Putnam
Arizona
Tax Exempt
Income
Fund
SEMIANNUAL REPORT
November 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "An improving economic outlook, low supply, and positive demographics
are favorably impacting the Arizona municipal bond market. We believe
our hands-on approach will be instrumental in enabling us to find
unrealized opportunities before the rest of the market does."
-- Howard Manning, manager,
Putnam Arizona Tax Exempt Income Fund
* "...the bulge of municipal bond issues that peaked at more than $300
billion in 1993 has slimmed down to about $150 billion a year
....Lower supply and strong demand lead to higher prices."
-- The Orange County (California) Register,
December 8, 1996
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
17 Financial statements
26 Results of December 5, 1996, shareholder meeting
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
The first half of Putnam Arizona Tax Exempt Income Fund's fiscal 1997
presented a significantly brighter municipal bond market environment
than the one that had prevailed in preceding months. As the fiscal
year's first half unfolded, the municipal bond market -- including the
market for Arizona tax-exempt bonds -- began to develop a sense of
serenity. The semiannual period closed on November 30, 1996, in an
almost upbeat mood.
That is not to imply there were no challenges. Your fund's manager,
Howard Manning, continues to address the potential impact of interest
rate trends and the periodic release of economic data on the market and
to make the appropriate adjustments to the portfolio. Howard believes
the ongoing scarcity of attractive securities bodes well for the market
and for your fund in the months ahead. Backed by Putnam's extensive
credit research capability, he is confident he will continue to find
attractive opportunities.
In the report that follows, Howard discusses the events and strategies
that drove the fund's performance during the fiscal year's first half
and then takes a look at prospects for the second half.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
January 15, 1997
Report from the Fund Manager
Howard K. Manning
Absence of supply in the Arizona municipal bond market, a strengthening
economy, and volatile interest rates made the six months ended November
30, 1996, a very challenging semiannual period indeed for Putnam Arizona
Tax Exempt Income Fund. Fortunately, a market rally in the closing weeks
of the period and positions in sectors that benefited from demographic
trends eased the pressure, enabling the fund to post a total return of
6.32% at net asset value (1.28% at public offering price) for class A
shares. Results for class B and class M shares and performance details
for longer periods can be found on page 9.
* SLOWING ECONOMY AND STRONG DEMAND SPARK MUNICIPAL BOND RALLY
After a difficult and volatile year, the municipal bond market shifted
gears into a long-awaited rally in late fall. The U.S. economy's fast-
paced growth of 4.6% during the third quarter of calendar 1996 gave way
to a projection of 2.2% growth for the final three months of the year.
Economists expect this slowdown to continue into early 1997. This
cooling of economic growth soothed investors' concerns over rising
interest rates and helped lead fixed-income investments, including
municipal bonds, to higher price levels.
Strong demand also helped spur the recent rally. While large numbers of
individual investors in the United States focused their attention on the
unprecedented gains in the stock market, overseas investors purchased
approximately $175 billion in U.S. bonds (an amount that exceeds the
federal budget deficit). Although foreign investors (ineligible for the
tax benefits of U.S. municipal bonds) invested primarily in Treasury
securities, their interest sparked greater demand and, consequently,
rising prices for the municipal market as well.
In terms of supply, the market for municipal securities was relatively
tight through the first few months of the period. June and July are
traditionally months in which many bonds mature or reach their call
dates and September's municipal bond issuance was the lowest in more
than a year. Autumn's lower interest rates, however, made bond issuance
more attractive for cash-strapped municipalities, and the supply of new
bonds rose.
We capitalized on the positive performance of the municipal bond market
by maintaining an above-market duration during much of the fall.
Duration is a measure of the portfolio's maturity structure and reflects
the price sensitivity of holdings to changes in interest rates. A longer
duration can mean a more volatile net asset value if rates change (but
also one more likely to appreciate substantially if rates decline). A
shorter duration can help preserve portfolio value as interest rates
rise. Your fund's longer duration helped boost performance during the
period as interest rates on medium- and long-term municipal bonds
dropped by 46 and 50 basis points, respectively.
* INCOME, QUALITY MAINTAINED DESPITE SCARCE SUPPLY
A high-quality portfolio has always been one of your fund's top
priorities. At the end of the semiannual period, investment-grade bonds
(those rated Baa or above) made up nearly 92% of the portfolio.
Furthermore, just over 40% of the holdings were rated in the highest
quality category, Aaa. For many of these holdings, timely payment of
principal and interest is insured by major municipal bond insurance
companies, adding an extra degree of assurance for investors.
