Putnam
Arizona
Tax Exempt
Income Fund
ANNUAL REPORT
May 31, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Depending on your tax bracket, municipal bonds may offer juicier
after-tax yields than Treasuries of comparable maturities."
-- Money, May 1997
* "For four years running, Arizona has maintained its place at the
very top of the nation in economic growth and prosperity. As I always like
to remind you, this has not been a matter of chance. It has been a matter
of choice."
-- Governor Fife Symington, State of the State Address,
January 13, 1997
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
18 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Putnam Arizona Tax Exempt Income Fund began fiscal 1997 on a hopeful, yet
cautious note in June 1996 after a somewhat tumultuous year for the municipal
bond market. The hope was warranted, as the market rallied in the fall. The
caution was justified, for the rally ended abruptly in late winter, cut short
by investor worries that inflation and interest rates would both rise in the
wake of an economy still growing too fast.
From the vantage point of the fiscal year's close on May 31, 1997, we can see
that the volatility, while somewhat nerve-racking for many investors, was
unusually low. By spring, even the Federal Reserve Board's increase in the
federal funds rate in late March, the source of considerable earlier anxiety,
caused little stir.
It is in these contexts that Fund Manager Howard Manning discusses your fund's
performance for the year just past and his view of its prospects for the year
ahead. His report begins on the following page.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 16, 1997
Report from the Fund Manager
Howard K. Manning
Compared with results in other years in the not-too-distant past, the
municipal bond market for the 12 months ended May 31, 1997, has been
characterized by abnormally low volatility in all dimensions. This is true not
only for interest-rate movements, but changes in bond spreads as well. Despite
this environment, punctuated by waves of uncertainty over economic strength
and interest rates, Putnam Arizona Tax Exempt Income Fund posted attractive
returns for the 12 months ended May 31, 1997: Class A shares generated 7.52%
at net asset value, 2.42% at public offering price. In comparison, the Lehman
Brothers Municipal Bond Index reported a return of 8.29%. Please see pages 9
through 11 for Class B and Class M shares, and performance
over longer periods.
* WAITING GAME OVER INTEREST RATES CONTINUES
Even the increase of a quarter of a percentage point by the Federal Reserve
Board in late March was virtually a nonevent for the markets, primarily
because the long-awaited rate increase had already been priced into the
market. Throughout the year, interest rates moved up and down in a relatively
narrow trading range with the 30-year Aaa municipal bond falling from 5.82% to
5.47% over the period. This produced modest appreciation in net asset value
while keeping dividends at an attractive level.
At its May policy-setting meeting, the Fed once again took no action on
interest rates. The municipal bond market's reaction appeared subdued, but
bond prices did respond favorably. Until there is more conclusive evidence of
inflation, we believe the bond markets will continue to show some uncertainty
while they await further Fed action.
* FUND MANAGEMENT ADOPTS DEFENSIVE STRATEGIES
Amidst robust economic growth, and with yields on long-term municipal bonds
near historic lows, we have adopted a defensive strategy in managing your
fund. Moving the portfolio toward a slightly shorter duration is one way we
are accomplishing this. Duration is a measure of the portfolio's maturity
structure; shorter durations can help preserve principal value as interest
rates rise, although they may also prevent the fund from participating fully
in a rally should rates decline.
Another defensive strategy we are using is to place a greater emphasis on
premium bonds. Premium bonds sell at prices above par value ($100.00),
carrying higher coupons and tending to be more stable in price when interest
rates are rising. At period's end, the average market price of the fund's
bonds was well above par.
Credit spreads nationwide and in Arizona have been extremely narrow, meaning
that the yields offered by high-quality bonds are close to those offered by
lower-rated bonds. This normally happens in periods of strong economic
activity. Credit quality within the fund is high -- stemming from the
increasing penetration of municipal bond insurance, which bestows Aaa ratings
on approved issues.
