Putnam
Arizona
Tax Exempt
Income Fund
ANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Positive trends appear to be in place, and we are confident that
our investments in the state's diverse economic sectors -- many of which
focus on improving the quality of life in Arizona -- can benefit as a
result."
-- Jerome J. Jacobs, manager
Putnam Arizona Tax Exempt Income Fund
* "Surging tax revenues in most states help bolster municipal credit
bond ratings. Standard & Poor's says the number of rating upgrades in this
year's first quarter was more than nine times the number of downgrades."
-- The Wall Street Journal, April 8, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
14 Portfolio holdings
18 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Analyzing risk premiums, yield spreads, call dates, yield curves, credit
ratings, supply-and-demand dynamics, taxable versus tax-exempt yield
relationships, and a host of other factors is all in a day's work for Putnam's
Tax-Exempt Bond Group. The result was another period of competitive
performance for Putnam Arizona Tax Exempt Income Fund's fiscal year, which
closed on May 31, 1998.
I am pleased to inform you that Jerome J. Jacobs has been named the manager of
your fund. Jerry, who joined Putnam in 1996, is also chief investment officer
of the Tax-Exempt Fixed-Income Group. He was previously with the Vanguard
Group of Investment Companies and Butcher and Singer and has 18 years of
investment experience.
In the following report, Jerry discusses the fund's performance during fiscal
1998 and then takes a look at prospects for the tax-exempt market, especially
with regard to Arizona, in the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Manager
Jerome J. Jacobs
In any discussion of Arizona's economy, glowing reports of fast growth in the
state's employment and private business sectors usually take the limelight.
However, in reality, the growth in employment has little correlation with the
economic well-being of the state. Nevertheless, positive trends appear to be
in place, and we are confident that our investments in the state's diverse
economic sectors -- many of which focus on improving the quality of life in
Arizona -- can benefit as a result.
Putnam Arizona Tax Exempt Income Fund's class A shares delivered returns of
8.28% at net asset value and 3.14% at public offering price for the 12-month
period ended May 31, 1998. For complete performance details, please refer to
the performance summaries that begin on page 8.
* ATTRACTIVE PRICES FOR MUNI BOND INVESTORS
Despite the relative calm that has fallen over the $1.3 trillion municipal
bond market, prices on these bonds have actually become very attractive
relative to the Treasury market -- a state of affairs that hasn't occurred
since the flat-tax scare of 1996. Municipal bonds (as represented by 30-year
insured municipals) are offering almost 90% of the yield of long-term Treasury
bonds. Since the typical level is 84%, the current percentage makes municipal
bond prices remarkably low.
There is more to this market than just the unusually attractive prices. The
tranquillity -- or lack of action -- in the overall U.S. bond market has also
been making news. For example, the yield on the benchmark 30-year U.S.
Treasury bond has hovered within a tight range of 5.6% to 6.1% during the past
six months, making it the least volatile period since 1979.
The first half of 1998 has also been notable for its huge supply, including
the sale of the largest municipal bond issue in history -- $3.4 billion by the
Long Island Power Authority in May.
Before the bonds were sold in May, there were fears of an overabundance of
supply, but because of prevailing attractive prices, the market easily
absorbed this huge issue and the all-important supply-and-demand ratios have
stayed in balance. Upon this quiet playing field, there have been fewer
opportunities for profit, but your fund has continued to deliver what it has
promised to shareholders: a reliable stream of income exempt from federal
taxes along with relatively low share price volatility.
* TARGETING BONDS WITH BEST VALUE
Also noteworthy is the unusually flat tax-exempt yield curve. With the 30-year
bond paying only a modest 30 to 40 basis points over a 10-year bond, investors
are not compensated for taking on higher risk. For this reason, we have found
the best value (attractive yield with minimal volatility) in the intermediate
range of the yield curve -- anywhere from 10 to 15 years.
Another way of providing shareholders with the best value is to improve the
call risk within the fund. Noncallable bonds or bonds with distant call dates
enable us to provide the highest and most durable level of income. Callable
bonds have the option of being called away by the issuer at a certain future
date usually if interest rates are lower than when the bonds were first
issued. By avoiding callable bonds, the portfolio has a better chance of
maintaining a reliable level of income.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/health care 24.1%
Education 13.3%
Utilities 11.9%
Housing 10.2%
Transportation 9.8%
Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.
