Putnam
Arizona
Tax Exempt
Income Fund
SEMIANNUAL REPORT
November 30, 1997
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Municipals' main draw, the tax-exempt interest, won't find much
competition from the new law's tax-free alternatives such as
Roth IRAs and the $250,000 exemption on home profits."
-- The Orange County (California) Register,
September 7, 1997
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
15 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The global flight to the relative safety of bonds in the aftermath of the
Southeast Asian currency crisis in late October provided a dramatic and
positive finale to the first half of Putnam Arizona Tax Exempt Income Fund's
fiscal year. In the five months prior to that flare-up, the U.S. municipal
bond market had demonstrated solid, albeit tenuous, strength as many investors
cautiously set aside their lingering concerns about the economy, interest
rates, and renewed inflation.
Recognizing the fragility of the generally positive environment both prior to
and following the disruption in global markets, Fund Manager Howard Manning
had pursued a slightly defensive policy in managing the fund. As the year
unfolded, however, he concluded that a somewhat more dynamic strategy was in
order and began adjusting the portfolio accordingly.
In the report that follows, Howard provides the specifics of his strategic
shift as well as details about the fiscal year's first half. Then he offers
some insights into what he believes is in store for the rest of the period.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 21, 1998
Report from the Fund Manager
Howard K. Manning
The municipal bond market had been humming along at a comfortable pace for
most of the past six months. But the Pacific Rim crisis and resulting
worldwide equity market correction that took place during the last week of
October changed all that. For a short time afterward, the municipal market,
normally somewhat removed from such events, became caught up in the worldwide
volatility.
By the end of November, things had begun to settle down and Putnam Arizona Tax
Exempt Income Fund's class A shares turned in a performance for the six months
ended November 30, 1997, of 4.64% at net asset value. This performance is
below the fund's much broader benchmark, the Lehman Brothers Municipal Bond
Index, which posted a 5.40% return. At public offering price, the shares
returned - 0.32%. Please see pages 8 and 9 for additional performance
information.
The Arizona economy has remained vibrant, following in the footsteps of the
U.S. economy. With much enthusiasm and optimism, Governor Jane Dee Hull,
formerly Arizona's secretary of state, took office on September 5, 1997,
promising to keep the state on its highly progressive track. The Arizona
municipal market has done well with an overabundance of supply versus demand,
but has been held back by the lack of higher-yielding lower investment grade
paper.
* SECTOR AND SECURITY SELECTION KEY FACTORS IN IMPROVING RETURNS
One way we improve returns is through careful security selection and in-depth
credit research. This entails choosing the right issues within each sector of
the market and making sure we are thorough in our evaluations of each credit.
Our research is especially important when reviewing higher-risk bond issuers.
Because of the strong economy, lower-quality bonds have outperformed
higher-quality bonds and investors have been rewarded for taking on extra
credit risk. Defaults remain at a historically low level.
The fund's exposure to the hospital and health-care sector, including elderly
housing, nursing homes, and assisted living facilities, continued to provide
strong income opportunities for your fund. We tend to favor this sector
because it is countercyclical. No matter what happens to the economy, elderly
care and nursing homes are always in demand.
The fund continues to hold Sierra Vista Community Hospital bonds, which have
been among the sector's best performers in the past few months. Interestingly
the Sierra Vista is also working on issuing some new bonds so we are
undertaking a full scale review of its credit situation. We would like to
increase the fund's stake in the potentially lucrative and growing
hospital/health care sector. While this holding, along with others discussed
in this report, was viewed favorably at the end of the fiscal period, all are
subject to review and adjustment in accordance with the fund's investment
strategy and may vary in the future.
* REDUCED CALL RISK, STRUCTURAL SHIFT, QUALITY SPREAD COMPRESSION HELP
PERFORMANCE
Another way your fund's management team seeks to provide high and durable
returns is by improving call risk within the fund. Our goal is to enhance the
durability of the income stream by extending call dates on holdings. Callable
bonds carry the option of being redeemed, or called away, by the issuer at a
certain future date. Bonds are normally called away if interest rates fall to
levels below those at which the bonds were originally issued. By avoiding
callable bonds, the portfolio has a better chance of maintaining a consistent
level of income.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Education 20.4%
Hospitals/health care 16.5%
Utilities 14.3%
Housing 13.3%
Transportation 6.8%
Footnote reads:
*Based on net assets as of 11/30/97. Holdings will vary over time.