[GRAPHIC HORIZONTAL BAR CHART OMITTED: TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/health care 20.7%
Education 16.7%
Utilities 14.3%
Transportation 9.8%
Water and
sewerage 9.0%
Footnote reads:
* Based on net assets as of 11/30/96. Sectors will vary over time.
General obligation bonds (GOs), backed by the general credit and taxing
power of the state or local government, are an essential component of
the fund's strategy and make up roughly 20% of the portfolio. However,
new issues of Arizona GOs are in short supply (a situation highlighted
by the fact that the state's tax burden consistently ranks below the
national average). With limited public funding of projects at the
government level, our research efforts focused on essential-service
bonds for much of the year.
Essential-service bonds are self-funding; that is, user fees for the
services become the sources of the bonds' payments to investors. Since
the issuers have the ability to set user fees, income from these bonds
is relatively stable and carries a lower risk of default than the income
from other types of municipal bonds. Salt River Power Authority and
Central Arizona Water District are examples of essential-service bonds
included in your fund's portfolio at the end of the period.
Given Arizona's steady population growth, greater demand for municipal
services and an expansion of the state's infrastructure are providing an
impetus for new municipal bond issues. Furthermore, large-scale
projects, such as schools, hospitals and new roads, are contributing to
the strength of the state's economy. Every phase of such a project, from
the purchase of materials to the hiring of workers, has an effect.
It should come as no surprise that the industries favorably impacted by
demographic trends also happen to represent the fund's larger sectors.
Health care, multi-family housing, utilities, and elderly care are
sectors we believe will be important contributors to the fund's
performance going forward. It's worth adding that health care made the
biggest contribution to the fund's performance in the year just past.
With a portion of the fund's health care holdings offering coupons of 8%
or more and improving credit profiles arising from consolidations and
improved efficiencies, this sector offers some of the best opportunities
in the Arizona municipal market.
[GRAPHIC PIE CHART OMITTED: PORTFOLIO QUALITY OVERVIEW]
PORTFOLIO QUALITY OVERVIEW*
A -- 7.6%
Aa --22.9%
Aaa --40.3%
VMIGI/A-1 -- 3.1%
Baa --18.0%
Ba -- 8.1%
Footnote reads:
* As a percentage of market value as of 11/30/96. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
terminology unless noted otherwise and may include unrated bonds
considered by Putnam Management to be of comparable quality.
Portfolio quality will vary over time.
* MANAGING CALL EXPOSURE TO PRESERVE INCOME STREAM
A bond's provisions may allow the issuer to call it in at or after a
specified date prior to maturity. When the call date arrives, if
interest rates have declined below their level at the time of issue, the
bond is likely to be called. Since this requires investors to reinvest
the assets at the new lower rates, exposure to callable bonds always
involves some risk to the fund's income stream. Thus, as an ongoing part
of the fund's strategy, we emphasize noncallable bonds in order to
reduce more effectively the fund's exposure to call risk.
* CONSTRUCTIVE, YET CAUTIOUS, OUTLOOK PREVAILS
After the market's positive performance during the past several months,
we now believe municipal bonds may be fully priced and we are scaling
back your portfolio's duration accordingly. We are also aiming to re-
position the portfolio from a barbell structure, which favors holdings
in both short- and long-term bonds, to one that emphasizes bonds in the
15- to 20-year maturity range, where we expect to find better values.
As your fund enters the second half of its fiscal year, our large staff
of experienced research analysts will continue to scrutinize existing
and new municipal bond issues to find the securities that will
contribute to your fund's stream of tax-exempt income. In a post-rally
environment, however, we must remain mindful of another tax consequence:
capital gains from the sales of portfolio holdings that have risen in
value. Although it is unlikely that any fund could avoid capital gains
altogether, we plan to shift portfolio holdings only when the benefits
will substantially outweigh the potential effects of any taxable
distributions.
Pre-election talk of sweeping tax reforms, such as the flat tax and the
elimination of the Internal Revenue Service, has been shelved, most
likely for the duration of the current administration. Although we
remain aware that these issues are merely dormant, not dead, the short-
term outlook for tax-advantaged income investments remains constructive.
