PUTNAM
ARIZONA
TAX EXEMPT
INCOME FUND
[GRAPHIC OMITTED:
art work]
SEMIANNUAL REPORT
November 30, 1995
[LOGO:
BOSTON - LONDON - TOKYO]
<PAGE>
FUND HIGHLIGHTS
o "ONE INVESTOR'S WORRY IS ANOTHER'S OPPORTUNITY. THAT'S THE MORAL OF THE STORY
OF THE MUNICIPAL BOND MARKET NOW, WHERE FEARS OF A FLAT TAX HAVE MADE MUNIS
EXTREMELY ATTRACTIVE."
-- FORTUNE, SEPTEMBER 1995
o "[T]HE UPHEAVAL IN THE MUNI MARKET HAS CREATED SOME GREAT DEALS FOR INVESTORS
WHO KNOW WHERE TO LOOK.
-- MONEY, NOVEMBER 1995
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
17 Financial statements
<PAGE>
FROM THE CHAIRMAN
[GRAPHIC OMITTED:
Photo of
George Putnam]
(C) Karsh, Ottawa
Dear Shareholder:
Tax-exempt bond investors will long remember 1995 as a year of highs and lows in
market results. The year began as the bond market was coming off one of its
worst periods in recent memory. Just as things began to look brighter for
tax-exempt bonds, talk in Washington about tax reform cast a wave of uncertainty
over investors.
By the time Putnam Arizona Tax Exempt Income Fund entered its new fiscal year in
June, investors had begun to regain their composure, realizing how remote
enactment of any tax-reform legislation was likely to be in an election year. As
the fund reached the fiscal year's midpoint on November 30, 1995, shareholders
could look back on a period of impressive recovery.
Furthermore, because of the earlier interruption over tax-reform proposals, Fund
Manager Howard Manning believes the rally will be sustained during the second
half of fiscal 1996.
As we notified shareholders earlier, the roman numeral "II" has been omitted
from the name of your fund. Since there is only one fund, the "II" designation
is not necessary.
Respectfully yours,
/s/ George Putnam
George Putnam
Chairman of the Trustees
January 17, 1996
<PAGE>
REPORT FROM THE FUND MANAGER
HOWARD MANNING
Although flat-tax concerns have dampened investor enthusiasm for municipals
since last spring, prices of Arizona bonds have been somewhat sheltered by an
umbrella of firm demand. In addition to Arizona investors seeking tax-exempt
income, such nontraditional buyers as insurance companies have shown
increased interest in the state's bonds. This heightened demand, combined
with our successful securities selection, produced attractive performance for
the six months ended November 30, 1995: class A and class B shares returned
5.22% and 4.78%, respectively, both at net asset value.
o STRONG RELATIVE PERFORMANCE: A MATTER OF PERSPECTIVE
After overcoming a brief stall in midsummer, the broad fixed-income market
continued its impressive run throughout the six months ended November 30,
1995. Increased investor confidence in the Federal Reserve Board's ability to
thwart inflation and effectively manage economic growth over the long term
fueled the gains of most fixed-income investments. Indeed, the rally had
gained such momentum by period's end that the current yield on the benchmark
30-year Treasury bond seems to be fast approaching the historically low level
of 5.79% reached in October 1993.
On an absolute basis, municipal bonds participated in the rally's strength in
a highly respectable fashion. However, their performance relative to taxable
investments may appear somewhat lackluster. Investors' lingering concerns
about the perceived effects of the flat-tax proposal introduced in April --
which, in its purest form, would deprive municipal bonds of their beneficial
tax treatment -- prevented your fund's investments from attaining the full
price appreciation potential presented by the favorable investment
environment.
<PAGE>
o FOCUS ON BOND QUALITY, STRUCTURE
Market technicals continue to be favorable for Arizona bonds, with 1995
new-issue volume down a dramatic 24.4% from 1994 levels. However, this
reduced quantity of new bonds coupled with scant secondary market supply and
continued strong demand has had a side effect: quality spreads among various
bonds have contracted considerably. That is, there is little price difference
between top- and lower-quality bonds in the current market. As a result,
although we will still explore opportunities on the lower end of the quality
spectrum when justified by our research, in most instances we find
shareholders are not adequately compensated for assuming added credit risk.
Our strategy, therefore, has been to maintain a portfolio of high-quality,
price-sensitive bonds, reflecting an optimistic outlook for interest rates.
We believe these narrow quality spreads present an ideal opportunity to
enhance the overall quality of your fund. Since our last report, we have
reduced the portfolio's holdings of BBB and A-rated issues by 9.5% and 4.1%,
respectively, and reinvested the proceeds into AA- and AAA-rated bonds. As a
result, bonds in the AAA and AA categories now total 73% of the fund, an
increase of approximately 13% since May 31, 1995.
