonds. This, in turn, helps us to keep the
fund's effective duration relatively short without requiring us to
deplete the portfolio of bonds that otherwise meet our structural
criteria. By period's end, nearly half of the portfolio's net assets
were invested in bonds with effective maturities ranging from 10 to 20
years.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS*]
Utilities 14.4%
Hospitals/health care 13.6%
Transportation 10.1%
Housing 7.9%
Water/sewerage 6.8%
Footnote reads:
*Based on net assets as of 5/31/96. Holdings will vary over time.
Simultaneously, we have increased the fund's position in premium-coupon
bonds, which sell at prices above par value. Because the prices of
premium-coupon bonds tend to be less sensitive to interest-rate
fluctuations than discount-coupon bonds, they add an element of
stability to the portfolio.
* PORTFOLIO REMAINS WELL DIVERSIFIED AS POCKETS OF EMPHASIS EMERGE
Throughout the year, we have kept the fund's portfolio well diversified
across the different sectors of the Arizona municipal bond market.
Housing, water and sewer, utilities, transportation, and airport issues
have all been well represented. Because of the state's robust economy
and the positive changes occurring in health care, however, two pockets
of emphasis had emerged by period's end. Uninsured hospital bonds and
political subdivision bonds (also known as general obligation issues
backed by the full faith, credit, and taxing authority of Arizona
municipalities) comprised a significant portion of the fund's net
assets.
The health-care sector as a whole has benefited from consolidation and
improved efficiency. In fact, thus far in 1996, health-care bonds have
outperformed all others in the national municipal market, and several of
the fund's uninsured hospital holdings -- Casa Grande Regional Medical
Center and Sierra Vista Community Hospital, for example -- have taken
their place in the sun. Rated BB+, Baa, and Baa, respectively, these
bonds also feature structurally favorable defensive characteristics,
including coupons of 8% and more; prices above par value, which make
them less sensitive to interest-rate changes; and a high probability of
prerefunding because of the issuers' improved creditworthiness.
Should prerefunding occur, the bonds' credit ratings would rise to the
highest level in the investment-grade spectrum, AAA, which in turn would
likely boost their prices. The solid performance of these bonds and
their promising market positions are evidence of Putnam's ability to
identify effectively solid long-term prospects in a credit-sensitive
part of the market. While these holdings and others discussed in this
report were viewed favorably on May 31, 1996, all are subject to review
and adjustment in accordance with the fund's investment strategy and may
well vary in the future.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW*]
A 10.5%
Aa 31.5%
Aaa 41.7%
Ba 5.2%
Baa 9.9%
VMIGI 1.2%
Footnote reads:
*As a percentage of net asset value as of 5/31/96. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
descriptions unless noted otherwise and may include unrated bonds judged
by Putnam management to be of comparable quality. Portfolio quality will
vary over time.
The strength of the Phoenix, Tucson, Sedona, and Flagstaff economies has
become increasingly recognized by the marketplace as well. As a result,
these cities' general obligation (GO) bonds -- many of which are held in
the fund's portfolio -- have gained favor, appreciating in price and
supporting the fund's net asset value during the market's recent unease.
We intend to continue our search for attractively structured uninsured
GOs as the state's economy grows. We believe the strength of Putnam's
credit research should help steer us toward additional opportunities.
* NEAR-TERM OUTLOOK REMAINS CAUTIOUS
As the fund enters fiscal 1997, we anticipate that conditions for
investing in fixed-income securities will remain challenging. That being
so, we expect to continue our cautious approach to the market, seeking
out only those bonds that can enhance the price stability and liquidity
of the portfolio and can benefit from current market dynamics while
allowing the fund sufficient flexibility to maneuver should the market
change direction.
The present turbulence notwithstanding, we are optimistic about the
total return potential of Arizona state bonds. The market's fundamentals
remain strong: demand for the state's municipal securities has not
abated, while supply remains constrained, thereby lending continued
price support. Furthermore, the state's economy is on a healthy track.
As the prospect of near-term passage of the flat tax diminishes, we
still consider that municipal bond returns could continue to outpace
those of taxables in the months ahead.
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 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
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.
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 in the fund.