* LOCAL ECONOMY SPARKLES AMIDST LOW SUPPLY OF BONDS
A vibrant economy and a growing population place Arizona in an enviable
financial position and Arizona municipal bonds are benefiting. Despite the
demand, however, the supply of Arizona offerings remains lean. This situation
is magnified by the lack of local lower-investment-grade bonds available for
investment. Because issuers can pay a lower interest rate if their bonds are
insured, much of the supply of Baa and A bonds with attractive yields has been
eliminated by the purchase of insurance.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/Health care 20.8%
Education 20.8%
Transportation 18.8%
Utilities 8.6%
Housing 8.0%
Footnote reads:
*Based on net assets as of 5/31/97. Holdings will vary over time.
The statewide economy has also developed international ventures that may help
buffer future downturns. Major markets for Arizona products include Mexico,
the United Kingdom,
and Japan.
* FOCUS ON IMPROVING CALL PROTECTION AND COUPON STRUCTURE
As we focus on improving the fund's income stream and price stability, we have
continued our efforts in three key areas: upgrading call protection and
optimizing both yield-curve position and coupon structure. Call protection
means reducing the risk that a bond will be called away at a certain date if
interest rates are lower than when the bond was originally issued. One way to
lower this risk is to emphasize noncallable bonds when making investment
decisions for the fund.
Optimizing yield curve position also results in improving the so-called aging
characteristics of the portfolio. Given the current flatness of the yield
curve, bonds with intermediate maturities will increase in value as they draw
closer to their call dates or maturity dates and rotate toward the shorter end
of the yield curve. Capitalizing on this appreciation potential -- which
operates independently of interest-rate changes -- can help us build the
overall value of the portfolio over time.
* HEALTH CARE REIGNS AS TOP-PERFORMING SECTOR
Bonds in the health-care sector continue to outperform other sectors. Within
this group, we have focused on the Sierra Vista Community Hospital. We
purchased this bond not only for its attractive tax-free income and improving
credit situation, but because we believe it is a candidate for prerefunding.
This process takes place when the issuer floats a second bond to raise funds
to pay off an older bond, generally in a lower interest-rate environment. The
proceeds from the second bond are invested in Aaa-rated U.S. Treasury
securities that mature around the time the older bond can be called. The
market then perceives this added security as a credit upgrade, which boosts
the bond's price. With a coupon of 8.75%, these bonds have contributed
substantially to the fund's income.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aaa 47.6%
Aa 19.1%
A 5.6%
Baa 16.5%
Ba 8.1%
B 1.4%
VMIGI 1.7%
Footnote reads:
*As a percentage of market value as of 5/31/97. A bond rated Baa or higher is
considered investment grade. All ratings relfect Moody's descriptions, unless
noted otherwise; percentages may include unrated bonds considered by Putnam
Management to be of comparable quality. Ratings will vary over time.
We also hold a small position in the City of Phoenix general obligation bonds.
These bonds carry ratings of AA+ and Aa1 from Standard & Poor's and Moody's,
respectively. While these holdings may change, these high ratings reflect the
strength of the local economy, a rebound in assessed values, and good city
management.
* FUND MANAGEMENT PLANNING TO MAINTAIN DEFENSIVE STRATEGIES
Looking ahead, we consider continuation of the current low volatility to be
improbable. In fact, unless the economy shows more convincing signs of a
slowdown, we believe there is a strong possibility of another Fed tightening
this summer. The next employment report, a key measure of the economy's growth
pace, will be watched by the markets very closely. However, investors should
not let a small rise in interest rates keep them from buying municipal bonds.
Municipals still represent good after-tax value against taxable investments
and an excellent way to diversify a stock-heavy portfolio.
As steady economic growth continues, we currently expect to maintain a
defensive posture that emphasizes high current income and price stability.
This should serve the funds well if rates move up. Our large, highly
experienced staff of research analysts will concentrate on trying to identify
undervalued issuers -- particularly of bonds rated A and Baa -- to generate an
attractive and competitive income for the fund. In this environment, special
attention to credit and sector selection becomes very important in providing
price stability, steady income, and liquidity.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 5/31/97, 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 high current income free from federal and Arizona income taxes,
consistent with capital preservation.