Footnote reads:
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 11/30/96, 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 11/30/96
Class A Class B Class M
(inception date) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------
6 months 6.32% 1.28% 6.10% 1.10% 6.15% 2.67%
- ---------------------------------------------------------------------
1 year 4.46 -0.50 3.89 -1.07 4.13 0.76
- ---------------------------------------------------------------------
5 years 40.89 34.12 -- -- -- --
Annual
average 7.10 6.05 -- -- -- --
- ---------------------------------------------------------------------
Life of
class 52.85 45.66 14.96 12.04 10.86 7.23
Annual
average 7.54 6.65 4.21 3.42 7.53 5.04
- ---------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- --------------------------------------------------------------------
6 months 6.50% 1.28%
- --------------------------------------------------------------------
1 year 5.89 3.26
- --------------------------------------------------------------------
5 years 45.83 15.09
Annual average 7.83 2.85
- --------------------------------------------------------------------
Life of class A 60.10 18.54
Annual average 8.28 2.92
- --------------------------------------------------------------------
Life of class B 22.50 9.83
Annual average 6.11 2.81
- --------------------------------------------------------------------
Life of class M 12.34 4.00
Annual average 8.54 2.80
- --------------------------------------------------------------------
Footnote reads:
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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/96
Class A Class B Class M
- ---------------------------------------------------------------------
Distributions (number) 6 6 6
- ---------------------------------------------------------------------
Income $0.231276 $0.201598 $0.217434
- ---------------------------------------------------------------------
Capital gains1 -- -- --
- ---------------------------------------------------------------------
Total $0.231276 $0.201598 $0.217434
- ---------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ---------------------------------------------------------------------
5/31/96 $8.84 $9.28 $8.82 $8.85 $9.15
- ---------------------------------------------------------------------
11/30/96 9.16 9.62 9.15 9.17 9.48
- ---------------------------------------------------------------------
Current return
(end of period)
- ---------------------------------------------------------------------
Current dividend
rate2 5.02% 4.78% 4.38% 4.73% 4.58%
- ---------------------------------------------------------------------
Taxable
equivalent3 8.80 8.38 7.68 8.30 8.03
- ---------------------------------------------------------------------
Current 30-day
SEC yield4 4.58 4.36 3.91 4.27 4.13
- ---------------------------------------------------------------------
Taxable equivalent3 8.03 7.65 6.86 7.49 7.24
- ---------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases,
state tax purposes. For some investors, investment income may also
be subject to the federal alternative minimum tax. Investment income
may be subject to state and local taxes.
2 Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period.
3 Assumes maximum 42.98% combined federal and state tax rate. Results
for investors subject to lower tax rates would not be as
advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 12/31/96
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------
6 months 4.69% -0.24% 4.36% -0.64% 4.52% 1.12%
- ---------------------------------------------------------------------
1 year 2.88 -1.98 2.21 -2.68 2.45 -0.86
- ---------------------------------------------------------------------
5 years 37.23 30.74 -- -- -- --
Annual
average 6.54 5.51 -- -- -- --
- ---------------------------------------------------------------------
Life of
class 52.16 45.00 14.39 11.49 10.34 6.72
Annual
average 7.35 6.48 3.95 3.18 6.78 4.43
- ---------------------------------------------------------------------
Footnote reads:
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.
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.
Footnote reads:
* Securities indexes assume reinvestment of all distributions and
interest payments and do not take in account brokerage fees or
taxes. Securities in the fund do not match those in the indexes and
performance of the fund will differ. It is not possible to invest
directly in an index.
WELCOME TO
www.putnaminv.com
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about investing and retirement planning, and access market news and an
economic outlook from Putnam experts - with just a few clicks of the
mouse!
VISIT PUTNAM'S NEW SITE ON THE WORLD WIDE WEB TO FIND OUT:
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* Putnam's money management philosophy
* daily fund pricing and long-term fund performance
* how to tell if your retirement savings plan is on track
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You can also read Dr. Robert Goodman's economic commentary and Putnam's
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The site can be accessed through any of the major online services
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provider.
New features will be added to the site on an ongoing basis. So, visit us
at http://www.putnaminv.com - often!