TOTAL RETURN FOR PERIODS ENDED 5/31/96
Class A Class B Class M
(inception date) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 3.38% -1.54% 2.60% -2.30% -- --
- ------------------------------------------------------------------------
5 years 39.21 32.59 -- -- -- --
Annual average 6.84 5.80 -- -- -- --
- ------------------------------------------------------------------------
Life of class 43.76 37.00 8.35 5.54 4.44% 1.02%
Annual average 7.03 6.07 2.82 1.89 -- --
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
1 year 4.57% 2.89%
- ------------------------------------------------------------------------
5 years 41.06 15.49
Annual average 7.12 2.92
- ------------------------------------------------------------------------
Life of class A 45.52 16.34
Annual average 7.29 2.88
- ------------------------------------------------------------------------
Life of class B 12.69 8.45
Annual average 4.31 2.86
- ------------------------------------------------------------------------
Life of class M 5.98 2.69
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and principal value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost. POP assumes 4.75% maximum sales charge for class A shares
and 3.25% for class M shares. CDSC for class B shares assumes 5% maximum
contingent deferred sales charge, declining from 5% to 1% in the sixth
year and eliminated thereafter.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
Cumulative total return of a $10,000 investment since 1/30/91
Starting value (Insert ending Total)
$9,525 Fund's class A shares at POP $13,700
$10,000 Lehman Bros. Municipal Bond Index $14,552
$10,000 Consumer Price Index $11,634
(plot points for 10-year total return mountain chart)
Lehman Bros.
Date/year Fund at POP Muni Bond Index CPI
1/31/91 9,525 10,000 10,000
5/31/91 9,841 10,316 10,074
5/31/92 10,851 11,329 10,379
5/31/93 12,128 12,685 10,713
5/31/94 12,313 12,998 10,958
5/31/95 13,251 13,916 11,308
5/31/96 13,700 14,552 11,634
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 $10,835 on 5/31/96 ($10,554 with a redemption at the end of the period).
A $10,000 investment in the fund's class M shares at inception on 7/3/95
would have been valued at $10,444 at net asset value on 5/31/96 ($10,102
at public offering price).
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 5.68% 0.68% 5.01% 0.01% -- --
- ------------------------------------------------------------------------
5 years 40.85 34.10 -- -- -- --
Annual average 7.09 6.04 -- -- -- --
- ------------------------------------------------------------------------
Life of class 45.14 38.32 9.48 6.64 5.42% 1.97%
Annual average 7.12 6.17 3.11 2.20 -- --
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns
and principal value will fluctuate so that an investor's shares, when
sold, may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/96
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 12 12 11
- ------------------------------------------------------------------------
Income $0.471083 $0.412648 $0.402193
- ------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------
Total $0.471083 $0.412648 $0.402193
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
5/31/95 $9.01 $9.46 $9.00 -- --
- ------------------------------------------------------------------------
7/3/95 -- -- -- $8.86 $9.16
- ------------------------------------------------------------------------
5/31/96 8.84 9.28 8.82 8.85 9.15
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate2 5.12% 4.88% 4.47% 4.83% 4.67%
- ------------------------------------------------------------------------
Taxable equivalent3 8.98 8.56 7.84 8.47 8.19
- ------------------------------------------------------------------------
Current 30-day SEC yield4 4.85 4.62 4.20 4.54 4.39
- ------------------------------------------------------------------------
Taxable equivalent3 8.51 8.10 7.37 7.96 7.70
- ------------------------------------------------------------------------
1Capital gains 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.
2Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3Assumes maximum 42.98% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4Based only on investment income, calculated using SEC guidelines.
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.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
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 and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's 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. It is not possible
to invest directly in an index.