It is always important to highlight careful security selection and in-depth
credit analysis as a fundamental investment strategy of the fund. This
strategy becomes even more important when we invest in bonds that carry
ratings below investment grade. These are the bonds that can add tremendously
to a fund's income level, but they also mean greater credit risk and require
the most meticulous research efforts.
Health-care issues, representing 24.1% of the fund's net assets and the
largest sector, continue to perform well in spite of forthcoming reductions in
the Medicare budget. Because of the inherently lower quality ratings of the
bonds in this sector, we look for potential merger/acquisition candidates as
we select the fund's holdings.
When the supply of local municipal bonds is low, one option available to the
managers of all single-state municipal bond funds is to purchase municipal
bonds issued by the Commonwealth of Puerto Rico or other tax-exempt entities
on the island. Puerto Rican municipal bonds are free from federal, state, and
local income taxes in Arizona. Well-structured Puerto Rican bonds are easier
to find and can offer the positive attributes that may not be readily
available in the scarce Arizona market. Currently our analysis indicates that
Puerto Rico is in solid fiscal and economic shape and the bonds we own either
are insured by a municipal insurance agency or have an attractive credit
rating without insurance.
* DESPITE LOW INTEREST RATES, ROOM FOR CAUTION
While the Asian crisis has been widely publicized as negative for economic
growth around the world, it has produced some positive effects in the United
States. Fears of the financial turmoil in Asia and in other emerging markets
have helped keep interest rates low. In turn, low interest rates have helped
improve corporate balance sheets, encouraged construction, and contributed to
low unemployment.
Although we are quite satisfied with the financial condition of Arizona, there
is room for caution. Governor Hull is wise to acknowledge that this economic
growth cycle can't last forever. In preparation for the inevitable slowdown, a
budget stabilization fund -- the so-called Rainy Day Fund -- has been
established from revenues to help protect Arizona residents from financial
setbacks during economic downturns.
[GRAPHIC OMITTED: pie chart of CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Ba -- 12.1%
Baa -- 16.5%
A -- 5.6%
Aa -- 15.3%
Aaa -- 49.1%
B -- 1.4%
Footnote reads:
* Based on percentage of market value as of 5/31/98. A bond rated Baa or higher
is considered investment grade. All ratings reflect 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 may begin to see slightly higher inflation during the second half of the
year. In our opinion, this is not a good time to expose the portfolio to bonds
with longer maturities and higher interest-rate risk. We believe that a
cautious strategy emphasizing intermediate maturities, low call risk, and
in-depth credit research will produce the best returns in the months ahead.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 5/31/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Arizona Tax Exempt Income Fund is designed for investors seeking a high
level of current income free from federal and state income tax consistent
with preservation of capital.
TOTAL RETURN FOR PERIODS ENDED 5/31/98
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 8.28% 3.14% 7.47% 2.47% 7.96% 4.48%
- ------------------------------------------------------------------------------
5 years 31.34 25.12 26.58 24.58 29.41 25.25
Annual average 5.60 4.58 4.83 4.49 5.29 4.61
- ------------------------------------------------------------------------------
Life of fund 67.15 59.29 58.16 58.16 62.96 57.67
Annual average 7.26 6.56 6.45 6.45 6.89 6.41
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98
Lehman
Bros. Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
1 year 9.39% 1.69%
- ------------------------------------------------------------------------------
5 years 38.53 12.90
Annual average 6.74 2.46
- ------------------------------------------------------------------------------
Life of fund 75.72 20.95
Annual average 8.00 2.63
- ------------------------------------------------------------------------------
Past performance is not indicative of future results. Returns for class A
and class M shares reflect the current maximum initial sales charges of
4.75% and 3.25%, respectively. Class B share returns for the 1-, 5-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares 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. All returns
assume reinvestment of distributions at NAV. 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
Plot Points
Lehman Bros.