We are also beginning to focus on a more bulleted structure, believing that we
are not rewarded by holding maturities that are longer than 15 to 20 years --
the point at which the yield curve begins to flatten out. In addition to
offering attractive yields, bonds in this maturity range tend to appreciate in
value simply by moving closer to maturity, thereby approaching the shorter end
of the yield curve.
There has been little opportunity to add local higher yielding lower
investment-grade bonds (Baa-rated to A-rated bonds) to the portfolio. This is
because issuers can pay to have their bonds insured. By obtaining the highest
credit rating of Aaa with insurance, issuers can lower the interest rate they
pay on their bonds. Many prospective Baa-rated and A-rated bonds have been
eliminated by the growing popularity of buying municipal bond insurance.
However, we were able to generate some additional income by investing in the
Baa-rated bonds of the Nevada Power and Public Service of New Mexico, which
are tax exempt in Arizona.
This report would not be complete without a discussion of the quality spread
compression that has taken place over the past six months. This phenomenon
usually occurs during periods of strong economic growth such as we have
experienced. With interest rates relatively low and the strong economy
improving many issuers' financial positions, investors are more confident
about taking on extra risk by buying lower investment-grade bonds and are
rewarded with higher bond prices. As a result, the difference between yields
on lower-rated and higher-rated bonds narrows to the point at which the yield
advantage of the lower-rated bonds may no longer justify the additional risk
exposure. Given this environment, we are selectively taking profits on
lower-rated bonds while maintaining positions in those we feel have less
sensitivity to interest rates.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
B 1.5%
Aaa 48.0%
Aa 14.4%
A 8.1%
Baa 16.3%
Ba 11.7%
Footnote reads:
*As a percentage of market value as of 11/30/97. 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.
* CAUTIOUS OUTLOOK AS MUNICIPAL MARKET BEGINS TO SETTLE DOWN
Although the Pacific Rim crisis and its repercussions are still the focus of
worldwide markets, U.S. economic growth remains robust supported by favorable
labor conditions. While the municipal market seems to be settling down, there
still may be periods of moderate volatility caused by the uncertainty
surrounding the impact of Southeast Asia's debacle. It is quite possible that
the Southeast Asian crisis will aid the Federal Reserve Board's efforts to
keep inflation at bay by keeping the U.S. economy in check. We realize that
volatility can be unsettling for investors, but as professional money
managers, we can often take advantage of short-term market swings and improve
the fund's return over time.
As time goes on, we still believe that there will be some moderate upward
drift in interest rates driven by healthy employment reports and the strong
economy in the United States. Our focus on key strategies such as reducing
call risk and careful security selection, especially among the lower quality
credits, should serve your fund very well as we move into 1998.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed
favorably as of 11/30/97, 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 high
current income free from federal and Arizona state income taxes,
consistent with capital preservation.
TOTAL RETURN FOR PERIODS ENDED 11/30/97
Class A Class B Class M
(inception date) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
6 months 4.64% -0.32% 4.31% -0.69% 4.60% 1.24%
- ------------------------------------------------------------------------
1 year 5.83 0.77 5.14 0.14 5.62 2.17
- ------------------------------------------------------------------------
5 years 35.24 28.81 30.46 28.46 33.42 29.02
Annual average 6.22 5.19 5.46 5.14 5.94 5.23
- ------------------------------------------------------------------------
Life of fund 61.75 54.15 53.69 53.69 58.09 52.96
Annual average 7.29 6.54 6.49 6.49 6.94 6.42
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/97
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
6 months 5.40% 0.87%
- ------------------------------------------------------------------------
1 year 7.18 1.83
- ------------------------------------------------------------------------
5 years 42.06 13.73
Annual average 7.27 2.61
- ------------------------------------------------------------------------
Life of fund 69.32 19.99
Annual average 8.01 2.70
- ------------------------------------------------------------------------
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-, and 10-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 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.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/97
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------
Income $.226246 $.195989 $.212691
- ------------------------------------------------------------------------
Long-term -- -- --
- ------------------------------------------------------------------------
Short-term -- -- --
- ------------------------------------------------------------------------
Total $.226246 $.195989 $.212691
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
5/31/97 $9.03 $9.48 $9.02 $9.04 $9.34
- ------------------------------------------------------------------------
11/30/97 9.22 9.68 9.21 9.24 9.55
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate1 4.86% 4.63% 4.21% 4.55% 4.40%
- ------------------------------------------------------------------------
Taxable equivalent2 8.48 8.08 7.35 7.94 7.68
- ------------------------------------------------------------------------
Current 30-day SEC yield3 4.53 4.31 3.93 4.28 4.14
- ------------------------------------------------------------------------
Taxable equivalent2 7.91 7.52 6.86 7.47 7.23
- ------------------------------------------------------------------------
1Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
2Assumes maximum 42.72% combined federal and state income tax rate.