Consumer Price Index (CPI ) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the Fiscal Year Ended May 31, 1996
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, 1996, and the related statement of
operations for the year then ended, the statements of changes in net
assets for the year then ended and for the nine month period ended May
31, 1995, 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, 1996, by correspondence
with the custodian. 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 Income Fund as of May
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for the year then ended and for the nine month
period ended May 31, 1995 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 12, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1996
AMBAC - AMBAC Indemnity Corporation
FGIC - Financial Guaranty Insurance Company
FHA Insd. - Federal Housing Administration Insured
G.O. Bonds - General Obligation Bonds
IFB - Inverse Floating Rate Bonds
MBIA - Municipal Bond Investors Assurance Corporation
VRDN - Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (96.0%)*
PRINCIPAL AMOUNT RATING VALUE
<S> <C> <C> <C> <C>
Arizona (81.5%)
- ------------------------------------------------------------------------------------------------------------------------
$1,000,000 AZ Edl. Loan. Marketing Corp. VRDN, Ser. A, 3.7s, 12/1/20 VMIG1 $1,000,000
1,975,000 AZ State Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds (Phoenix Mem. Hosp.),
8.2s, 6/1/21 BBB 2,120,656
1,500,000 AZ State Student Loan Acquisition Auth. Rev. Bonds, Ser. B, 6.6s, 5/1/10 Aa 1,561,875
AZ State Trans. Board Hwy. Rev. Bonds, Ser. A
2,500,000 6 1/2s, 7/1/11 Aaa 2,731,250
5,000,000 5s, 7/1/09 Aa 4,812,500
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,792,563
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,364,000
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s, 7/1/14# Aaa 2,717,063
750,000 Cochise Cnty., Unified School Dist. No. 68 Rev. Bonds, FGIC, 7 1/2s, 7/1/09 Aaa 880,313
3,880,000 Gila Cnty., Indl. Dev. Auth. Poll. Ctrl. Rev. Bonds (Asarco Inc. Project), Ser.
85, 8.9s, 7/1/06 Baa 4,133,907
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC, 6 1/2s, 7/1/22 Aaa 1,052,500
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds, 7 1/8s, 7/1/20 AAA 1,106,250
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac. Rev. Bonds
(Samaritan Hlth. Svcs.), Ser. A, MBIA, 7s, 12/1/16 Aaa 3,981,250
700,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac. VRDN
(Samaritan Hlth. Svc. Hosp.-B2), MBIA, 2.8s, 12/1/08 VMIG1 700,000
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg. Rev. Bonds (Laguna
Point Apt. Project), 6 3/4s, 7/1/19 A 2,713,388
1,685,000 Maricopa Cnty., Indl. Dev. Auth. Single Fam. Mtge. Rev. Bonds, Ser. A,
7 1/2s, 8/1/12 Aa 1,777,675
2,000,000 Maricopa Cnty., School Dist. No. 28, Rev. Bonds (Kyrene Elem.), Ser. C,
FGIC, zero %, 1/1/11 Aaa 847,500
1,500,000 Maricopa Cnty., School Dist. No. 11, Rev. Bonds (Peoria Unified),
MBIA, 6.4s, 7/1/10 Aaa 1,573,125
2,875,000 Maricopa Cnty., School Dist. No. 4, Rev. Bonds (Mesa U.) Ser. B,
FGIC, 5s, 7/1/12 Aaa 2,670,156
3,000,000 Maricopa Cnty., Unified School Dist. No. 69 Rev. Bonds (Paradise
Valley Project), Ser. B, MBIA, 5 1/4s, 7/1/15 Aaa 2,801,250
Maricopa Cnty., Unified School Dist. No. 80 Rev. Bonds (Chandler), MBIA
500,000 zero %, 7/1/11 Aaa 205,625
1,000,000 zero %, 7/1/09 Aaa 471,250
1,465,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge. Rev. Bonds (Coopers
Ridge Apts.), FHA insd., 7 3/8s, 4/1/32 Aaa 1,560,225
1,000,000 Mohave Cnty., Indl. Dev. Auth. Hosp. Syst. Rev. Bonds, (Baptist
Hosp.), MBIA, 5 1/2s, 9/1/21 Aaa 936,250
1,000,000 Oro Valley, Muni. Property Corp. Rev Bonds (Muni Wtr. Syst.),
MBIA, 5 3/8s, 7/1/26 Aaa 920,000
1,000,000 Phoenix, Civic Impt. Corp. Wastewater Syst. Lease Rev. Bonds,
6 1/8s, 7/1/23 AAA 1,086,250