Municipal Bond Consumer Price Fund's class A
Date Index Index shares at POP
1/30/91 10,000 10,000 9,529
5/31/91 10,316 10,074 9,841
5/31/92 11,329 10,378 10,851
5/31/93 12,685 10,712 12,128
5/31/94 12,998 10,958 12,313
5/31/95 14,187 11,307 13,251
5/31/96 14,835 11,634 13,699
5/31/97 16,064 11,893 14,730
5/31/98 17,572 12,095 15,929
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 $15,816 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$16,296 ($15,767 at public offering price). See first page of performance
section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------------
Income $0.444270 $0.383575 $0.417099
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Total $0.444270 $0.383575 $0.417099
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/97 $9.03 $9.48 $9.02 $9.04 $9.34
- ------------------------------------------------------------------------------
5/31/98 9.32 9.78 9.30 9.33 9.64
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.60% 4.39% 3.95% 4.30% 4.17%
- ------------------------------------------------------------------------------
Taxable equivalent3 8.03 7.66 6.90 7.51 7.28
- ------------------------------------------------------------------------------
Current 30-day
SEC yield4 4.22 4.02 3.57 3.92 3.79
- ------------------------------------------------------------------------------
Taxable equivalent3 7.37 7.02 6.23 6.84 6.62
- ------------------------------------------------------------------------------
1Capital 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.
2Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3Assumes maximum 42.72% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
(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 7.20% 2.15% 6.63% 1.63% 7.00% 3.47%
- ------------------------------------------------------------------------------
5 years 29.31 23.13 24.83 22.85 27.53 23.34
Annual average 5.28 4.25 4.54 4.20 4.98 4.28
- ------------------------------------------------------------------------------
Life of fund 67.31 59.44 58.39 58.39 63.24 57.95
Annual average 7.19 6.50 6.40 6.40 6.84 6.36
- ------------------------------------------------------------------------------
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. See first page of
performance section for performance calculation method.
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 4.75%maximum 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.
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Report of independent accountants
For the fiscal year ended May 31, 1998
To the Trustees and Shareholders of
Putnam Arizona Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, (except for bond ratings), and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the financial
position of Putnam Arizona Tax Exempt Income Fund (the "fund") at May 31,
1998, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statements presentation. We believe that
our audits, which included confirmation of investments owned at May 31, 1998
by correspondence with the custodian and the application of alternative
auditing procedures where investments purchased were not yet received by the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 14, 1998
Portfolio of investments owned
May 31, 1998
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
FHLMC Coll. -- Federal Home Loan Mortgage Corporation Collaterized
FNMA Coll. -- Federal National Mortgage Association Collateralized
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.1%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
Arizona (87.2%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 1,975,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB $ 2,145,342
1,500,000 AZ Student Loan Acquisition Auth.
Rev. Bonds, Ser. B, 6.6s, 5/1/10 Aa 1,629,375
AZ, State Hlth. Facs. Auth. Rev. Bonds
(Bethesda Foundation), Ser. A
2,000,000 6.4s, 8/15/27 BB/P 2,115,000
1,315,000 6 3/8s, 8/15/15 BB/P 1,398,831
1,750,000 Central AZ Wtr. Consv. Dist. Contract
Rev. Bonds (Central AZ), Ser. A, 5 1/2s, 11/1/10 AA- 1,885,625
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,908,563
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,450,625
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s,
7/1/14 (SEG) Aaa 2,932,063
Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
1,995,000 Ser. B, 8 1/2s, 12/1/21 BBB-/P 2,284,275
2,625,000 Ser. C, 8 1/4s, 12/1/14 BBB-/P 3,123,750
Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.)
4,000,000 6 3/8s, 10/1/36 BBB 4,330,000
3,000,000 Ser. B, 5.8s, 11/1/32 BBB- 3,063,750
4,000,000 Gila Cnty., Indl. Dev. Auth. Rev. Bonds
(Asarco, Inc.), 5.55s, 1/1/27 Baa2 4,055,000
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC,
6 1/2s, 7/1/22 Aaa 1,105,000
1,500,000 Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds
(Connection Dev. Fee), 6 7/8s, 4/1/14 BB+ 1,554,375
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
CLI Insd., 7 1/8s, 7/1/20 AAA 1,181,250
5,000,000 Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co.), Ser. A, 6.3s, 12/1/26 Ba1 5,356,250
4,500,000 Maricopa Cnty., Hosp. Rev. Bonds
(Sun Health Corp.), 6 1/8s, 4/1/18 Baa1 4,781,250
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam.