Results for investors subject to lower tax rates would not be as
advantageous.
3Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 12/31/97
(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
- ------------------------------------------------------------------------
6 months 5.07% 0.12% 4.76% -0.25% 4.92% 1.47%
- ------------------------------------------------------------------------
1 year 7.75 2.67 6.96 1.96 7.43 3.90
- ------------------------------------------------------------------------
5 years 35.81 29.34 30.96 28.96 33.80 29.37
Annual average 6.31 5.28 5.54 5.22 6.00 5.29
- ------------------------------------------------------------------------
Life of fund 64.16 56.45 55.75 55.75 60.24 55.04
Annual average 7.43 6.68 6.61 6.61 7.05 6.54
- ------------------------------------------------------------------------
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.
Portfolio of investments owned
November 30, 1997 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
CLI Insd. -- Connie Lee Insurance Insured
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA Insd. -- Federal Housing Administration Insured
FHLMC Coll. -- Federal Home Loan Mortgage Corporation Collateralized
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
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (99.1%) *
PRINCIPAL AMOUNT RATINGS** VALUE
Arizona (88.3%)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
$ 1,975,000 AZ State Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB $ 2,162,625
AZ, State Hlth. Facs. Auth. Rev. Bonds (Bethesda
Foundation), Ser. A
2,000,000 6.4s, 8/15/27 BB/P 2,015,000
1,315,000 6 3/8s, 8/15/15 BB/P 1,333,081
1,500,000 AZ State Student Loan Acquisition Auth. Rev.
Bonds, Ser. B, 6.6s, 5/1/10 Aa 1,627,500
1,750,000 Central AZ Wtr. Consv. Dist. Contract Rev.
Bonds (Central AZ), Ser. A, 5 1/2s, 11/1/10 AA- 1,850,625
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,886,813
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,441,000
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s, 7/1/14# Aaa 2,864,875
Cochise Cnty., Indl. Dev. Rev. Bonds (Sierra
Vista Cmnty. Hosp.)
1,995,000 Ser. B, 8 1/2s, 12/1/21 BBB-/P 2,274,300
2,625,000 Ser. C, 8 1/4s, 12/1/14 BBB-/P 3,054,844
750,000 Cochise Cnty., Unified School Dist. No. 68
Rev. Bonds, FGIC, 7 1/2s, 7/1/09 Aaa 933,750
Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.)
4,000,000 6 3/8s, 10/1/36 BBB 4,255,000
3,000,000 Ser. B, 5.8s, 11/1/32 BBB- 3,033,750
3,880,000 Gila Cnty., Indl. Dev. Auth. Poll. Control Rev.
Bonds (Asarco Inc.), Ser. 85, 8.9s, 7/1/06 Baa2 4,013,899
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC,
6 1/2s, 7/1/22 Aaa 1,095,000
1,500,000 Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds
(Connection Dev. Fee), 6 7/8s, 4/1/14 BB+/P 1,518,750
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
CLI Insd., 7 1/8s, 7/1/20 AAA 1,173,750
4,500,000 Maricopa Cnty., Hosp. Rev.Bonds (Sun Health
Corp.), 6 1/8s, 4/1/18 Baa1 4,719,375
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg.
Rev. Bonds (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,923,650
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac. Rev.