Phoenix G.O. Bonds
1,000,000 6 3/8s, 7/1/13 Aa 1,040,000
6,850,000 5.4s, 7/1/07 Aa 6,918,500
4,000,000 5s, 7/1/19 Aa 3,510,000
1,600,000 Phoenix Hsg. Fin. Corp. Mtg. Rev. Bonds, Ser. A, MBIA, 6.9s, 1/1/23 Aaa 1,646,000
2,150,000 Phoenix, Indl. Dev. Auth. Mtge. Rev. Bonds (Chris Ridge Village Project),
FHA insd., 6.8s, 11/1/25 AAA 2,203,750
945,000 Phoenix, Indl. Dev. Rev. Bonds (Christian Care Retirement Apts.),
Ser. A, 10 1/4s, 1/1/18 AA/P 1,024,140
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds, FGIC, 7 1/2s, 7/1/08 Aaa 1,182,500
2,000,000 Pinal Cnty. COP, 6 1/2s, 6/1/09 AA 2,070,000
2,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds (Casa Grande Regl. Med. Ctr.),
Ser. A, 8 1/8s, 12/1/22 BB/P 2,107,500
3,000,000 Salt River, Project Agric. Impt. & Pwr. Dist. Elec. Syst. IFB, 7.382s,
1/1/19 (acquired 3/16/93, cost $ 3,015,719)(double dagger) Aa 2,835,000
Salt River, Project Agric. Impt. & Pwr. Dist. Elec. Syst. Rev. Bonds
4,750,000 Ser. D, 6s, 1/1/09 Aa 4,987,500
6,450,000 Ser. A, 5 3/4s, 1/1/07 Aa 6,683,813
2,000,000 Ser. A, 5 5/8s, 1/1/06 Aa 2,057,500
4,400,000 Scottsdale G.O. Bonds, 5s, 7/1/15 Aa 3,971,000
4,000,000 Scottsdale Indl. Dev. Auth. Rev. Bonds (First Mtge. Westminster
Village), Ser. A, 8 1/4s, 6/1/15 BB/P 4,270,000
1,000,000 Sedona, COP, 7.2s, 4/1/12 BBB/P 1,031,250
Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds (Sierra Vista
Cmnty. Hosp. Project
1,800,000 8 3/4s, 12/1/16 BBB/P 1,937,250
1,995,000 8 1/2s, 12/1/21 BBB/P 2,189,513
2,745,000 8 1/4s, 12/1/14 BBB/P 3,002,344
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev. Bonds, 8 1/2s, 6/1/05 BB/P 1,105,000
1,630,000 Tempe, G.O. Bonds, 4 1/2s, 7/1/15 Aa 1,363,088
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds (Lockheed Aermod
Ctr. Inc.), 8.7s, 9/1/19 A 4,540,000
900,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds (La Entrada),
FHA Insd., 7.4s, 7/1/26 AAA 933,750
Tucson, St. & Hwy. User Rev. Bonds
3,765,000 6s, 7/1/10 Aaa 3,953,250
2,300,000 Ser. 1994-B, MBIA, 5 1/2s, 7/1/16 Aaa 2,199,375
2,200,000 Ser. A, MBIA, 5s, 7/1/15 Aaa 1,999,250
1,000,000 U. of AZ COP (Telecommunications Syst.), 6 1/2s, 7/15/12 A 1,045,000
1,000,000 U. of AZ Rev. Bonds, Ser. B, 6.9s, 6/1/16 AAA/P 1,097,500
1,000,000 U. of AZ Rev. Bonds, 6 1/4s, 6/1/11 AA 1,031,250
1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds, MBIA, 6 7/8s, 7/1/21 Aaa 1,613,125
------------
123,064,969
Puerto Rico (14.5%)
- ------------------------------------------------------------------------------------------------------------------------
Cmnwlth. of PR, Aqueduct & Swr. Auth. Rev. Bonds
2,500,000 Ser. A, 7 7/8s, 7/1/17 AAA 2,728,125
2,750,000 MBIA, 6s, 7/1/07 Aaa 2,901,250
3,800,000 PR Elect. Pwr. Auth. Rev. Bonds, Ser. Z, 5 1/2s, 7/1/13 A 3,643,250
PR Hwy. & Trans. Auth. Rev. Bonds
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,062,500
1,900,000 Ser. Y, 5 1/2s, 7/1/26 A 1,738,500
1,800,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. Z, 5 1/4s, 7/1/21 A 1,597,500
PR Pub. Bldgs. Auth. Gtd. Ed. & Hlth. Fac. Rev. Bonds
1,375,000 Ser. H, 7 7/8s, 7/1/16 Aaa 1,460,429
1,500,000 Ser. L, 6 7/8s, 7/1/21 Aaa 1,678,125
5,000,000 Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 5,100,000
21,909,679
- ------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $144,227,408) $144,974,648
- ------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $ 151,059,126.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most
recent ratings available at May 31, 1996 for the securities listed. Ratings are generally ascribed
to securities at the time of issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated do not necessarily represent
what the agencies would ascribe to these securities at May 31, 1996. Securities rated by Putnam are
indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of Independent
Accountants.