[GRAPHIC OMITTED: line chart: BOND YIELDS: MUNICIPALS VERSUS TREASURIES
Y-axis reads (top to bottom) 8% to 5% in one percent decrements
X-axis reads (left to right) 11/94 through 11/95 in one-year increments
A solid black line represents Municipal bond yields, ranging from 6.93%
to 5.56% (see plot points below: "Municipal")
A solid white line represents Treasury bond yields, ranging from 8.0% to 6.13%
(see plot points below: "Treasury")
Municipal Treasury
--------- --------
6.93% 8.00%
6.70 7.88
6.39 7.70
6.00 7.44
6.03 7.33
5.76 6.65
6.00 6.62
6.02 6.65
5.96 6.50
5.74 6.33
5.56 6.13
Caption reads:
Chart compares the yield of an average 30-year general obligation municipal
bond with the yield of an average 30-year Treasury bond during the 12 months
ended 11/30/95. Interest and principal payments of Treasury bonds are backed
by the full faith and credit of the U.S. government, while those of municipal
bonds have no such guarantee. Source: Bloomberg.]
<PAGE>
Credit quality alone, however, is not enough to assure attractive returns.
When selecting securities for purchase, we pay particular attention to the
bond structure (coupon, maturity, call protection) that we believe offers the
greatest opportunity for price appreciation. We limit exposure to par bonds
(bonds priced at or near face value) and concentrate purchases on discount
bonds with reasonable levels of call protection. Discount bonds tend to
advance in price quickly as interest rates decline. Of course, they are also
apt to decline in price rapidly as interest rates rise. Prices of par bonds,
on the other hand, are inclined to rise less than prices of discounts as
interest rates decline. Since we currently believe that rates are more likely
to move downward than upward, par bonds appear to be the less desirable
investments at present.
o HOSPITALS OFFER INCOME, POTENTIAL GAINS IF PREREFUNDED
Even though we have reduced the fund's allocation to the health-care sector
by 6% to 20% as part of our upgrading strategy, we still consider hospital
bonds to be important core holdings for the portfolio. By carefully
concentrating on a few names, we attempt to identify improving situations
that provide your fund with generous income as well as the possibility of
significant price appreciation in the event of a prerefunding.
As we discussed in May's annual report, prerefundings occur when a municipal
issuer sells new bonds to eliminate older, higher-cost debt, not unlike a
homeowner refinancing his or her mortgage when interest rates fall. Proceeds
of the new issue are used to establish an account that is invested in
AAA-rated government securities. These securities and their earnings then
provide payment on the old bonds until they are redeemed by the issuer on the
earliest call date. While there can be no guarantees, the improved credit
quality of the prerefunded bonds generally translates into higher prices.
Potential refunding candidates owned by your fund include the bonds of the
Casa Grande Regional Medical Center, a hospital that benefits from its
presence in the state's fastest growing county, located halfway between the
major cities of Phoenix and Tucson. Bonds issued by the Sierra Vista
Community Hospital, a facility with a solid market position as a sole
provider in a desirable, well-
<PAGE>
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS* showing
Hospitals/Health care 20.0%
Utilities/Water and Sewerage 15.2%
Transportation/Airline 7.7%
Housing 7.0%
Footnote Reads:
*Based on net assets on 11/30/95. Holdings will vary over time.]
populated retirement area, offer another example. Both of these holdings
possess large interest payments -- in excess of 8% annually -- that could
conceivably be refinanced at lower rates. The relatively high interest
payments of these bonds, along with the improving creditworthiness of the
issuers, make them ideal candidates for a possible prerefunding.
o FUNDAMENTALS ARE SOUND, VALUATIONS APPEALING
As we enter the second half of fiscal 1996, we expect conditions for
investing in fixed-income securities to remain hospitable. Subsiding
inflation, a benign interest rate environment, and decelerating economic
growth seem likely to continue. Government, on both the state and national
levels, is addressing for the first time in history the issue of how to be
more efficient. Such attention to fiscal responsibility bodes well for the
fundamental structure of the municipal market. Going forward, we will
continue to carefully monitor market events as they unfold and position your
fund to benefit from longer-term trends.
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 11/30/95, there is no guarantee the fund will continue to
hold these securities in the future.
<PAGE>
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 11/30/95
CLASS A CLASS B CLASS M
INCEPTION DATES (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
6 months 5.22% 0.22% 4.78% -0.22% -- --
- --------------------------------------------------------------------------------
1 year 18.67 13.04 17.85 12.85 -- --
- --------------------------------------------------------------------------------
Life of class 46.32 39.44 10.66 7.72 6.46% 2.98%
Annual average 8.18 7.11 4.35 3.17 -- --
- --------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS
ENDED 11/30/95
LEHMAN BROS.
MUNICIPAL BOND CONSUMER
BOND INDEX PRICE INDEX
- --------------------------------------------------------------------------------
6 months 5.18% 0.92%
- --------------------------------------------------------------------------------
1 year 18.90 2.61
- --------------------------------------------------------------------------------
Life of class A 49.16 14.12
Annual average 8.61 2.77
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Life of class B 15.66 6.37
Annual average 6.30 2.63
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Life of class M 6.10 0.72
- --------------------------------------------------------------------------------
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.