TOTAL RETURN FOR PERIODS ENDED 5/31/97
Class A Class B Class M
(inception date) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 7.52% 2.42% 6.94% 1.94% 7.19% 3.68%
- ------------------------------------------------------------------------------
5 years 35.75 29.33 30.78 28.78 33.69 29.35
Annual average 6.30 5.28 5.51 5.19 5.98 5.28
- ------------------------------------------------------------------------------
Life of fund 54.57 47.31 47.34 47.34 51.14 46.24
Annual average 7.12 6.31 6.31 6.31 6.74 6.19
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/97
Lehman Bros. Consumer
Municipal Bond Price
Index Index
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1 year 8.29% 2.23%
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5 years 41.80 14.60
Annual average 7.24 2.76
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Life of fund 60.64 18.95
Annual average 7.78 2.78
- ------------------------------------------------------------------------------
Returns for class A and class M shares at POP reflect the current maximum
initial sales charges of 4.75% and 3.25%, respectively. Class B share
returns for the 1- and 5-year periods reflect the applicable contingent
deferred sales charge (CDSC), which is 5% in the first year, declining to
1% in the sixth year, and eliminated thereafter. Returns shown for class B
and class M for periods prior to their inception are derived from the
historical performance of class A shares, adjusted to reflect both the
initial sales charge or CDSC, if any, currently applicable to each class
and, in the case of class B and class M shares, the higher operating
expenses applicable to such shares. Returns shown for class A shares have
not been adjusted to reflect payments under the class A distribution plan
prior to its implementation. All returns assume reinvestment of
distributions at NAV and represent past performance; they do not guarantee
future results. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 1/30/91
Fund's
class A Lehman Bros. Consumer
shares Municipal Price
at POP Bond Index Index
------- ----------- --------
1/30/91 9525 10000 10000
12/31/91 10565 11171 10268
12/31/92 11519 12155 10566
12/31/93 12905 13648 10856
12/31/94 12039 12945 11146
12/31/95 14095 15205 11429
12/31/96 14518 15880 11809
5/31/97 14731 16064 11895
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have been
valued at $14,734 on 5/31/97 and a $10,000 investment in the fund's class M
shares would have been valued at $15,114 ($14,624 at public offering price).
Please see the first page of the performance section for the method of
performance calculation.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/97
Class A Class B Class M
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Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.461950 $0.402491 $0.434620
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Total $0.461950 $0.402491 $0.434620
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Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/96 $8.84 $9.28 $8.82 $8.85 $9.15
- ------------------------------------------------------------------------------
5/31/97 9.03 9.48 9.02 9.04 9.34
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate1 5.04% 4.80% 4.39% 4.74% 4.59%
- ------------------------------------------------------------------------------
Taxable equivalent2 8.80 8.38 7.66 8.28 8.01
- ------------------------------------------------------------------------------
Current 30-day SEC yield3 4.73 4.50 4.08 4.43 4.28
- ------------------------------------------------------------------------------
Taxable equivalent2 8.26 7.86 7.12 7.73 7.47
- ------------------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided by NAV
or POP at end of period.
2 Assumes maximum 42.72% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous. For
some investors, investment income may be subject to the alternative
minimum tax. Income may also be subject to state and local taxes.
3 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURNS FOR PERIODS ENDED 6/30/97
(most recent calendar quarter)
Class A Class B Class M
(inception date) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
1 year 7.38% 2.32% 6.58% 1.58% 7.05% 3.56%
- ------------------------------------------------------------------------------
5 years 34.7 28.27 29.75 27.75 32.64 28.39
Annual average 6.14 5.11 5.35 5.02 5.81 5.13
- ------------------------------------------------------------------------------
Life of class 56.07 48.73 48.54 48.54 52.57 47.62
Annual average 7.19 6.39 6.37 6.37 6.81 6.26
- ------------------------------------------------------------------------------
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. Please see the first page of the performance section for
method of performance calculation.
TERMS AND DEFINITIONS
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.
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. 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.
Consumer Price Index (CPI ) is a commonly used measure of inflation; it
does not represent an investment return.