(double dagger) Restricted, excluding 144A securities, as to public resale. The total market
value of restricted securities held at May 31, 1996 was $ 2,835,000. There were no outstanding unrestricted
securities of the same class as those held.
# A portion of this security was pledged and segregated with a custodian to cover
margin requirements for futures contracts at May 31, 1996. The market value of the segregated
security with the custodian for transactions on futures contracts is $2,717,063 or 1.8% of net assets.
*** The aggregate identified cost on a tax basis is $144,230.932, resulting in gross
unrealized appreciation and depreciation of $3,787.873 and $3,044.157, respectively,
or net unrealized appreciation of $743.716.
The rates shown on IFB, which are securities paying interest rates that vary inversely
to changes in the market interest rates, are the current rates at May 31, 1996.
The fund had the following industry group concentrations greater than 10% on May 31, 1996
(as a percentage of net assets):
Utilities 14.4%
Hospitals/Health Care 13.6
Transportation 10.1
The fund had the following insurance concentration greater than 10% at May 31, 1996 (as a
percentage of net assets):
MBIA 14.6%
<CAPTION>
- -----------------------------------------------------------------------------
Future Contracts Outstanding at May 31, 1996
Total Aggregate Face Expiration Unrealized
Value Value Date Appreciation
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UST Bonds (Short) $3,225,937 $3,225,937 Sept. 96 --
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1996
<S> <C>
Assets
Investments in securities, at value (identified cost $144,227,408 (Note 1) $144,974,648
- ----------------------------------------------------------------------------------------------------------------------
Cash 130,662
- ----------------------------------------------------------------------------------------------------------------------
Interest receivable 3,623,554
- ----------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 327,911
- ----------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 2,797,599
- ----------------------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 1,141
- ----------------------------------------------------------------------------------------------------------------------
Total assets 151,855,515
Liabilities
- ----------------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders $186,707
- ----------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 334,227
- ----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 196,220
- ----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 173
- ----------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,262
- ----------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 60,312
- ----------------------------------------------------------------------------------------------------------------------
Other accrued expenses 17,488
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 796,389
- ----------------------------------------------------------------------------------------------------------------------
Net assets $151,059,126
Represented by
- ----------------------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) 153,051,894
- ----------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 2) 140,414
- ----------------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,880,422)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 747,240
- ----------------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $151,059,126
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares ($126,715,702 divided by 14,341,110 shares) $8.84
- ----------------------------------------------------------------------------------------------------------------------
Offering price per Class A share (100/95.25 of $8.84)* $9.28
- ----------------------------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares ($24,050,050 divided by 2,725,682 shares)+ $8.82
- ----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares ($293,374 divided by 33,145 shares) $8.85
- ----------------------------------------------------------------------------------------------------------------------
Offering price per Class M share (100/96.75 of $8.85)** $9.15
- ----------------------------------------------------------------------------------------------------------------------
* 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.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales the offering price is reduced.