<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1996 (Unaudited)
Key to Abbreviations
AMBAC --AMBAC Indemnity Corporation
CLI Insd. --Connie Lee Insurance Insured
COP --Certificate of Participation
FGIC --Financial Guaranty Insurance Company
FHA Insd. --Federal Housing Administration Insured
G.O. Bonds --General Obligation Bonds
IFB --Inverse Floating Rate Bond
MBIA --Municipal Bond Investors Assurance Corporation
VRDN --Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (102.6%) *
PRINCIPAL AMOUNT RATINGS** VALUE
<S> <C> <C> <C>
Arizona (85.3%)
- ---------------------------------------------------------------------------------------------
$1,000,000 AZ Edl. Loan. Marketing Corp. VRDN, Ser. A,
3.6s, 12/1/20 VMIG1 $ 1,000,000
AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
1,975,000 (Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB 2,157,688
2,000,000 (Northern AZ Healthcare), Ser. A, MBIA,
5 1/4s, 10/1/26 Aaa 1,902,500
1,325,000 (Northern AZ Healthcare), Ser. A, MBIA,
5 1/4s, 10/1/17 Aaa 1,276,969
1,500,000 AZ Student Loan Acquisition Auth. Rev. Bonds,
Ser. B, 6.6s, 5/1/10 Aa 1,593,750
2,500,000 AZ State Trans. Board Hwy. Rev. Bonds, Ser. A,
6 1/2s, 7/1/11 Aaa 2,762,500
Central AZ Wtr. Consv. Dist. Contract Rev. Bonds
(Central AZ), Ser. A
1,750,000 5 1/2s, 11/1/10 AA 1,817,813
3,750,000 5 1/2s, 11/1/08 AA 3,900,000
Chandler, G.O. Bonds
1,450,000 FGIC, 8s, 7/1/10 Aaa 1,854,188
4,000,000 Ser. B, FGIC, 5 1/4s, 7/1/16 Aaa 3,925,000
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,414,875
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC,
8s, 7/1/14 # Aaa 2,846,063
750,000 Cochise Cnty., Unified School Dist. No. 68
Rev. Bonds, FGIC, 7 1/2s, 7/1/09 Aaa 917,813
3,000,000 Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.), 6 3/8s, 10/1/36 BBB 3,056,250
3,880,000 Gila Cnty., Indl. Dev. Auth. Poll.
Control Rev. Bonds (Asarco Inc.), Ser. 85,
8.9s, 7/1/06 Baa 4,083,545
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC,
6 1/2s, 7/1/22 Aaa 1,087,500
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
CLI Insd., 7 1/8s, 7/1/20 AAA 1,180,000
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds (Samaritan Hlth. Svcs.), Ser. A, MBIA,
7s, 12/1/16 Aaa 4,217,500
1,000,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac. VRDN
(Samaritan Hlth. Svcs. Hosp.-B2), MBIA,
3.6s, 12/1/08 A-1 1,000,000
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg.
Rev. Bonds (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,766,788
5,000,000 Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co. NM), Ser. A, 6.3s, 12/1/26 Ba 5,062,500
Maricopa Cnty., School Dist. G.O. Bonds
1,500,000 (No. 11 Peoria U.), MBIA, 6.4s, 7/1/10 Aaa 1,603,125
2,875,000 (No. 4 Mesa U.), Ser. B, FGIC, 5s, 7/1/12 Aaa 2,803,125
Maricopa Cnty., Unified School Dist. G.O. Bonds
(No. 69 Paradise Valley), Ser. B, MBIA
2,000,000 7s, 7/1/12 Aaa 2,407,500
3,000,000 5 1/4s, 7/1/15 Aaa 2,985,000
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 1,580,369
1,500,000 Oro Valley, Muni Property Corp. Rev. Bonds (Muni.
Wtr. Syst. Canada Hills), MBIA, 5 3/8s, 7/1/26 Aaa 1,485,000
Phoenix, G.O. Bonds
1,000,000 6 3/8s, 7/1/13 Aa 1,072,500
4,000,000 5s, 7/1/19 Aa 3,865,000
1,000,000 Phoenix, Civic Impt. Corp. Wastewater Syst. Lease
Rev. Bonds, 6 1/8s, 7/1/23 AAA 1,110,000
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds, Ser. A,
MBIA, 6.9s, 1/1/23 Aaa 1,668,000
2,150,000 Phoenix, Indl. Dev. Auth. Mtge. Rev. Bonds
(Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 AAA 2,236,000
945,000 Phoenix, Indl. Dev. Auth. Rev. Bonds (Christian Care
Retirement Apts.), Ser. A, 10 1/4s, 1/1/18 AA/P 1,006,416
Pima Cnty., G.O. Bonds (Cmnty. College Dist.),
Ser. A
2,270,000 5s, 7/1/16 Aa 2,167,850
2,150,000 5s, 7/1/15 Aa 2,069,375
2,035,000 5s, 7/1/14 Aa 1,971,400
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds, FGIC,
7 1/2s, 7/1/08 Aaa 1,230,000
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,117,500
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 2,250,000
3,000,000 Salt River, Project Agric. Impt. & Pwr.