Report of independent accountants
For the fiscal year ended May 31, 1997
To the Trustees and Shareholders of
Putnam Arizona Tax Exempt Income Fund
We have audited the accompanying statement of assets and liabilities of Putnam
Arizona Tax Exempt Income Fund, including the portfolio of investments owned,
as of May 31, 1997, and the related statement of operations for the year then
ended and the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of May 31, 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Putnam Arizona Tax Exempt Income Fund as of May 31, 1997, the results of its
operations for the year then ended and the changes in its net assets for each
of the two years in the period then ended and the financial highlights for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 16, 1997
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31, 1997
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
CLI Insd. -- Connie Lee Insurance Insured
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FNMA Coll. -- Federal National Mortgage Association Collateralized
FHA Insd. -- Federal Housing Administration Insured
FHLMC Coll. -- Federal Home Loan Mortgage Corporation Collateralized
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.2%) *
PRINCIPAL AMOUNT RATING** VALUE
<S> <C> <C> <C>
Arizona (89.8%)
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$ 1,975,000 AZ State Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB $ 2,145,344
AZ State Trans. Board Excise Tax Rev. Bonds
(Maricopa Cnty. Regl. Area), Ser. A, AMBAC
5,000,000 6 1/2s, 7/1/04 Aaa 5,512,500
1,950,000 5.6s, 7/1/03 Aaa 2,042,625
4,000,000 AZ State Trans. Board Hwy. Rev. Bonds,
Ser. A, 6s, 7/1/08 Aa 4,345,000
1,500,000 AZ State Student Loan Acquisition Auth.
Rev. Bonds, Ser. B, 6.6s, 5/1/10 Aa 1,591,875
Central AZ Wtr. Consv. Dist. Contract Rev. Bonds
(Central AZ), Ser. A
1,750,000 5 1/2s, 11/1/10 AA 1,782,813
3,750,000 5 1/2s, 11/1/08 AA 3,890,620
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,825,188
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,398,375
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s,
7/1/14 # Aaa 2,797,688
Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
1,995,000 Ser. B, 8 1/2s, 12/1/21 BBB/P 2,256,844
2,685,000 Ser. C, 8 1/4s, 12/1/14 BBB/P 3,067,613
750,000 Cochise Cnty., Unified School Dist. No. 68
Rev. Bonds, FGIC, 7 1/2s, 7/1/09 Aaa 903,750
4,000,000 Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.), 6 3/8s, 10/1/36 BBB 4,045,000
3,880,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev. Bonds
(Asarco Inc.), Ser. 85, 8.9s, 7/1/06 Baa 4,008,350
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds,
FGIC, 6 1/2s, 7/1/22 Aaa 1,073,750
1,500,000 Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds
(Connection Dev. Fee), 6 7/8s, 4/1/14 BB/P 1,503,750
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac.
Rev. Bonds, CLI Insd., 7 1/8s, 7/1/20 AAA 1,162,500
4,500,000 Maricopa Cnty., Hosp. Rev.Bonds
(Sun Health Corp.), 6 1/8s, 4/1/18 Baa 4,550,625
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg.
Rev. Bonds (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,750,100
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds (Samaritan Hlth. Svcs.),
Ser. A, MBIA, 7s, 12/1/16 Aaa 4,099,375
5,000,000 Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co. NM), Ser. A, 6.3s, 12/1/26 Ba 5,068,750
Maricopa Cnty., School Dist. G.O. Bonds
2,000,000 (Dist. No. 69 Paradise Valley),
Ser. B, MBIA, 7s, 7/1/12 Aaa 2,347,500
1,500,000 (No. 11 Peoria U.), MBIA, 6.4s, 7/1/10 Aaa 1,588,125
3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,468,688
2,875,000 (No. 4 Mesa U.), Ser. B, FGIC, 5s, 7/1/12 Aaa 2,767,188
3,650,000 Mesa G.O. Bonds, FGIC, 6 1/2s, 7/1/09 Aaa 4,083,438
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 1,192,500
1,455,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds (Coopers Ridge Apts.),
FHA Insd., 7 3/8s, 4/1/32 AAA 1,558,669
Phoenix G.O. Bonds
1,000,000 6 3/8s, 7/1/13 Aa 1,061,250
1,000,000 6s, 7/1/10 Aa 1,072,500
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds,
Ser. A, MBIA, 6.9s, 1/1/23 Aaa 1,658,000
2,150,000 Phoenix, Indl. Dev. Auth. Mtge. Rev. Bonds
(Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 AAA 2,222,563
875,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Christian Care Retirement Apts.),
Ser. A, 10 1/4s, 1/1/18 AA/P 912,791
Pima Cnty., G.O. Bonds (Cmnty. College Dist.), Ser. A
2,270,000 5s, 7/1/16 Aa 2,116,775
2,150,000 5s, 7/1/15 Aa 2,031,750
2,035,000 5s, 7/1/14 Aa 1,938,338
2,015,000 Pima Cnty., Indl. Dev. Auth. Single Family Mtge.