<PAGE>
TOTAL RETURN FOR PERIODS ENDED 12/31/95
(most recent calendar quarter)
CLASS A CLASS B CLASS M
(1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- --------------------------------------------------------------------------------
1 year 16.90% 11.32% 16.23% 11.23% -- --
- --------------------------------------------------------------------------------
Life of class 47.68 40.74 11.77 8.80 7.55% 4.03%
Annual average 8.25 7.19 4.63 3.49 -- --
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PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/95
CLASS A CLASS B CLASS M
- --------------------------------------------------------------------------------
Distributions (number) 6 6 5
- --------------------------------------------------------------------------------
Income $0.239585 $0.211360 $0.184682
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Capital gains(1)
Long-term -- -- --
Short-term -- -- --
- --------------------------------------------------------------------------------
TOTAL $0.239585 $0.211360 $0.184682
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SHARE VALUE: NAV POP NAV NAV POP
- --------------------------------------------------------------------------------
5/31/95 $9.01 $9.46 $9.00 -- --
- --------------------------------------------------------------------------------
7/3/95 -- -- -- $8.86 $9.16
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11/30/95 $9.23 $9.69 $9.21 $9.24 $9.55
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CURRENT RETURN
- --------------------------------------------------------------------------------
End of period
Current dividend rate(2) 5.15% 4.90% 4.49% 4.81% 4.65%
- --------------------------------------------------------------------------------
Taxable equivalent(3) 9.03 8.59 7.87 8.44 8.16
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Current 30-day SEC yield(4) 4.49 4.28 3.84 4.40 4.25
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Taxable equivalent(3) 7.87 7.51 6.73 7.72 7.45
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(1)Capital 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. (2)Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period. (3)Assumes maximum combined state and federal tax
rates of 42.98%. Results for investors subject to lower tax rates would not be
as advantageous. (4)Based on investment income, calculated using SEC guidelines.
<PAGE>
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
CLASS M SHARES have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge upon redemption.
NET ASSET VALUE (NAV) is the value of the fund's assets, minus any liabilities,
divided by the number of outstanding common 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.
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.
<PAGE>
RELATIVE RISK/REWARD POTENTIAL OF PUTNAM FUNDS
These illustrations provide a simplified guide to the risk/reward potential for
funds within each category of the Putnam Family of Funds and are not intended as
investment advice. Your investment advisor can help you evaluate your risk
tolerance.
These rankings are relative only to Putnam funds and should not be compared to
other investments. There is no guarantee that one Putnam fund will be less
volatile than another, since each fund has its own investment risks. That's why
it is essential to read the fund's prospectus before investing.
PUTNAM GROWTH FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to
"Higher Risk/Higher Reward Potential" of the following:
Investors; Diversified Equity(1); Global Growth(1); Vista; Natural Resources;
Health Sciences; Voyager & Voyager II; Overseas Growth(1); Europe Growth(1);
New Opportunities(2); OTC Emerging Growth(2) & Int'l New Opportunities(1,2);
Asia Pacific Growth(1)]
PUTNAM GROWTH AND INCOME FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to
"Higher Risk/Higher Reward Potential" of the following:
Balanced Retirement; Utilities Growth and Income; George Putnam; Convertible
Income-Growth; Equity Income; Fund for Growth and Income; Putnam Growth and
Income Fund II]
(1) Foreign investments are subject to certain risks, such as currency
fluctuations and political developments, that are not present with domestic
investments.
(2) This fund invests all or a portion of its assets in small to medium-sized
companies, which increases the risk of price fluctuations.
(3) While U.S. government backing of individual securities does not insure your
principal, which will fluctuate, it does guarantee that the fund's
government-backed holdings will make timely payments of interest and
principal.
<PAGE>
PUTNAM INCOME FUNDS
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential" to
"Higher Risk/Higher Reward Potential" of the following:
Money Market(4); Adjustable Rate U.S. Gov't.(3); Intermediate U.S. Gov't.(3);
U.S. Gov't. Income(3); American Gov't. Income(3); Federal Income(3);
Diversified Income(1,3,5); Income; Preferred Income; Global Gov't.(1,5);
High Yield(5); High Yield Advantage(5)]
PUTNAM TAX-FREE FUNDS(6)
[GRAPHIC OMITTED: showing "Lower Risk/Lower Reward Potential to
"Higher Risk/Higher Reward Potential" of the following:
Tax Exempt Money Market(4); Intermediate Tax Exempt; Tax-Free Insured(7);
Tax Exempt Income; Single-state tax-free funds*; Municipal Income;
Tax-Free High Yield(5)]
* State tax-free funds available for Arizona, California, Florida,
Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, and
Pennsylvania. Not available in all states.