Dist. Elec. Syst. IFB, 7.399s, 1/1/19
(acquired 3/16/93, cost $3,015,990) [DBL. DAGGER] Aa 3,063,750
4,750,000 Salt River, Project Agric. Rev. Bonds, 6s, 1/1/09 Aa 5,171,563
4,400,000 Scottsdale, G.O. Bonds, 5s, 7/1/15 Aa 4,235,000
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village), Ser. A,
8 1/4s, 6/1/15 BB/P 4,330,000
1,000,000 Sedona, COP, 7.2s, 4/1/12 BBB/P 1,040,000
Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
1,800,000 8 3/4s, 12/1/16 BBB/P 1,957,500
1,995,000 8 1/2s, 12/1/21 BBB/P 2,266,819
2,685,000 8 1/4s, 12/1/14 BBB/P 3,077,681
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev.
Bonds, 8 1/2s, 6/1/05 BB 1,112,500
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 4,575,000
885,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 Aaa 931,463
Tuscon, St. & Hwy. User Rev. Bonds
3,765,000 Sr. Lien, MBIA, 6s, 7/1/10 Aaa 4,113,263
2,200,000 Ser. A, MBIA, 5s, 7/1/15 Aaa 2,117,500
1,000,000 U. of AZ COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A 1,072,500
U. of AZ Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,103,750
1,000,000 6 1/4s, 6/1/11 AA 1,060,000
1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds, MBIA,
6 7/8s, 7/1/21 Aaa 1,631,250
3,000,000 Yavapai Cnty., Indl. Dev. Auth. VRDN
(Kachina Pointe), 3.7s, 1/1/09 VMIG1 3,000,000
--------------
131,310,941
Puerto Rico (17.3%)
- ---------------------------------------------------------------------------------------------
2,500,000 Cmnwlth. of PR, Aqueduct & Swr. Auth. Rev. Bonds,
Ser. A, 7 7/8s, 7/1/17 AAA 2,706,250
Cmnwlth. of PR, Hwy & Trans. Auth.
Rev. Bonds, Ser. Y
3,225,000 6 1/4s, 7/1/13 A 3,531,375
1,000,000 MBIA, 6 1/4s, 7/1/09 Aaa 1,122,500
PR, Elec. Pwr. Auth. Rev. Bonds
2,000,000 Ser. X, 6s, 7/1/15 Baa 2,065,000
2,000,000 Ser. X, 5 1/2s, 7/1/25 Baa 1,947,500
3,800,000 Ser. Z, 5 1/2s, 7/1/13 Baa 3,771,500
3,000,000 5 1/2s, 7/1/20 Baa 2,943,750
PR, Pub. Bldg. Auth. Gtd.
Ed. & Hlth. Fac. Rev. Bonds
1,375,000 Ser. H, 7 7/8s, 7/1/16 Aaa 1,438,278
1,500,000 Ser. L, 6 7/8s, 7/1/21 Aaa 1,708,125
5,000,000 5 3/4s, 7/1/10 Aaa 5,331,250
--------------
26,565,528
- ---------------------------------------------------------------------------------------------
Total Investments (cost $150,906,769) *** $157,876,469
- ---------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $153,889,079.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent
ratings available at November 30, 1996 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, 1996. Securities rated by Putnam are indicated by "/P" and are not publicly
rated.
*** The aggregate identified cost on a tax basis is $150,910,292, resulting in gross unrealized
appreciation and depreciation of $7,542,101 and $575,924, respectively, or net unrealized
appreciation of $6,966,177.
[DBL.DAGGER] Restricted, excluding 144A securities, as to public resale. The total market value
of restricted securities held at November 30, 1996 was $3,063,750 or 2.0% of net assets.
# A portion of this security was pledged and segregated with the custodian to cover margin
requirements for futures contracts at November 30, 1996.
The rates shown on IFB, which are securities paying interest that vary inversely to changes
in the market interest rates, and VRDN's are the current interest rates at November 30, 1996.