+ 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>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31,1996
<S> <C>
Tax exempt interest income $9,468,873
- --------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------
Compensation of Manager (Note 2) 943,091
- --------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 192,766
- --------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,814
- --------------------------------------------------------------------
Administrative services (Note 2) 7,808
- --------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 268,581
- --------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 195,822
- --------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 393
- --------------------------------------------------------------------
Amortization of organization expenses (Note 1) 7,190
- --------------------------------------------------------------------
Reports to shareholders 44,940
- --------------------------------------------------------------------
Auditing 42,507
- --------------------------------------------------------------------
Legal 14,212
- --------------------------------------------------------------------
Postage 20,330
- --------------------------------------------------------------------
Registration fees 4,675
- --------------------------------------------------------------------
Other expenses 7,075
- --------------------------------------------------------------------
Total expenses 1,760,204
- --------------------------------------------------------------------
Expense reduction (296,280)
- --------------------------------------------------------------------
Net expenses 1,463,924
- --------------------------------------------------------------------
Net investment income 8,004,949
- --------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 3,575,858
- --------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (37,161)
- --------------------------------------------------------------------
Net unrealized depreciation during the year (6,356,255)
- --------------------------------------------------------------------
Net loss on investments (2,817,558)
- --------------------------------------------------------------------
Net increase in net assets resulting from operations $5,187,391
- --------------------------------------------------------------------
The accompanying notes are an integral part of these financial statement.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended Nine months ended
May 31 May 31
1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------
Net investment income $8,004,949 $6,635,084
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 3,538,697 (3,979,037)
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (6,356,255) 6,447,029
- ----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,187,391 9,103,076
- ----------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------
Class A (7,001,986) (5,840,450)
- ----------------------------------------------------------------------------------------------
Class B (1,049,588) (700,347)
- ----------------------------------------------------------------------------------------------
Class M (3,649) --
- ----------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (4,209,725) (3,622,742)
- ----------------------------------------------------------------------------------------------
Total decrease in net assets (7,077,557) (1,060,463)
- ----------------------------------------------------------------------------------------------
Net Assets
- ----------------------------------------------------------------------------------------------
Beginning of year 158,136,683 159,197,146
- ----------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $56,522 and $106,796, respectively) $151,059,126 $158,136,683
- ----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statement.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period For the Period
July 3, 1995 For the July 15, 1993
(commencement of nine months (commencement
operations) to Year ended ended Year ended of operations)
May 31 May 31 May 31 August 31 to August 31
--------------------------------------------------------------------
1996 1996 1995* 1994 1993
--------------------------------------------------------------------
Class M Class B
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.86 $9.00 $8.83 $9.47 $9.39
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income .41 .41 .34 .45 .11
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.02) (.18) .17 (.61) .03
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations .39 .23 .51 (.16) .14
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income (.40) (.41) (.34) (.45) (.06)
- -----------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- -- (.03) --
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (.40) (.41) (.34) (.48) (.06)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.85 $8.82 $9.00 $8.83 $9.47
- -----------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 4.44 (c) 2.60 5.99 (c) (1.80) 1.45 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $293 $24,050 $21,538 $16,247 $2,974
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) 1.09 (c) 1.67 1.19 (c) 1.60 .19 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 4.28 (c) 4.52 3.89 (c) 4.82 .43 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 108.68 108.68 51.48 (c) 34.68 5.72
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (Continued)
(For a share outstanding throughout the period)
For the
nine months
Year ended ended
May 31 May 31 Year ended August 31
1996 1995* 1994 1993 1992
------------------------------------------------------------
Class A
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.01 $8.84 $9.47 $9.07 $8.66
- ------------------------------------------------------------------------------------------------------------------------
Investment operations
Net investment income .47 .38 .51 .54 (a) .57 (a)
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (.17) .17 (.61) .47 .42
- ------------------------------------------------------------------------------------------------------------------------
Total from investment operations .30 .55 (.10) 1.01 .99
- ------------------------------------------------------------------------------------------------------------------------
Less distributions:
From net investment income (.47) (.38) (.50) (.55) (.57)
- ------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- (.06) (.01)
- ------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on investments -- -- (.03) -- --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.38) (.53) (.61) (.58)
- ------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $8.84 $9.01 $8.84 $9.47 $9.07
- ------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(b) 3.38 6.45 (c) (1.07) 11.54 11.85
- ------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $126,716 $136,598 $142,950 $145,304 $88,566
- ------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(d) 1.03 .70 (c) .97 .89 .58 (a)
- ------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%) 5.20 4.42 (c) 5.55 5.82 6.34 (a)
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 108.68 51.48 (c) 34.68 5.72 31.84
- ------------------------------------------------------------------------------------------------------------------------
* The fiscal year end has advanced from August 31 to May 31.
(a) Reflects expense limitation. As a result of these limitations,
net investment income of the fund for the year ended August 31, 1992
reflects an expense reduction of $0.03 per share.
(b) Total investment return assumes dividend reinvestment and does
not reflect the effect of sales charges.
(c) Not annualized.