LIFESTAGE(SM) FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread your
money across a variety of stocks, bonds, and money market investments. The three
portfolios are:
o PUTNAM ASSET ALLOCATION: BALANCED PORTFOLIO
o PUTNAM ASSET ALLOCATION: CONSERVATIVE PORTFOLIO
o PUTNAM ASSET ALLOCATION: GROWTH PORTFOLIO
Please call your financial advisor -- or Putnam at 1-800-225-1581 -- to
obtain a prospectus for any Putnam fund. The prospectus contains more
complete information, including risk considerations, charges, and expenses.
Read it carefully before you invest or send money.
(4) The fund is managed to maintain a steady price of $1.00 per share, although
there is no assurance this price can be maintained in the future.
(5) The lower credit ratings of high-yield corporate and municipal bonds reflect
a greater possibility that adverse changes in the economy or their issuers
may affect their ability to pay principal and interest on the bonds.
(6) Income may be subject to state and local taxes. Capital gains, if any, are
taxable for federal and, in most cases, state purposes.
(7) Bond insurance does not guarantee principal or protect against changes in
market price.
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
November 30, 1995 (Unaudited)
KEY TO ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
COP -- Certificate of Participation
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Financial Security Assurance
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Bonds
MBIA -- Municipal Bond Investors Assurance Corp.
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (103.5%)*
PRINCIPAL AMOUNT RATINGS** VALUE
ARIZONA (92.0%)
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<C> <S> <C> <C>
$1,975,000 AZ State Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB $ 2,157,688
1,500,000 AZ State Student Loan Acquisition Auth. Rev. Bonds,
Ser. B, 6.6s, 5/1/10 AA 1,620,000
7,000,000 AZ State Trans. Board Excise Tax Rev. Bonds
(Maricopa Cnty. Regional Area B), AMBAC,
6s, 7/1/05 AAA 7,665,000
2,500,000 AZ State Trans. Board Hwy. Rev. Bonds,
Ser. A, 6 1/2s, 7/1/11 AA 2,793,750
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 AAA 1,883,188
1,100,000 Chandler Street & Hwy. Rev. Bonds, MBIA, 8s,
7/1/11 AAA 1,432,750
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s, 7/1/14 AAA 2,840,688
750,000 Cochise Cnty., U. School Dist. No. 68
Rev. Bonds, FGIC, 7 1/2s, 7/1/09 AAA 923,438
3,880,000 Gila Cnty., Indl. Dev. Auth. Poll Control Rev. Bonds
(Asarco Inc. Project), Ser. 85, 8.9s, 7/1/06 Baa 4,224,350
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC, 6 1/2s, 7/1/22 AAA 1,081,250
1,000,000 Glendale Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
7 1/8s, 7/1/20 AAA 1,140,000
2,700,000 Maricopa Cnty., Indl. Dev. Auth. Hlth. Fac. IFB,
MBIA, 7.752s, 7/1/13 AAA 2,811,375
Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds
3,500,000 (Samaritan Hlth. Svcs.), Ser. A, MBIA, 7s, 12/1/16 AAA 4,221,875
3,100,000 (Samaritan Hlth. Svc. Hosp.-B2), MBIA,
3.8s, 12/1/08 A 3,100,000
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam.
Hsg. Rev. Bonds (Laguna Point Apt. Project),
6 3/4s, 7/1/19 A 2,763,450
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
ARIZONA (continued)
- -------------------------------------------------------------------------------------------
$2,015,000 Maricopa Cnty., Indl. Dev. Auth. Rev. Bonds
(Catholic Hlth. care) MBIA, 5s, 7/1/15 AAA $ 1,909,213
1,910,000 Maricopa Cnty., Indl. Dev. Auth. Single Fam. Mtge.
Rev. Bonds, Ser. A, 7 1/2s, 8/1/12 AA 2,053,250
3,650,000 Maricopa Cnty. Unified School Dist. #48
IFB, 5.55s, 7/1/14, (acquired 6/28/95,
cost $3,300,622)++ AA 3,426,438
4,000,000 Maricopa Cnty. Unified School Dist. #80
Rev. Bonds (Paradise Valley Project), Ser. B,
MBIA, 5 1/4s, 7/1/15 AAA 3,930,000
Maricopa Cnty. Unified School Dist. No 80
Rev. Bonds (Chandler), MBIA
500,000 zero %, 7/1/11 AAA 207,500
1,000,000 zero %, 7/1/09 AAA 473,750
2,000,000 Maricopa Cnty., School Dist. No 028 Rev. Bonds
(Kyrene Elem.), Ser. C, FGIC, zero %, 1/1/11 AAA 892,500
1,475,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds (Coopers Ridge Apts.) FHA, 7 3/8s,
4/1/32 AAA 1,596,688
10,000,000 Phoenix Civic Impt. Corp. Wastewtr. Syst. Lease
Rev. Bonds, MBIA, 5s, 7/1/18 AAA 9,412,500
Phoenix G.O. Bonds
6,250,000 5s, 7/1/19 AA 5,921,875
4,040,000 Ser. B, 5s, 7/1/16 AA 3,863,250
1,600,000 Phoenix Hsg. Fin. Corp. Mtg. Rev. Bonds,
Ser. A, MBIA, 6.9s, 1/1/23 AAA 1,672,000
4,800,000 Phoenix, Civic Impt. Corp. Wtr. Syst. Rev. Bonds,
FGIC, 5 1/2s, 7/1/24 AAA 4,758,000
1,000,000 Phoenix, Civic Impt. Corp. Wastewater Syst.