Stepped-Coupon Rev. Bonds, FNMA Coll.,
GNMA Coll. , FHLMC Coll., 6.15s,
(6.95s, 8/1/98), 11/1/23 ++ AAA 2,139,406
2,500,000 Pima Cnty., Indl. Dev. Auth. VRDN
(Tucson Elec. Pwr. Ivington),
Ser. A, 3.9s, 10/1/22 (Societe Gernerale LOC) VMIG1 2,500,000
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds,
FGIC, 7 1/2s, 7/1/08 Aaa 1,212,500
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,097,500
2,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.),
Ser. A, 8 1/8s, 12/1/22 B/P 2,112,500
1,325,000 Pinal Cnty., School Dist. (AZ U., Apache Junction),
Ser. A, FGIC, 6.8s, 7/1/08 Aaa 1,533,688
3,250,000 Salt River, Project Agric Rev. Bonds, 6s, 1/1/09 Aa 3,514,063
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village),
Ser. A, 8 1/4s, 6/1/15 BB/P 4,390,000
1,000,000 Sedona COP, 7.2s, 4/1/12 BBB/P 1,033,750
1,800,000 Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp.), 8 3/4s, 12/1/16 Aaa 1,973,250
1,000,000 South Tucson, Muni. Property Corp. Fac.
Rev. Bonds, 8 1/2s, 6/1/05 BB 1,092,500
3,985,000 Tucson G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 4,463,200
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A 4,500,000
880,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 AAA 919,600
Tuscon, St. & Hwy. User Rev. Bonds.
3,765,000 Sr. Lien, MBIA, 6s, 7/1/10 Aaa 4,042,669
2,200,000 Ser. A, MBIA, 5s, 7/1/15 Aaa 2,079,000
1,000,000 U. of AZ COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A 1,058,750
U. of AZ Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,087,500
1,000,000 6 1/4s, 6/1/11 AA 1,050,000
1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds,
MBIA, 6 7/8s, 7/1/21 Aaa 1,605,875
--------------
136,248,261
Puerto Rico (8.4%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Cmnwlth. of PR G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,103,750
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
3,225,000 Ser. Y, 6 1/4s, 7/1/13 Baa 3,503,156
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,112,500
Cmnwlth of PR Pub. Bldg. Auth. Gtd. Ed. & Hlth.
Fac. Rev. Bonds
1,500,000 Ser. L, 6 7/8s, 7/1/21 Aaa 1,680,000
5,000,000 Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 5,275,000
--------------
12,674,406
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Total Investments (cost $144,499,321) *** $ 148,922,667
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $151,585,868.
** The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available at May 31, 1997 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at May 31, 1997. Securities rated by Putnam are indicated by
"/P" and are not publicly rated. Ratings are not covered by the Report
of independent accountants.
*** The aggregate identified cost on a tax basis is $144,502,844,
resulting in gross unrealized appreciation and depreciation of
$5,101,628 and $681,805, respectively, or net unrealized appreciation
of $4,419,823.
++ The interest rate and date shown parenthetically represent the
new interest rate to be paid and the date the fund will begin receiving
interest at this rate.
# A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at May 31,
1997.
The rates shown on VRDN's, which are securities paying interest
rates that vary inversely to changes in the market interest rates, are
the current interest rates at May 31, 1997.