Hsg. Rev. Bonds (Laguna Point Apt.),
6 3/4s, 7/1/19 A 2,930,325
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds (Samaritan Hlth. Svcs.), Ser. A,
MBIA, 7s, 12/1/16 Aaa 4,392,500
2,000,000 Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co.), Ser. A, 5 3/4s, 11/1/22 Ba1 2,047,500
Maricopa Cnty., School Dist. G.O. Bonds
2,000,000 (Dist. No. 69 Paradise Valley), Ser. B,
MBIA, 7s, 7/1/12 Aaa 2,465,000
1,500,000 (Dist. No. 69 Paradise Valley), MBIA,
6.35s, 7/1/10 Aaa 1,747,500
1,500,000 (No. 11 Peoria U.), MBIA, 6.4s, 7/1/10 Aaa 1,605,000
3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,679,031
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 1,253,750
1,445,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam.
Mtge. Rev. Bonds (Coopers Ridge Apts.),
FHA Insd., 7 3/8s, 4/1/32 AAA 1,571,438
2,725,000 Northern AZ U. Rev. Bonds, FGIC, 6 1/2s, 6/1/09 Aaa 3,195,063
Phoenix G.O. Bonds
1,000,000 6 3/8s, 7/1/13 AA+ 1,090,000
1,000,000 6s, 7/1/10 AA+ 1,098,750
2,845,000 Phoenix, Civic Impt. Corp. Waste Wtr. Syst.
Rev. Bonds, MBIA, 6 1/2s, 7/1/08 Aaa 3,268,194
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds,
Ser. A, MBIA, 6.9s, 1/1/23 Aaa 1,698,000
2,150,000 Phoenix, Indl. Dev. Auth. Rev. Bonds (Chris
Ridge Village), FHA Insd., 6.8s, 11/1/25 Aaa 2,270,938
4,000,000 Pima Cnty., Indl. Dev. Auth. Multi-Fam.
Rev. Bonds (Willowick Apts.), 5 1/2s, 3/1/28 AA 4,035,000
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, 11/1/23) (STP) AAA 2,145,208
4,100,000 Pima Cnty., Indl. Dev. Auth. VRDN
(Tucson Elec.), 3.45s, 12/1/22 Aa2 4,100,000
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds,
FGIC, 7 1/2s, 7/1/08 Aaa 1,238,750
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,145,000
2,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.), Ser. A,
8 1/8s, 12/1/22 B 2,150,000
1,325,000 Pinal Cnty., School Dist. Pinal Cnty., School
Dist. (AZ U., Apache Junction), Ser. A,
FGIC, 6.8s, 7/1/08 Aaa 1,573,438
3,250,000 Salt River, Rev. Bonds (Project Agric.), 6s, 1/1/09 Aa 3,672,500
1,140,000 Scottsdale G.O. Bonds, 5 1/2s, 7/1/12 Aa1 1,236,900
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village),
Ser. A, 8 1/4s, 6/1/15 BB-/P 4,550,000
1,740,000 Scottsdale, Indl. Dev. Auth. Hosp. Rev. Bonds
(Scottsdale Memorial Hosp.), Ser. A, AMBAC,
6 1/8s, 9/1/17 Aaa 1,929,225
1,000,000 Sedona COP, 7.2s, 4/1/12 BBB/P 1,040,000
1,800,000 Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp.), 8 3/4s, 12/1/16 AAA 1,897,884
1,000,000 South Tucson, Muni. Property Corp. Fac.
Rev. Bonds, 8 1/2s, 6/1/05 BB 1,080,000
3,985,000 Tucson G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 4,602,675
1,000,000 Tucson Wtr Rev. Bonds, FGIC, 5 1/2s, 7/1/14 AAA 1,085,000
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A3 4,450,000
880,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 Aaa 933,900
3,765,000 Tuscon, St. & Hwy. User Rev. Bonds, Sr. Lien,
MBIA, 6s, 7/1/10 Aaa 4,254,450
1,000,000 U. of AZ COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A2 1,081,250
U. of AZ Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,073,750
1,000,000 6 1/4s, 6/1/11 AA 1,076,250
1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds,
MBIA, 6 7/8s, 7/1/21 Aaa 1,595,000
--------------
133,559,493
Puerto Rico (10.9%)
- -------------------------------------------------------------------------------------------------------------
1,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,162,500
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
3,225,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 AAA 3,745,031
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,157,500
4,000,000 Cmnwlth of PR, Muni. Fin. Agcy. Rev. Bonds,
Ser. A, FSA, 6s, 7/1/11 Aaa 4,530,000
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
4,000,000 Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 4,445,000
--------------
16,720,031
- -------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $141,634,294) $ 150,279,524
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $153,216,172.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at May 31, 1998 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, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings
are not covered by the Report of independent accountants.