Lease Rev. Bonds, 6 1/8s, 7/1/23 AAA 1,111,250
1,000,000 Phoenix, G.O. Bonds, 6 3/8s, 7/1/13 AA 1,071,250
2,150,000 Phoenix, Indl. Dev. Auth. Mtge. Rev. Bonds
(Chris Ridge Village Project), FHA, 6.8s, 11/1/25 AAA 2,238,688
955,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Christian Care Retirement Apts.), Ser. A,
10 1/4s, 1/1/18 BB/P 1,009,913
1,000,000 Pima Cnty. Indl. Dev. Auth. Hlth. Care Corp.
Rev. Bonds (Carondelet Hlth. Care Corp.),
MBIA, 5.2s, 7/1/10 AAA 992,500
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds,
FGIC, 7 1/2s, 7/1/08 AAA 1,238,750
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,127,500
Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.)
1,960,000 9s, 12/1/13 BB/P 2,035,499
2,000,000 Ser. A, 8 1/8s, 12/1/22 BB/P 2,152,500
Salt River, Project Agric. Impt. & Pwr. Dist. Elec.
Syst. Rev. Bonds
3,000,000 7.028s, 1/1/19 (acquired 3/16/93, cost $3,015,459)++ A 3,090,000
3,500,000 Ser. B, MBIA, 5 1/4s, 1/1/19 AAA 3,381,875
5,000,000 Ser. D, 5s, 1/1/30 AA 4,575,000
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
ARIZONA (continued)
- -------------------------------------------------------------------------------------------
$3,350,000 5s, 1/1/13 AAA $ 3,367,344
4,400,000 Scottsdale G.O. Bonds 5s, 7/1/15 AA 4,235,000
4,000,000 Scottsdale Ind. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village), Ser. A,
8 1/4s, 6/1/15 BB/P 4,330,000
1,000,000 Scottsdale Indl. Dev. Auth. Hosp. Rev. Bonds
(Scottsdale Memorial Hosp.), AMBAC,
5 1/4s, 9/1/18 AAA 956,250
1,000,000 Sedona, COP, 7.2s, 4/1/12 BBB/P 1,047,500
Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp. Project)
1,800,000 8 3/4s, 12/1/16 BBB 1,953,000
1,995,000 8 1/2s, 12/1/21 BBB/P 2,216,944
2,745,000 8 1/4s, 12/1/14 BBB/P 3,057,244
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev. Bonds,
8 1/2s, 6/1/05 BB 1,137,500
1,630,000 Tempe. G.O. Bonds, 4.5s, 07/01/15 AA 1,463,137
1,200,000 Tucson Str. & Hwy. User Rev. Bonds, Ser. A,
MBIA, 5s, 7/1/15 AAA 1,143,000
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 4,665,000
3,000,000 Tucson, G.O. Bonds, Ser. A, 5 3/8s, 7/1/20 AA 2,970,000
905,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), 7.4s, 7/1/26 AAA 959,300
1,000,000 U. of AZ, COP
(Telecommunications Syst.), 6 1/2s, 7/15/12 A 1,081,250
1,450,000 U. of AZ, Med. Ctr. Corp. Hosp., Rev. Bonds
MBIA, 6 7/8s, 7/1/21 AAA 1,653,000
U. of AZ, Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,121,250
1,000,000 6 1/4s, 6/1/11 AA 1,067,500
3,475,000 U. of Arizona Medical Ctr MBIA, 5s, 7/1/21 AAA 3,231,750
------------
147,456,460
PUERTO RICO (11.5%)
- -------------------------------------------------------------------------------------------
Comnwlth. of Puerto Rico, Hwy. & Trans. Auth.
Rev. Bonds
$2,500,000 Ser. X, 5 1/4s, 7/1/21 A $ 2,350,000
1,000,000 Ser. X, 5s, 7/1/22 A 905,000
2,500,000 Comnwlth. of Puerto Rico Aqueduct & Swr. Auth.
Rev. Bonds, Ser. A, 7 7/8s, 7/1/17 Baa 2,775,000
2,250,000 Comnwlth. of Puerto Rico IFB
FSA, 7.677s, 7/1/20 AAA 2,396,250
2,000,000 Puerto Rico Elec Pwr. Auth. Rev. Bonds,
Ser. Z, 5 1/4s, 7/1/21 A 1,902,500
Puerto Rico Pub. Bldgs. Auth., Gtd. Edl. & Hlth.