Bonds (Samaritan Hlth. Svcs.), Ser. A, MBIA,
7s, 12/1/16 Aaa 4,270,000
Maricopa Cnty., Poll. Control Rev. Bonds (Public
Service Co.) Ser. A
5,000,000 6.3s, 12/1/26 Ba1 5,275,000
2,000,000 5 3/4s, 11/1/22 Ba1 2,000,000
Maricopa Cnty., School Dist. G.O. Bonds
2,000,000 (Dist. No. 69 Paradise Valley), Ser. B, MBIA,
7s, 7/1/12 Aaa 2,430,000
1,500,000 (No. 11 Peoria U.), MBIA, 6.4s, 7/1/10 Aaa 1,606,875
1,500,000 (Dist. No. 69 Paradise Valley), MBIA, 6.35s, 7/1/10 Aaa 1,719,375
3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,611,563
3,650,000 Mesa G.O. Bonds, FGIC, 6 1/2s, 7/1/09 Aaa 4,238,563
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 1,225,000
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 1,587,769
2,725,000 Northern AZ U. Rev. Bonds, 6 1/2s, 6/1/09 Aaa 3,099,688
Phoenix G.O. Bonds
1,000,000 6 3/8s, 7/1/13 Aa 1,086,250
1,000,000 6s, 7/1/10 Aa1 1,088,750
2,845,000 Phoenix, Civic Impt. Corp. Waste Wtr. Syst.
Rev. Bonds, 6 1/2s, 7/1/08 Aaa 3,232,631
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds, Ser. A,
MBIA, 6.9s, 1/1/23 Aaa 1,696,000
Phoenix, Indl. Dev. Auth. Rev. Bonds
875,000 (Christian Care Retirement Apts.), Ser. A,
10 1/4s, 1/1/18 AA/P 895,370
2,150,000 (Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 AAA 2,268,250
2,270,000 Pima Cnty., G.O. Bonds (Cmnty. College Dist.),
Ser. A, 5s, 7/1/16 Aa 2,227,438
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 2,138,802
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds, FGIC,
7 1/2s, 7/1/08 Aaa 1,243,750
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,135,000
2,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds (Casa
Grande Regl. Med. Ctr.), Ser. A, 8 1/8s, 12/1/22 B+/P 2,230,000
1,325,000 Pinal Cnty., School Dist. (AZ U., Apache Junction),
Ser. A, FGIC, 6.8s, 7/1/08 Aaa 1,583,375
Salt River, (Project Agric.) Rev. Bonds
4,000,000 Ser. A, 5s, 1/1/20 Aa2 3,890,000
3,250,000 6s, 1/1/09 Aa2 3,607,500
1,140,000 Scottsdale G.O.Bonds, 5 1/2s, 7/1/12 Aa1 1,209,825
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village), Ser. A,
8 1/4s, 6/1/15 BB-/P 4,495,000
1,000,000 Sedona COP, 7.2s, 4/1/12 BBB/P 1,038,750
1,800,000 Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds
(Sierra Vista Cmnty. Hosp.), 8 3/4s, 12/1/16 Aaa 1,938,150
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev.
Bonds, 8 1/2s, 6/1/05 BB 1,090,000
3,985,000 Tucson G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 4,572,785
1,000,000 Tucson Wtr Rev. Bonds, 5 1/2s, 7/1/14 AAA 1,053,750
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A3 4,505,000
880,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 Aaa 937,200
3,765,000 Tuscon, St. & Hwy. User Rev. Bonds, Sr. Lien,
MBIA, 6s, 7/1/10 Aaa 4,183,856
1,000,000 U. of AZ COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A2 1,073,750
U. of AZ Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,081,250
1,000,000 6 1/4s, 6/1/11 AA 1,073,750
1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds,
MBIA, 6 7/8s, 7/1/21 Aaa 1,602,250
--------------
134,419,852
Puerto Rico (10.8%)
- ------------------------------------------------------------------------------------------------------------
1,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,137,500
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
3,225,000 Ser. Y, 6 1/4s, 7/1/13 A 3,648,281
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,143,750
4,000,000 Cmnwlth of PR, Muni. Fin. Agcy. Rev. Bonds, Ser. A,
FSA, 6s, 7/1/11 Aaa 4,460,000
Cmnwlth of PR, Pub. Bldg. Auth. Gtd. Ed & Hlth.