The fund had the following industry group concentrations greater than 10% at November 30, 1996
(as a percentage of net assets):
Hospitals / Health Care 20.7%
Education 16.7
Utilities 14.3
<CAPTION>
- --------------------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1996
Aggregate Face Delivery Unrealized
Total Value Value Date Depreciation
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond
Futures (Short) 4,648,750 4,627,500 Dec. 96 $(21,250)
U. S. Treasury Bond
Futures (Short) 2,896,875 2,881,250 Mar. 97 (15,625)
- --------------------------------------------------------------------------------------------
$(36,875)
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1996 (Unaudited)
<S> <C>
Assets
- --------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $150,906,769) (Note 1) $157,876,469
- --------------------------------------------------------------------------------
Cash 664,928
- --------------------------------------------------------------------------------
Interest and other receivables 3,826,345
- --------------------------------------------------------------------------------
Receivable for shares of the fund sold 315,442
- --------------------------------------------------------------------------------
Receivable for securities sold 60,000
- --------------------------------------------------------------------------------
Total assets 162,743,184
Liabilities
- --------------------------------------------------------------------------------
Payable for variation margin 58,906
- --------------------------------------------------------------------------------
Distributions payable to shareholders 222,725
- --------------------------------------------------------------------------------
Payable for securities purchased 8,204,024
- --------------------------------------------------------------------------------
Payable for shares of the fund repurchased 14,301
- --------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 224,977
- --------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 13,301
- --------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,546
- --------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,165
- --------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 60,505
- --------------------------------------------------------------------------------
Other accrued expenses 48,655
- --------------------------------------------------------------------------------
Total liabilities 8,854,105
- --------------------------------------------------------------------------------
Net assets $153,889,079
Represented by
- --------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $150,390,965
- --------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 118,048
- --------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (3,552,759)
- --------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,932,825
- --------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $153,889,079
Computation of net asset value and offering price
- --------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($126,676,163 divided by 13,827,844 shares) $9.16
- --------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.16)* $9.62
- --------------------------------------------------------------------------------
Net asset value and offering price per class B share
($26,801,621 divided by 2,929,884 shares)+ $9.15
- --------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($411,295 divided by 44,834 shares) $9.17
- --------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.17)** $9.48
- --------------------------------------------------------------------------------
* 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
Six months ended November 30, 1996 (Unaudited)
<S> <C>
Tax exempt interest income: $4,578,405
- ---------------------------------------------------------------------------
Expenses:
- ---------------------------------------------------------------------------
Compensation of Manager (Note 2) 452,496
- ---------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 77,430
- ---------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,814
- ---------------------------------------------------------------------------
Administrative services (Note 2) 3,471
- ---------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 125,013
- ---------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 107,432
- ---------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 889
- ---------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 1,141
- ---------------------------------------------------------------------------
Reports to shareholders 13,943
- ---------------------------------------------------------------------------
Registration fees 241
- ---------------------------------------------------------------------------
Auditing 9,884
- ---------------------------------------------------------------------------
Legal 11,661
- ---------------------------------------------------------------------------
Postage 25,718
- ---------------------------------------------------------------------------
Other 3,925
- ---------------------------------------------------------------------------
Total expenses 844,058
- ---------------------------------------------------------------------------
Expense reduction (Note 2) (70,776)
- ---------------------------------------------------------------------------
Net expenses 773,282
- ---------------------------------------------------------------------------
Net investment income 3,805,123
- ---------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (839,023)
- ---------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 166,686
- ---------------------------------------------------------------------------
Net unrealized appreciation of investments
and futures during the period 6,185,585
- ---------------------------------------------------------------------------
Net gain on investments 5,513,248
- ---------------------------------------------------------------------------
Net increase in net assets resulting from operations $9,318,371
- ---------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
-----------------------------------
1996* 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- -------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------
Net investment income $ 3,805,123 $ 8,004,949
- -------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (672,337) 3,538,697
- -------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments 6,185,585 (6,356,255)
- -------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 9,318,371 5,187,391
- -------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------
From net investment income
Class A (3,245,205) (7,001,986)
- -------------------------------------------------------------------------------------------
Class B (573,575) (1,049,588)
- -------------------------------------------------------------------------------------------
Class M (8,709) (3,649)
- -------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (2,660,929) (4,209,725)