Facs. Rev. Bonds
1,375,000 Ser. H, 7 7/8s, 7/1/16 AAA 1,488,438
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
PUERTO RICO (continued)
- -------------------------------------------------------------------------------------------
$1,500,000 Ser. L, 6 7/8s, 7/1/21 AAA $ 1,736,250
1,200,000 Comnwlth. of Puerto Rico Rev Bonds, AMBAC,
5s, 7/1/21 AAA 1,128,000
3,925,000 U. of Puerto Rico Rev. Bonds, Ser. M, MBIA,
5 1/4s, 6/1/25 AAA 3,836,688
------------
$ 18,518,126
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $157,247,809)*** $165,974,586
- -------------------------------------------------------------------------------------------
<FN>
* Percentages indicated are based on net assets of $160,339,297.
** The Moody's or Standard & Poor's ratings indicated are believed to be the
most recent ratings available at November 30, 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 November
30, 1995. Securities rated by Putnam are indicated by "/P" and are not
publicly rated.
*** The aggregate identified cost on a tax cost basis is $157,247,809, resulting
in gross unrealized appreciation and depreciation of $8,952,468 and
$225,691, respectively, or net unrealized appreciation of $8,726,777.
++ 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 November
30, 1995 was $6,516,438 or 4% of net assets.
The fund had the following insurance concentration greater than 10% of net
assets at November 30, 1995.
MBIA 27.1%
The fund had the following industry group concentrations greater than 10% of
net assets at November 30, 1995.
Hospitals/Health Care 20.0%
Utilities/Water & Sewerage 15.2
The rates shown on Variable Rate Demand Notes (VRDN) and Inverse Floating
Bonds (IFB) which are securities paying variable interest rates that vary
inversely to changes in the market interest rates, are the current interest
rates at November 30, 1995, which are subject to change based on the terms
of the security.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995 (Unaudited)
ASSETS
- -------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $157,247,809) (Note 1) $165,974,586
- -------------------------------------------------------------------------------
Cash 2,158
- -------------------------------------------------------------------------------
Interest receivable 3,723,069
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 103,239
- -------------------------------------------------------------------------------
Receivable for securities sold 95,000
- -------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 2,953
- -------------------------------------------------------------------------------
TOTAL ASSETS 169,901,005
LIABILITIES
- -------------------------------------------------------------------------------
Distributions payable to shareholders 196,135
- -------------------------------------------------------------------------------
Payable for securities purchased 8,790,156
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 227,698
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 237,111
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 105
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 17,657
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,363
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 61,715
- -------------------------------------------------------------------------------
Other accrued expenses 29,768
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 9,561,708
- -------------------------------------------------------------------------------
NET ASSETS $160,339,297
REPRESENTED BY
- -------------------------------------------------------------------------------
Paid-in capital (Note 4) $155,607,282
- -------------------------------------------------------------------------------
Undistributed net investment income 70,714
- -------------------------------------------------------------------------------
Accumulated net realized loss on investment transactions
and futures contracts (Note 1) (4,065,476)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,726,777
- -------------------------------------------------------------------------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO CAPITAL SHARES
OUTSTANDING $160,339,297
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- -------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($137,068,087 divided by 14,857,181 shares) $9.23
- -------------------------------------------------------------------------------
Offering price per share (100/95.25 of $9.23)* $9.69
- -------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($23,269,141 divided by 2,525,898 shares)+ $9.21
- -------------------------------------------------------------------------------
Net asset value and redemption price of class M shares ($2,069
divided by 224 shares) $9.24
- -------------------------------------------------------------------------------
Offering price per share (100/96.75 of $9.24)** $9.55
- -------------------------------------------------------------------------------
* 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.
<PAGE>
STATEMENT OF OPERATIONS
Six months ended November 30, 1995 (Unaudited)
TAX EXEMPT INTEREST INCOME $4,868,050
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 471,601
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 90,845
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,328
- -------------------------------------------------------------------------------
Reports to shareholders 36,413
- -------------------------------------------------------------------------------
Auditing 30,541
- -------------------------------------------------------------------------------
Legal 12,130
- -------------------------------------------------------------------------------
Administrative services (Note 2) 4,081
- -------------------------------------------------------------------------------
Postage 13,054
- -------------------------------------------------------------------------------
Registration fees 225
- -------------------------------------------------------------------------------
Distribution Fees (Note 2)
- -------------------------------------------------------------------------------
Class A 135,404
- -------------------------------------------------------------------------------
Class B 93,554
- -------------------------------------------------------------------------------
Class M 4
- -------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 5,378
- -------------------------------------------------------------------------------
Other 2,067
- -------------------------------------------------------------------------------
TOTAL EXPENSES 900,625
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (129,262)
- -------------------------------------------------------------------------------
NET EXPENSES 771,363
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 4,096,687
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,213,327
- -------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 63,320
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 1,623,283
- -------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 3,899,930
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $7,996,617
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED NINE MONTHS
NOVEMBER 30 ENDED MAY 31
1995* 1995
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $ 4,096,687 $ 6,635,084