Rev. Bonds
1,500,000 Ser. L, 6 7/8s, 7/1/21 Aaa 1,683,750
4,000,000 Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 4,385,000
--------------
16,458,281
- ------------------------------------------------------------------------------------------------------------
Total Investments (cost $143,475,818) *** $ 150,878,133
- ------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $152,254,623.
** The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available at November 30, 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 November 30, 1997. Securities rated by Putnam are
indicated by "/P"and are not publicly rated.
*** The aggregate identified cost on a tax basis is $143,479,341,
resulting in gross unrealized appreciation and depreciation of $7,768,161
and $369,369, respectively, or net unrealized appreciation of $7,398,792.
++ 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 November 30, 1997.
The fund had the following industry group concentrations greater
than 10% at November 30, 1997 (as a percentage of net assets):
Education 20.4%
Hospitals/Healthcare 16.5
Utilities 14.3
Housing 13.3
The fund had the following insurance concentrations greater than
10% at November 30, 1997 (as a percentage of net assets):
MBIA 13.9%
FGIC 12.9
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1997 (Unaudited)
Unrealized
Total Aggregate Face Expiration Appreciation/
Value Value Date (Depreciation)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
U.S. Treasury Bonds
20 Yr. (short) $13,349,000 $13,178,656 Dec97 $(170,344)
Municipal Bond
Index (long) 1,834,219 1,824,375 Dec97 9,844
- ----------------------------------------------------------------------------------------
$(160,500)
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1997 (Unaudited)
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $(143,475,818) (Note 1) $150,878,133
- ---------------------------------------------------------------------------------------------------
Cash 360,235
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 3,603,458
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 30,481
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 60,000
- ---------------------------------------------------------------------------------------------------
Total assets 154,932,307
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 10,031
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 198,778
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 2,000,000
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 115,131
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 228,979
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 19,991
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 6,646
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,070
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 61,903
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 35,155
- ---------------------------------------------------------------------------------------------------
Total liabilities 2,677,684
- ---------------------------------------------------------------------------------------------------
Net assets $152,254,623
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $147,704,225
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 39,369
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investment (Note 1) (2,730,787)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 7,241,816
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $152,254,623
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($122,624,765 divided by 13,293,099 shares) $9.22
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.22)* $9.68
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($29,124,112 divided by 3,161,778 shares)** $9.21
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($505,746 divided by 54,745 shares) $9.24
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.24)* $9.55
- ---------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales
the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more on group sales the
offering price is reduced.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended November 30, 1997 (Unaudited)
<S> <C>
Tax exempt interest income: $4,450,677
- --------------------------------------------------------------------------------------------------
Expenses:
Compensation of Manager (Note 2) 460,759
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 88,026
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 3,789
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,166
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 123,831
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 124,054
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,389
- --------------------------------------------------------------------------------------------------
Reports to shareholders 9,878
- --------------------------------------------------------------------------------------------------
Auditing 12,811
- --------------------------------------------------------------------------------------------------
Legal 7,933
- --------------------------------------------------------------------------------------------------
Postage 12,130
- --------------------------------------------------------------------------------------------------
Other 4,091
- --------------------------------------------------------------------------------------------------
Total expenses 851,857
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (26,869)
- --------------------------------------------------------------------------------------------------
Net expenses 824,988
- --------------------------------------------------------------------------------------------------
Net investment income 3,625,689
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 1,003,138
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (872,282)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures during the period 3,144,338
- --------------------------------------------------------------------------------------------------
Net gain on investments 3,275,194
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $6,900,883
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
--------------------------------------
1997* 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 3,625,689 $ 7,518,550
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 130,856 21,107
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 3,144,338 3,350,238
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,900,883 10,889,895
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (3,048,701) (6,368,622)
- ----------------------------------------------------------------------------------------------------------------------
Class B (622,677) (1,175,109)
- ----------------------------------------------------------------------------------------------------------------------
Class M (12,956) (19,547)
- ----------------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (2,547,794) (2,799,875)
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 668,755 526,742
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period 151,585,868 151,059,126
- ----------------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $39,369 and $98,014, respectively) $152,254,623 $151,585,868