The fund had the following industry group concentrations greater
than 10% at May 31, 1997 (as a percentage of net assets):
Education 20.8%
Hospitals/Healthcare 20.8
Transportation 18.8
The fund had the following insurance concentrations greater than 10%
at May 31, 1997 (as a percentage of net assets):
FGIC 14.4%
MBIA 13.9
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1997
Aggregate Face Expiration Unrealized
Total Value Value Date Depreciation
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bond
Index Futures (Short) $9,945,000 $9,619,132 June 97 $(325,868)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1997
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $144,499,321) (Note 1) $148,922,667
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 3,429,915
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 81,672
- ---------------------------------------------------------------------------------------------------
Total assets 152,434,254
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 145,533
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 26,563
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 200,164
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 145,585
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 225,915
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 22,195
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 5,617
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,148
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 60,956
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 14,710
- ---------------------------------------------------------------------------------------------------
Total liabilities 848,386
- ---------------------------------------------------------------------------------------------------
Net assets $151,585,868
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $150,252,019
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 98,014
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments
(Note 1) (2,861,643)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,097,478
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $151,585,868
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($122,743,039 divided by 13,590,218 shares) $9.03
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.03)* $9.48
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($28,340,214 divided by 3,142,442 shares)+ $9.02
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($502,615 divided by 55,575 shares) $9.04
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.04)** $9.34
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more
and on group sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more
and on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1997
<S> <C>
Tax exempt interest income: $ 9,071,401
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 902,931
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 166,122
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 14,979
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,884
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 247,454
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 222,553
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,032
- --------------------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 1,141
- --------------------------------------------------------------------------------------------------
Reports to shareholders 23,559
- --------------------------------------------------------------------------------------------------
Registration fees 316
- --------------------------------------------------------------------------------------------------
Auditing 25,598
- --------------------------------------------------------------------------------------------------
Legal 18,924
- --------------------------------------------------------------------------------------------------
Postage 11,361
- --------------------------------------------------------------------------------------------------
Other 6,725
- --------------------------------------------------------------------------------------------------
Total expenses 1,650,579
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (97,728)
- --------------------------------------------------------------------------------------------------
Net expenses 1,552,851
- --------------------------------------------------------------------------------------------------
Net investment income 7,518,550
- --------------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (443,972)
- --------------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Notes 1 and 3) 465,079
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the year 3,350,238
- --------------------------------------------------------------------------------------------------
Net gain on investments 3,371,345
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $10,889,895
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
- ----------------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 7,518,550 $ 8,004,949
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 21,107 3,538,697
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments 3,350,238 (6,356,255)
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 10,889,895 5,187,391
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (6,368,622) (7,001,986)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,175,109) (1,049,588)
- ----------------------------------------------------------------------------------------------------------------------
Class M (19,547) (3,649)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (2,799,875) (4,209,725)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 526,742 (7,077,557)
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 151,059,126 158,136,683
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $98,014 and $140,414, respectively) $151,585,868 $151,059,126
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
For the
nine months
Per-share ended
operating performance Year ended May 31 May 31 Year ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995+ 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.84 $9.01 $8.84 $9.47 $9.07
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .46 .47 .38 .51 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .19 (.17) .17 (.61) .47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .65 .30 .55 (.10) 1.01
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.46) (.47) (.38) (.50) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.46) (.47) (.38) (.53) (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.03 $8.84 $9.01 $8.84 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.52 3.38 6.45* (1.07) 11.54
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $122,743 $126,716 $136,598 $142,950 $145,304
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .98 1.03 .70* .97 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.11 5.20 4.42* 5.55 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 73.61 108.68 51.48* 34.68 5.72
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the
nine months For the period
Per-share ended Year ended July 15, 1993+
operating performance Year ended May 31 May 31 August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995+ 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $8.82 $9.00 $8.83 $9.47 $9.39
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .40 .41 .34 .45 .11
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .20 (.18) .17 (.61) .03
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .60 .23 .51 (.16) .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.41) (.34) (.45) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.40) (.41) (.34) (.48) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.02 $8.82 $9.00 $8.83 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.94 2.60 5.99* (1.80) 1.45*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $28,340 $24,050 $21,538 $16,247 $2,974
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.63 1.67 1.19* 1.60 .19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.44 4.52 3.89* 4.82 .43*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 73.61 108.68 51.48* 34.68 5.72
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share Year ended July 3, 1995+
operating performance May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.85 $8.86
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .43(c) .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .19 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .62 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.04 $8.85
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.19 4.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $503 $293
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.28 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.75 4.28*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 73.61 108.68
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* 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.