(b) The aggregate identified cost on a tax basis is $141,637,817, resulting in gross unrealized appreciation
and depreciation of $8,839,688 and $197,981, respectively, or net unrealized appreciation of $8,641,707.
(STP) 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.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at May 31, 1998.
The rates shown on VRDN's are the current interest rates at May 31, 1998.
The fund had the following industry group concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
Hospitals/Health care 24.1%
Education 13.3
Utilities 11.9
Housing 10.2
The fund had the following insurance concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
MBIA 19.0%
FGIC 11.5
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1998
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date Depreciation
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
Municipal Bond
Index (long) $ 4,590,313 $ 4,496,438 Jun-98 $ 93,875
US Treasury Notes
20 yr. (short) 14,606,250 14,442,344 Jun-98 (163,906)
- --------------------------------------------------------------------------------------------
$ (70,031)
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $141,634,294) (Note 1) $150,279,524
- ---------------------------------------------------------------------------------------------------
Cash 276,073
- ---------------------------------------------------------------------------------------------------
Interest receivable 3,252,645
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 36,910
- ---------------------------------------------------------------------------------------------------
Total assets 153,845,152
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 23,062
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 204,500
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 55,740
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 230,187
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 29,558
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 7,428
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,011
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 63,580
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 13,914
- ---------------------------------------------------------------------------------------------------
Total liabilities 628,980
- ---------------------------------------------------------------------------------------------------
Net assets $153,216,172
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $147,157,832
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 3,189
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,520,048)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,575,199
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $153,216,172
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($120,649,062 divided by 12,950,156 shares) $9.32
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.32)* $9.78
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($32,046,457 divided by 3,444,754 shares)+ $9.30
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($520,653 divided by 55,795 shares) $9.33
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.33)** $9.64
- ---------------------------------------------------------------------------------------------------
* 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
offerring price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent deferred
sale charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1998
<S> <C>
Tax exempt interest income: $8,742,647
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 919,202
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 203,604
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,914
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,164
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 245,415
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 254,553
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,682
- --------------------------------------------------------------------------------------------------
Reports to shareholders 16,431
- --------------------------------------------------------------------------------------------------
Registration fees 75
- --------------------------------------------------------------------------------------------------
Auditing 26,339
- --------------------------------------------------------------------------------------------------
Legal 18,512
- --------------------------------------------------------------------------------------------------
Postage 8,636
- --------------------------------------------------------------------------------------------------
Other 7,536
- --------------------------------------------------------------------------------------------------
Total expenses 1,717,063
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (61,988)
- --------------------------------------------------------------------------------------------------
Net expenses 1,655,075
- --------------------------------------------------------------------------------------------------
Net investment income 7,087,572
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,489,318
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,147,723)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures contracts during the year 4,477,721
- --------------------------------------------------------------------------------------------------
Net gain on investments 4,819,316
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $11,906,888
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 7,087,572 $ 7,518,550
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 341,595 21,107
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 4,477,721 3,350,238
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 11,906,888 10,889,895
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (5,914,397) (6,368,622)
- ----------------------------------------------------------------------------------------------------------------------
Class B (1,243,648) (1,175,109)
- ----------------------------------------------------------------------------------------------------------------------
Class M (24,352) (19,547)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (3,094,187) (2,799,875)
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 1,630,304 526,742
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 151,585,868 151,059,126
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $3,189 and $98,014, respectively) $ 153,216,172 $ 151,585,868
- ----------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995++ 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.03 $8.84 $9.01 $8.84 $9.47 $9.07
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .44 .46 .47 .38 .51 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .29 .19 (.17) .17 (.61) .47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .73 .65 .30 .55 (.10) 1.01
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.46) (.47) (.38) (.50) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.46) (.47) (.38) (.53) (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.32 $9.03 $8.84 $9.01 $8.84 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.28 7.52 3.38 6.45* (1.07) 11.54
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $120,649 $122,743 $126,716 $136,598 $142,950 $145,304