- ----------------------------------------------------------------------------------------------------------------------
*Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months For the
ended nine months
Per-share Nov. 30 ended
operating performance (Unaudited) Year ended May 31 May 31 Year ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 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 .22 .46 .47 .38 .51 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .20 .19 (.17) .17 (.61) .47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .42 .65 .30 .55 (.10) 1.01
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.23) (.46) (.47) (.38) (.50) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.23) (.46) (.47) (.38) (.53) (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.22 $9.03 $8.84 $9.01 $8.84 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.64* 7.52 3.38 6.45* (1.07) 11.54
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $122,625 $122,743 $126,716 $136,598 $142,950 $145,304
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .49* .98 1.03 .70* .97 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.43* 5.11 5.20 4.42* 5.55 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.73* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months For the
ended nine months For the period
Per-share Nov. 30 ended Year ended July 15, 1993++
operating performance (Unaudited) Year ended May 31 May 31 August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 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 .20 .40 .41 .34 .45 .11
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .19 .20 (.18) .17 (.61) .03
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .39 .60 .23 .51 (.16) .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.40) (.41) (.34) (.45) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.20) (.40) (.41) (.34) (.48) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.21 $9.02 $8.82 $9.00 $8.83 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.31 * 6.94 2.60 5.99* (1.80) 1.45*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $29,124 $28,340 $24,050 $21,538 $16,247 $2,974
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .82* 1.63 1.67 1.19* 1.60 .19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.10* 4.44 4.52 3.89* 4.82 .43*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.73* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 Year ended July 3, 1995++
operating performance (Unaudited) May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $9.04 $8.85 $8.86
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .21 .43(c) .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .20 .19 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .41 .62 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.24 $9.04 $8.85
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 4.60* 7.19 4.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $506 $503 $293
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .64* 1.28 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.28* 4.75 4.28*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.73* 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
November 30, 1997 (Unaudited)
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 six months ended November 30, 1997, 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 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
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. 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.
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. 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.
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, 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 six months ended November 30, 1997, fund expenses were reduced by
$26,869 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 funds receive an annual Trustees fee of which $368 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 six months ended November 30, 1997, Putnam Mutual Funds Corp., acting
as underwriter received net commissions of $9,651 and $10 from the sale of
class A and class M shares, respectively and $47,042 in contingent deferred
sales charges from redemptions of class B shares. A deferred sales charge of
up to 1% is assessed on certain redemptions of class A shares. For the six
months ended November 30, 1997, Putnam Mutual Funds Corp., acting as
underwriter received no monies on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended November 30, 1997, purchases and sales of
investment securities other than short-term investments aggregated $27,779,874
and $29,623,972, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost basis.
Note 4
Capital shares
At November 30, 1997, there was an unlimited number of shares of beneficial
interest authorized. Transaction in capital shares were as follows:
Six months ended
November 30, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 586,418 $5,378,967
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 149,635 1,374,509
- ------------------------------------------------------------
736,053 6,753,476
Shares
repurchased (1,033,172) (9,474,000)
- ------------------------------------------------------------
Net decrease (297,119) $(2,720,524)
- ------------------------------------------------------------
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)
- ------------------------------------------------------------
Six months ended
November 30, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 230,638 $2,113,166
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,929 311,095
- ------------------------------------------------------------
264,567 2,424,261
Shares
repurchased (245,231) (2,243,401)
- ------------------------------------------------------------
Net increase 19,336 $180,860
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Six months ended
November 30, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 7,135 $65,102
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 927 8,527
- ------------------------------------------------------------
8,062 73,629
Shares
repurchased (8,892) (81,759)
- ------------------------------------------------------------
Net decrease (830) $(8,130)
- ------------------------------------------------------------
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
- ------------------------------------------------------------
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation 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 +
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
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
Diversified Income Trust II
Federal Income Trust
Global Governmental Income Trust
High Yield Advantage Fund +
High Yield Total Return Fund
High Yield Trust +
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
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
* Formerly Overseas Growth Fund
+ Closed to new investors. Some exceptions may apply. Contact Putnam
for details.
[DBL. DAGGER] Formerly OTC Emerging Growth Fund
[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
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
Gary N. Coburn
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
SA044-36876-279 1/98