</TABLE>
Notes to financial statements
May 31, 1997
Note 1
Significant accounting policies
Putnam Arizona Tax Exempt Income Fund (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 taxable
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, as amended. 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, 1997, the fund had a capital loss carryover of approximately
$2,487,000 available to offset future capital gains, if any. The amount of the
carryover and the expiration dates are:
Loss Carryover Expiration
- ------------------ --------------------
$1,952,000 May 31, 2003
$ 351,000 May 31, 2004
$ 184,000 May 31, 2005
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 at least annually. The amount and
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles.
These differences include treatment of capital loss carryover, market
discount, and realized and unrealized gains and losses on certain futures
contracts. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available capital loss
carryovers) under income tax regulations. For the year ended May 31, 1997,
the fund reclassified $2,328 to increase undistributed net investment income
and $2,328 to increase accumulated net realized loss on investments. The
calculation of net investment income per share in the financial highlights
table excludes these adjustments.
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. The premium in excess of the call
price, if any, is amortized to the call date; thereafter, the remaining excess
premium is amortized to maturity.
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 have been fully amortized over a
five-year period as of May 31, 1997.
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 of
average net assets, 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 of the next $5 billion, 0.340% of the next $5 billion and
0.33% thereafter. Prior to September 20, 1996, any amount over $1.5 billion
was based on 0.40%.
As part of the custodian contract between the subcustodian bank and PFTC, the
subcustodian bank has a lien on the securities of the fund to the extent
permitted by the funds investment restrictions to cover any advances made by
the subcustodian bank for the settlement of securities purchased by the fund.
At May 31, 1997, the payable to the subcustodian bank represents the amount
due for cash advance for the settlement of a security purchased.
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 May 31, 1997, fund expenses were reduced by $97,728 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 $390 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 has 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 year ended May 31, 1997, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $19,256 and $167 from the sale of
class A and class M shares, respectively and $64,409 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the year
ended May 31, 1997, Putnam Mutual Funds Corp., acting as underwriter received
no monies on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1997, purchases and sales of investment
securities other than short-term investments aggregated $107,277,609 and
$211,012,790, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Capital shares
At May 31, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transaction in capital shares were
as follows:
Year ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,483,127 $13,346,426
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 313,766 2,821,411
- ------------------------------------------------------------
1,796,893 16,167,837
Shares
repurchased (2,547,785) (22,902,316)
- ------------------------------------------------------------
Net decrease (750,892) $(6,734,479)
- ------------------------------------------------------------
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)
- ------------------------------------------------------------
Year ended
May 31, 1996
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 762,312 $6,839,527
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 67,815 609,235
- ------------------------------------------------------------
830,127 7,448,762
Shares
repurchased (413,367) (3,714,173)
- ------------------------------------------------------------
Net increase 416,760 $3,734,589
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 36,584 $327,649
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,538 13,848
- ------------------------------------------------------------
38,122 341,497
Shares
repurchased (15,692) (141,482)
- ------------------------------------------------------------
Net increase 22,430 $200,015
- ------------------------------------------------------------
For the period
July 3, 1995
(commencement
of operations) to
May 31, 1996
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 32,771 $301,786
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 374 3,355
- ------------------------------------------------------------
33,145 305,141
Shares
repurchased -- --
- ------------------------------------------------------------
Net increase 33,145 $305,141
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.14% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in Januay 1998 will show the tax status of all
distributions paid to your account in calendar 1997.
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.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
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.
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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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34407-855/235/2AA 7/97