(d) The ratio of expenses to average net assets for the year ended May 31, 1996
includes amounts paid through expense offset arrangements. Prior period
ratios exclude these amounts (Note 3).
</TABLE>
Notes to financial statements
May 31, 1996
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 class A, class B and class M shares. The fund commenced
offering class M shares on July 3, 1995. Class A shares are sold with a
maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after approximately eight years, do not pay a front-
end sales charge, but pay a higher ongoing distribution fee than class A
shares, and are subject to a contingent deferred sales charge, if those
shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class
A shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
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 and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
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 on securities held and for excise tax on income and capital
gains.
At May 31, 1996, the fund had a capital loss carryover of approximately
$2,474,000 available to offset future net capital gain, if any. The
amount of the carryover and the expiration dates are:
Loss carryover Expiration
-------------- --------------
$1,952,000 May 31, 2003
522,000 May 31, 2004
E) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain 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 to reflect
income and gains available for distribution (or available capital loss
carryovers) under income tax regulations.
These differences include treatment of post-October loss deferrals,
dividends payable, market discount, and realized gains and losses on
certain futures contracts. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For
the year ended May 31, 1996, the fund reclassified $83,892 to increase
undistributed net investment income and $6,896 to decrease paid-in-
capital, with an increase to accumulated net realized loss on
investments of $76,996. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
F) Amortization of bond premium and discount Any premium resulting from
the purchase of securities in excess of maturity value is amortized on a
yield-to-maturity basis. Discounts on zero coupon bonds are 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
and Exchange Commission and with various states and the initial public
offering of its shares were $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. Such fee is based on the following annual rates: 0.60% of the
first $500 million, 0.50% of the next $500 million, 0.45% of the next
$500 million, and 0.40% of any excess over $1.5 billion subject, under
current law, to reduction in any year by the amount of certain brokerage
commissions and fees (less expenses) received by the affiliates of
Putnam Management on the fund's portfolio transactions.
The fund reimburses Putnam Management 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 Trustees fee of $700 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain invested in
certain Putnam funds until distribution in accordance with
the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided
by Putnam Investor Services, a division of PFTC.
For the year ended May 31, 1996, fund expenses were reduced by $296,280
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam 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 Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.20%, 0.85% and 0.50% of the average
net assets attributable to class A, class B and class M shares,
respectively.
For the year ended May 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $23,412 and $674 from the sale
of class A and class M shares, respectively and $100,749 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. For the year ended May 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received $10,000 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $160,294,633 and
$165,611,285, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At May 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 1,377,124 $ 12,414,424
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 356,388 3,182,603
- ----------------------------------------------------
1,733,512 15,597,027
Shares
repurchased (2,558,466) (23,092,926)
- ----------------------------------------------------
Net decrease (824,954) $ (7,495,899)
- ----------------------------------------------------
Nine months ended
May 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 1,316,331 $ 11,401,930
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 309,532 2,664,890
- ----------------------------------------------------
1,625,863 14,066,820
Shares
repurchased (2,631,078) (22,501,834)
- ----------------------------------------------------
Net decrease (1,005,215) $ (8,435,014)
- ----------------------------------------------------
Year ended
May 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 806,485 $7,259,464
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 61,931 556,769
- ----------------------------------------------------
868,416 7,816,233
Shares
repurchased (537,152) (4,835,200)
- ----------------------------------------------------
Net increase 331,264 $2,981,033
- ----------------------------------------------------
Nine months ended
May 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 733,286 $6,313,926
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 41,782 360,443
- ----------------------------------------------------
775,068 6,674,369
Shares
repurchased (219,915) (1,862,097)
- ----------------------------------------------------
Net increase 555,153 $4,812,272
- ----------------------------------------------------
For the period
July 3, 1995
(commencement of
operations) to
May 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 32,771 $301,786
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 374 3,355
- ----------------------------------------------------
33,145 305,141
Shares
repurchased -- --
- ----------------------------------------------------
Net increase 33,145 $305,141
- ----------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.75% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
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
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
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
John R. Verani
Vice President
Paul M. O'Neil
Vice President
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 copy of Putnam's Quarterly Performance
Summary. For more information, or to request a prospectus, call toll
free: 1-800-225-1581.
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.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------
25859-855/235/2AA 7/96