- -------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 2,829,953 (7,077,557)
- -------------------------------------------------------------------------------------------
Net assets
- -------------------------------------------------------------------------------------------
Beginning of period 151,059,126 158,136,683
- -------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $118,048 and $140,414, respectively) $153,889,079 $151,059,126
- -------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period
Six months July 3, 1995 Six months
ended (commencement ended
November 30 of operations) to November 30 Year ended
(Unaudited) May 31 (Unaudited) May 31
--------------------------------------------------------------------
1996 1996 1996 1996
---------------------------------------------------------------------
Class M Class B
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $8.85 $8.86 $ 8.82 $ 9.00
- ---------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------
Net investment income .22(c) .41 .20 .41
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .32 (.02) .33 (.18)
- ---------------------------------------------------------------------------------------------------
Total from investment
operations .54 .39 .53 .23
- ---------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------
From net investment income (.22) (.40) (.20) (.41)
- ---------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ---------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- --
- ---------------------------------------------------------------------------------------------------
Total distributions (.22) (.40) (.20) (.41)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $9.17 $8.85 $ 9.15 $ 8.82
- ---------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.15* 4.44* 6.10* 2.60
- ---------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $ 411 $ 293 $26,802 $24,050
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .65* 1.09* .83* 1.67
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.37* 4.28* 2.25* 4.52
- ---------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.43* 108.68 34.43* 108.68
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights (continued)
(For a share outstanding throughout the period)
For the period
For the July 15, 1993 Six months
nine months (commencement ended
ended Year ended of operations) November 30
May 31 August 31 to August 31 (Unaudited)
--------------------------------------------------------------------
1995+ 1994 1993 1996
--------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 8.83 $ 9.47 $ 9.39 $ 8.84
- ---------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------
Net investment income .34 .45 .11 .23
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.61) .03 .32
- ---------------------------------------------------------------------------------------------------
Total from investment
operations .51 (.16) .14 .55
- ---------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------
From net investment income (.34) (.45) (.06) (.23)
- ---------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ---------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- (.03) -- --
- ---------------------------------------------------------------------------------------------------
Total distributions (.34) (.48) (.06) (.23)
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.00 $ 8.83 $ 9.47 $ 9.16
- ---------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 5.99* (1.80) 1.45* 6.32*
- ---------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $21,538 $16,247 $2,974 $126,676
- ---------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.19* 1.60 .19* .51*
- ---------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.89* 4.82 .43* 2.58*
- ---------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.48* 34.68 5.72 34.43*
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<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 .57(d)
- --------------------------------------------------------------------------------------------------------------------
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 (%)(a) 3.38 6.45* (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(%)(b) 1.03 .70* .97 .89 .58(d)
- --------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.20 4.42* 5.55 5.82 6.34(d)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 108.68 51.48* 34.68 5.72 31.84
- --------------------------------------------------------------------------------------------------------------------
* Not annualized.
+ The fiscal year end advanced from August 31 to May 31.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charge.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter,
includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of shares
outstanding during the period.
(d) Reflects an expense limitation in effect during the period. As a result of such limitation, expenses for the
fund reflect a reduction of $0.03 per share.
</TABLE>
Notes to financial statements
November 30, 1996 (Unaudited)
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a non-diversified, open-end management investment company.
The fund seeks as high a level of current income exempt from federal
income tax and Arizona state income tax as Putnam Management believes is
consistent with preservation of capital by investing primarily in a
portfolio of Arizona tax exempt securities.
The fund offers 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 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 nor 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 Income dividends are recorded daily by
the fund and are distributed monthly. 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.
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 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 were amortized on a
straight-line basis over a five-year period and have been fully
amortized as of November 30, 1996.
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 the next $5 billion, 0.375% of the next $5
billion, 0.355% of the next $5 billion, 0.340% of the next $5 billion
and 0.330% thereafter. Prior to September 20, 1996, any amount over $1.5
billion was based on 0.40%.
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.
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 six months ended November 30, 1996, fund expenses were reduced
by $70,776 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.
Trustees of the fund receive an annual Trustees fee of $690 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 in the fund
and are invested in certain Putnam funds until distribution in
accordance with the Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
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 six months ended November 30, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $9,944 and $71 from
the sale of class A and class M shares, respectively and $29,561 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 six months ended November 30, 1996, Putnam
Mutual Funds Corp., acting as underwriter received no monies on class A
redemptions.