- -------------------------------------------------------------------------------
Net realized gain (loss) on investment
transactions 2,276,647 (3,979,037)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,623,283 6,447,029
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 7,996,617 9,103,076
- -------------------------------------------------------------------------------
Distributions to shareholders from:
- -------------------------------------------------------------------------------
Net investment income
- -------------------------------------------------------------------------------
Class A (3,613,769) (5,840,450)
- -------------------------------------------------------------------------------
Class B (518,962) (700,347)
- -------------------------------------------------------------------------------
Class M (38) --
- -------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (1,661,234) (3,622,742)
- -------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,202,614 (1,060,463)
NET ASSETS
- -------------------------------------------------------------------------------
Beginning of period 158,136,683 159,197,146
- -------------------------------------------------------------------------------
END OF PERIOD (including undistributed net invest-
ment ncome $70,714 and $106,796, respectively) $160,339,297 $158,136,683
- -------------------------------------------------------------------------------
*Unaudited
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD FOR THE
JULY 3, 1995 NINE
(COMMENCEMENT SIX MONTHS MONTHS
OF OPERATIONS) TO ENDED ENDED YEAR ENDED
NOVEMBER 30 NOVEMBER 30 MAY 31 AUGUST 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995+ 1995+ 1995* 1994
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS M** CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.86 $9.00 $8.83 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .18 .21 .34 .45
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized/unrealized gain (loss)
on investments .38 .21 .17 (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .56 .42 .51 (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income (.18) (.21) (.34) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- -- -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.18) (.21) (.34) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.24 $9.21 $9.00 $8.83
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) 6.46(c) 4.78(c) 5.99(c) (1.80)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $2 $23,269 $21,538 $16,247
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (d) .48(c) .85(c) 1.19(c) 1.60
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 2.08(c) 2.32(c) 3.89(c) 4.82
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 46.27(c) 46.27(c) 51.48(c) 34.68
- ------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
FINANCIAL HIGHLIGHTS [continued]
(For a share outstanding throughout the period) [continued]
FOR THE PERIOD FOR THE FOR THE PERIOD
JULY 15, 1993 SIX NINE JANUARY 30, 1991
(COMMENCEMENT MONTHS MONTHS (COMMENCEMENT
OF OPERATIONS) TO ENDED ENDED OF OPERATIONS) TO
AUGUST 31 NOVEMBER 30 MAY 31 YEAR ENDED AUGUST 31 AUGUST 31
- ------------------------------------------------------------------------------------------------------------------------------------
1993 1995+ 1995* 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $9.39 $9.01 $8.84 $9.47 $9.07 $8.66 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .11 .24 .38 .51 .54(a) .57(a) .33(a)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized/unrealized gain (loss)
on investments .03 .22 .17 (.61) .47 .42 .16
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS .14 .46 .55 (.10) 1.01 .99 .49
- ------------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
- ------------------------------------------------------------------------------------------------------------------------------------
From net investment income (.06) (.24) (.38) (.50) (.55) (.57) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- -- (.06) (.01) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments -- -- -- (.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.06) (.24) (.38) (.53) (.61) (.58) (.33)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $9.47 $9.23 $9.01 $8.84 $9.47 $9.07 $8.66
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%) (b) 1.45(c) 5.22(c) 6.45(c) (1.07) 11.54 11.85 5.84(c)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $2,974 $137,068 $136,598 $142,950 $145,304 $88,566 $46,902
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
assets (%) (d) .19(c) .53(c) .70(c) .97 .89 .58(a) .16(a)(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) .43(c) 2.66(c) 4.42(c) 5.55 5.82 6.34(a) 3.91(a)(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 5.72(c) 46.27(c) 51.48(c) 34.68 5.72 31.84 12.46(c)
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
+ Unaudited.
* The fiscal year has advanced from August 31 to May 31.
** Per share net investment income for class M has been determined on the basis of the weighted average number of shares
outstanding during the period.
(a) Reflects expense limitation. As a result of these limitations, net investment income of the fund for the year ended August 31,
1992 and the period ended August 31, 1991, reflect expense reductions of $0.03 and $0.05 per share, respectively.
(b) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c) Not annualized.
(d) The ratio of expenses to average net assets for the period ended November 30, 1995 included amounts paid through expenses offset
arrangements. Prior period ratios exclude these amounts (see Note 2).
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
November 30, 1995 (Unaudited)
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a non-diversified, open-end management investment company. The fund seeks as
high a level of current income exempt from federal income tax and Arizona state
income tax as Putnam 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 class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert to
class A shares after 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
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 Putnam Management 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 which it
invests 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
<PAGE>
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 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 available to offset future net capital gain, if any,
which will expire on May 31, 2003.
E DISTRIBUTIONS TO SHAREHOLDERS Income dividends are recorded 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.
F AMORTIZATION OF BOND PREMIUM AND ACCRETION OF BOND DISCOUNT Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and
original issue discount 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 & Exchange
Commission and with various states, and the initial public offering of its class
A shares were $44,979. These expenses are being amortized over a five-year
period.
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: 0.60% of the first
$500 million of average net assets, 0.50% of the next $500 million, 0.45% of the
next $500 million, 0.40% 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 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 Trustee's fee of $710 and an additional
fee for each Trustees' 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.