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .99 .98 1.03 .70* .97 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.76 5.11 5.20 4.42* 5.55 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 29.63 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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995++ 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.02 $8.82 $9.00 $8.83 $9.47 $9.39
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38 .40 .41 .34 .45 .11
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .28 .20 (.18) .17 (.61) .03
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .66 .60 .23 .51 (.16) .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.40) (.41) (.34) (.45) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.40) (.41) (.34) (.48) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.30 $9.02 $8.82 $9.00 $8.83 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.47 6.94 2.60 5.99* (1.80) 1.45*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $32,046 $28,340 $24,050 $21,538 $16,247 $2,974
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.64 1.63 1.67 1.19* 1.60 .19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.10 4.44 4.52 3.89* 4.82 .43*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 29.63 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 July 3, 1995+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $9.04 $8.85 $8.86
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .41 .43 (c) .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .30 .19 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .71 .62 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.33 $9.04 $8.85
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 7.96 7.19 4.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $521 $503 $293
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.29 1.28 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.47 4.75 4.28*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 29.63 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, 1998
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
Investment Management, Inc. ("Putnam Management"), the fund's Manager, a
wholly-owned subsidiary of Putnam Investments, Inc. believes is consistent
with preservation of capital by investing primarily in a portfolio of Arizona
tax exempt securities.
The fund offers class A, class B and class M shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares after 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. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
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) Line of credit The fund has entered into a committed line of credit with
certain banks. This line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the year ended May 31, 1998, the fund had
no borrowings against the line of credit.
E) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, 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, 1998, the fund had a capital loss carryover of approximately
$1,215,152 available to offset future capital gains, if any. The amount of the
carryover and the expiration dates are:
Loss Carryover Expiration
- ------------------ ------------------
$680,643 May 31, 2003
350,629 May 31, 2004
183,880 May 31, 2005
F) 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 temporary and permanent
differences of capital loss carryover, straddle loss deferrals, 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, 1998, the fund required no such
reclassifications.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on original issue discount
bonds are accreted according to the yield-to-maturity basis.
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, 0.34% of the next $5 billion and
0.33% thereafter.
The fund reimburses Putnam Management an allocated amount 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 subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended May 31, 1998, fund expenses were reduced by $61,988 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.
Each Trustee of the fund receives an annual Trustee fee, of which $320 has
been allocated to the fund, 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 "Deferral 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
Deferral 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 currently limit payment by the fund to 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, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $20,714 and $53 from the sale of class
A and class M shares, respectively and $71,193 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 that were purchased
without an initial sales charge as part of an investment of $1 million or
more. For the year ended May 31, 1998, Putnam Mutual Funds Corp., acting as
underwriter received $3,552 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $43,899,770 and
$49,495,540, 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, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 1,430,266 $13,242,339
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 291,066 2,692,593
- ------------------------------------------------------------
1,721,332 15,934,932
Shares
repurchased (2,361,394) (21,843,453)
- ------------------------------------------------------------
Net decrease (640,062) $(5,908,521)
- ------------------------------------------------------------
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, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 712,440 $6,592,978
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 67,218 620,900
- ------------------------------------------------------------
779,658 7,213,878
Shares
repurchased (477,346) (4,401,245)
- ------------------------------------------------------------
Net increase 302,312 $2,812,633
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
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, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 8,994 $82,408
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,677 15,530
- ------------------------------------------------------------
10,671 97,938
Shares
repurchased (10,451) (96,237)
- ------------------------------------------------------------
Net increase 220 $1,701
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment
income during the fiscal year as tax exempt for Federal income tax
purposes.
The Form 1099 you receive in January 1999 will show the tax status
of all distributions paid to your account in calendar 1998.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
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
Global Growth and Income Fund
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
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Money Market 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 Exempt Money Market 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
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER]Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**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.
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Blake E. Anderson
Vice President
Jerome J. Jacobs
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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 the 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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