Note 3
Purchase and sales of securities
During the six months ended November 30, 1996, purchases and sales of
investment securities other than short-term investments aggregated
$54,289,849 and $49,744,430, 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 November 30, 1996, there was an unlimited number of shares of
beneficial interest authorized. Transaction in capital shares were as
follows:
Six months ended
November 30, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 803,161 $7,204,180
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 159,971 1,432,463
- ----------------------------------------------------
963,132 8,636,643
Shares
repurchased (1,476,398) (13,222,396)
- ----------------------------------------------------
Net decrease (513,266) $(4,585,753)
- ----------------------------------------------------
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)
- ----------------------------------------------------
Six months ended
November 30, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 332,687 $2,967,084
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,109 296,166
- ----------------------------------------------------
365,796 3,263,250
Shares
repurchased (161,594) (1,442,288)
- ----------------------------------------------------
Net increase 204,202 $1,820,962
- ----------------------------------------------------
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
- ----------------------------------------------------
Six months ended
November 30, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 17,761 $158,851
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 716 5,019
- ----------------------------------------------------
18,477 163,870
Shares
repurchased (6,788) (60,008)
- ----------------------------------------------------
Net increase 11,689 $103,862
- ----------------------------------------------------
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
- ----------------------------------------------------
Results of December 5, 1996 shareholder meeting
A meeting of shareholders of the fund was held on December 5, 1996. At
the meeting, each of the nominees for Trustees was elected, as follows:
Votes
Votes for withheld
Jameson Adkins Baxter 10,246,459 111,610
Hans H. Estin 10,233,274 124,795
John A. Hill 10,247,453 110,616
Ronald J. Jackson 10,246,459 111,610
Elizabeth T. Kennan 10,243,882 114,187
Lawrence J. Lasser 10,247,453 110,616
Robert E. Patterson 10,247,453 110,616
Donald S. Perkins 10,240,386 117,683
William F. Pounds 10,242,011 116,058
George Putnam 10,228,040 130,029
George Putnam, III 10,236,176 121,893
Eli Shapiro 10,155,417 202,652
A.J.C. Smith 10,236,174 121,895
W. Nicholas Thorndike 10,238,723 119,346
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
auditors for the fund was approved as follows: 9,954,432 and 135,258
votes against, with 268,379 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in the securities of a single issuer was approved
as follows: 8,881,036 votes for, and 406,401 votes against, with
1,070,632 abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to making loans through purchases of debt obligations,
repurchase agreements and securities loans was approved as follows:
8,553,841 votes for, and 732,029 votes against, with 1,072,199
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in real estate was approved as follows: 8,719,506
votes for, and 585,054 votes against, with 1,053,509 abstentions and
broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to concentration of its assets was approved as follows:
8,852,765 votes for, and 445,491 votes against, with 1,059,813
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in senior securities was approved as follows:
8,871,778 votes for, and 433,487 votes against, with 1,052,804
abstentions and broker non-votes.
A proposal to amend the fund's fundamental investment restriction with
respect to investments in commodities or commodity contracts was
approved as follows: 8,439,732 votes for, and 854,559 votes against,
with 1,063,778 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in securities of issuers in which management
of the fund or Putnam Investment Management, Inc. owns securities was
approved as follows: 8,569,099 votes for, and 724,589 votes against,
with 1,064,381 abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to margin transactions was approved as follows: 8,350,096
votes for, and 945,777 votes against, with 1,062,196 abstentions and
broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to short sales was approved as follows: 8,370,640 votes
for, and 912,640 votes against, with 1,074,789 abstentions and broker
non-votes.
A proposal to eliminate the fund's fundamental investment restriction
which limits the fund's ability to pledge assets was approved as
follows: 8,319,695 votes for, and 950,556 votes against, with 1,087,818
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investments in restricted securities was approved as
follows: 8,343,244 votes for, and 917,273 votes against, with 1,097,552
abstentions and broker non-votes.
A proposal to eliminate the fund's fundamental investment restriction
with respect to investing to gain control of a company's management was
approved as follows: 8,457,853 votes for, and 818,591 votes against,
with 1,081,625 abstentions and broker non-votes.
All tabulations are rounded to nearest whole number.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund *
Health Sciences Trust
International Growth Fund +
International New Opportunities Fund
Investors Fund
New Opportunities Fund
OTC & Emerging Growth Fund [DBL. DAGGER]
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund
High Yield Trust
Income Fund
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
LIFESTAGESM 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:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
MOST CONSERVATIVE
INVESTMENTS **
Putnam money market funds: ++
California Tax Exempt Money Market Fund
Money Market Fund
New York Tax Exempt Money Market Fund
Tax Exempt Money Market Fund
CDs and savings accounts [2 DBL. DAGGERS]
* Formerly Natural Resources Fund
+ Formerly Overseas Growth Fund
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[SECTION MARK] Not available in all states.
** Relative to above.
++ An investment in a money market fund is neither insured
nor guaranteed by the U.S. government. These funds are
managed to maintain a price of $1.00 per share,
although there is no assurance that this price will be
maintained in the future.
[2 DBL. DAGGERS] Not offered by Putnam Investments. Certificates of
deposit offer a fixed rate of return and may be insured
up to certain limits by federal/state agencies.
Savings accounts may also be insured up to certain
limits. Please call your financial advisor or Putnam at
1-800-225-1581 to obtain a prospectus for any Putnam
fund. It contains more complete information, including
charges and expenses. Please read it carefully before
you invest or send money.
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past six years. In 1995, over 146,000 tests of 56 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
* HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
* SWITCH FUNDS EASILY
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-
1581.
* Regular investing of course, does not guarantee a profit or protect
against a loss in a declining market.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
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
William J. Curtin
Vice President
Jerome J. Jacobs
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. You can also learn more at Putnam Investments'
website: http://www.putnaminv.com.
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
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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29944-855/235/2AA 1/97