During the period ended November 30, 1995, the fund adopted a Trustee Fee
Deferral Plan (the "Plan") which allows the Trustees to defer the receipt of all
or
<PAGE>
a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees
remain in the fund and are invested in the fund or in other 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 period ended November 30, 1995, fund expenses were reduced by $129,262
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 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 period ended November 30, 1995, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $11,380 and $3 from the sale of class A
and class M shares, respectively and received $51,219 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 period ended
November 30, 1995, Putnam Mutual Funds Corp., acting as underwriter received no
monies on class A redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the period ended November 30, 1995, purchases and sales of investment
securities other than short-term municipal obligations aggregated $77,717,865,
and $69,246,705, respectively. Purchases and sales of short-term municipal
obligations aggregated $19,100,000 and $18,500,000 respectively. 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 November 30, 1995, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
SIX MONTHS ENDED NOVEMBER 30 NINE MONTHS ENDED MAY 31
1995 1995
- -------------------------------------------------------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 636,185 $ 5,684,562 1,316,331 $11,401,930
- -------------------------------------------------------------------------------
Shares issued in
connection with reinvest-
ment of distributions 181,139 1,616,650 309,532 2,664,890
- -------------------------------------------------------------------------------
817,324 7,301,212 1,625,863 14,066,820
- -------------------------------------------------------------------------------
Shares repurchased (1,126,711) (10,130,452) (2,631,078) (22,501,834)
- -------------------------------------------------------------------------------
NET DECREASE (309,387) $(2,829,240) (1,005,215) $(8,435,014)
- -------------------------------------------------------------------------------
<PAGE>
SIX MONTHS ENDED NOVEMBER 30 NINE MONTHS ENDED MAY 31
1995 1995
- -------------------------------------------------------------------------------
CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 384,255 $3,431,543 733,286 $6,313,926
- -------------------------------------------------------------------------------
Shares issued in connection
with reinvestment of
distributions 30,778 274,355 41,782 360,443
- -------------------------------------------------------------------------------
415,033 3,705,898 775,068 6,674,369
- -------------------------------------------------------------------------------
Shares repurchased (283,551) (2,539,875) (219,915) (1,862,097)
- -------------------------------------------------------------------------------
NET INCREASE 131,482 $1,166,023 555,153 $4,812,272
- -------------------------------------------------------------------------------
FOR THE PERIOD
JULY 3, 1995
(COMMENCEMENT OF
OPERATIONS) TO
NOVEMBER 30
1995
- -------------------------------------------------------------------------------
CLASS M SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 220 $1,947
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 4 36
- -------------------------------------------------------------------------------
224 1,983
- -------------------------------------------------------------------------------
Shares repurchased -- --
- -------------------------------------------------------------------------------
NET INCREASE 224 $1,983
- -------------------------------------------------------------------------------
<PAGE>
RESULTS OF JULY 13, 1995 SHAREHOLDER MEETING
(Unaudited)
An annual meeting of shareholders of the fund was held on July 13, 1995. At the
meeting, each of the nominees for Trustees was elected, as follows:
VOTES FOR VOTES WITHHELD
- --------------------------------------------------------------------------------
Jameson Adkins Baxter 9,725,606 136,374
Hans H. Estin 9,722,852 139,129
John A. Hill 9,732,030 129,950
Elizabeth T. Kennan 9,717,960 144,021
Lawrence J. Lasser 9,729,460 132,520
Robert E. Patterson 9,731,445 130,536
Donald S. Perkins 9,694,434 167,546
William F. Pounds 9,725,561 136,420
George Putnam 9,718,099 143,882
George Putnam, III 9,692,782 169,199
E. Shapiro 9,706,793 155,187
A.J.C. Smith 9,727,829 134,151
W. Nicholas Thorndike 9,697,964 164,017
- --------------------------------------------------------------------------------
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as auditors for
the fund was approved as follows: 9,600,534 votes for, and 58,765 votes against,
with 202,682 abstentions and broker non-votes. A proposal to eliminate the
fund's fundamental investment restriction on investments in investment companies
was approved as follows: 8,583,826 for, and 732,915 against, with 545,240
abstentions and broker non-votes. A proposal to amend the fund's fundamental
investment restriction on investments in restricted securities was approved as
follows: 8,288,047 for, and 901,430 against, with 672,504 abstentions and broker
non-votes. All tabulations have been rounded to the nearest whole number.
<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
Lawrence J. Lasser
CUSTODIAN Vice President
Putnam Fiduciary Trust Company
Gordon H. Silver
LEGAL COUNSEL Vice President
Ropes & Gray
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 John R. Verani
Vice President
Lawrence J. Lasser
Paul M. O'Neil
Robert E. Patterson Vice President
Donald S. Perkins John D. Hughes
Vice President and Treasurer
George Putnam, III
Beverly Marcus
Eli Shapiro Clerk and Assistant Treasurer
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
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.
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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
-------------
22190 855/235/2AA 1/96
