Putnam
Arizona
Tax Exempt
Income Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "A scarcity of municipal bond issuance may complicate our search for
investments. But we believe our hands-on management, which is backed by a
team of dedicated analysts will be instrumental in finding unrealized
opportunities before the rest of the market does."
-- David E. Hamlin, manager
Putnam Arizona Tax Exempt Income Fund
* "When a whiff of recession sends equity markets into a panic, bond funds
will be a rock. The rest of the time their regular monthly income payments
will help stabilize your portfolio's overall returns."
-- Fortune, December 21, 1998
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
16 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The rush of foreign investors to the safety of U.S. Treasury bonds in
recent months has driven prices on these securities markedly higher.
Because of the inverse relationship of yields to prices, yields on 30-year
Treasuries have declined to virtually the same level as those on long-term
municipals. This near parity has made Arizona tax-exempt bonds unusually
attractive for the state's tax-conscious investors.
On the other side, however, the ability to find appropriate investments
for Putnam Arizona Tax Exempt Income Fund's portfolio has become the
biggest challenge for David E. Hamlin, who was recently appointed as your
fund's manager. David, who joined Putnam in August from the Vanguard
Group, is also responsible for the management of a number of other
municipal bond funds and institutional portfolios. He has 16 years of
investment experience. Jerome Jacobs, who had served as interim manager,
continues to monitor the fund in his role as chief investment officer of
the Tax Exempt Group.
In the following report, David discusses the fund's performance during the
first half of fiscal 1999 and comments on his current expectations for the
months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 20, 1999
Report from the Fund Manager
David E. Hamlin
In the midst of the uncertainty clouding world financial markets,
municipal bonds offered a welcome refuge for U.S. investors this fall.
Prices of municipal bonds fluctuated less than those of their taxable
counterparts. Furthermore, falling interest rates brought long-term
municipal bond yields in line with the 30-year Treasury bond yield
throughout the fall, suggesting that tax-free securities are undervalued
relative to Treasuries. Putnam Arizona Tax Exempt Income Fund's
performance demonstrates this relative safety, with class A shares
delivering a total return of 2.59% at net asset value (-2.24% at public
offering price) for the six months ended November 30, 1998. Performance
for other shares and over longer time periods can be found on page 8.
* MUNICIPAL BONDS OFFER EXCEPTIONAL VALUE
After a turbulent autumn, the municipal bond market has calmed down and
even slightly outperformed the Treasury market. Long-term municipal bond
yields are approximately the same as the 30-year Treasury market --
exhibiting a remarkable level of cheapness relative to Treasuries. This
ratio dropped to 97% during November but by the end of the month had
returned to 100%. Up until the last few months, the ratio of municipal
bond yields to Treasury yields had been in the 84% to 87% range.
The market arrived at these unprecedented yield ratios after a string of
international problems set off the stock market volatility and the bond
market rallies. As foreign and hedge fund investors panicked about
plummeting stock markets, they began a flight to quality -- selling
investments with virtually any element of risk and rushing for the safety
of U.S. Treasury bonds. This buying spree drove up the prices of
Treasuries while pushing down their yields. Since foreign investors do not
benefit from the tax advantages of municipal bonds, prices in this market
did not rise as much as those of Treasuries. For the past few months,
municipal bond yields have been extremely close or equal to Treasury
yields, making them an exceptional investment choice for U.S. investors.
Normally when interest rates fall, prerefundings boost the bond supply.
But rates have been low for some time and so most issuers have already
completed their refundings and we expect that the supply of new issues
will slow -- a positive factor for municipal bond prices. In addition, the
calendar of municipal bond sales usually slows during the holiday season
as well.
The yield relationship of Treasury yields to municipal securities is also
contributing to the decline in supply. Since Treasury yields fell so
dramatically relative to municipal yields, the Treasury escrows used in
prerefundings are not adequate to pay off the municipal issues.
* STRONG CREDIT FUNDAMENTALS, WEAK BOND ISSUANCE
A stable Arizona economy, steady population growth -- approximately 30%
over the past 10 years -- and low unemployment are contributing to
favorable conditions around the state. In addition, with budget surpluses
since 1992, Arizona's fiscal management has remained strong, and we expect
it to remain stable for the foreseeable future.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/health care 19.1%
Transportation 17.4%
Utilities 10.9%
Education 9.1%
Water and sewerage 8.5%
Footnote reads:
*Based on net assets as of 11/30/98. Holdings will vary over time.
The limited supply of municipal bonds coming to market in Arizona often
complicates our search for attractively priced, higher-yielding
securities. However, with a team of in-house analysts dedicated to the
various industry sectors we follow, we're ready to move quickly when an
opportunity presents itself. In September, we participated in an offering
by the Glendale, Arizona, school district, which is financing the
renovation of existing schools. The bonds, which are insured by the major
municipal bond insurance companies to assure timely payment of principal
and interest, also carry a noncallable provision. In today's low
interest-rate environment, noncallable bonds are an effective way to
protect the fund's income stream.
Given Arizona's steady population growth, greater demand for municipal
services and an expansion of the state's infrastructure are providing an
impetus for new municipal bond issues. Hospitals and water/sewerage
facilities bonds make up the largest portion of these issues. Northern
Arizona Hospital System, a holding we acquired shortly after the reporting
period, is a group of hospitals that dominate the regions that they serve.
The bonds are insured, adding an extra degree of assurance for investors.
Within the sector as a whole, we have seen some widening of credit spreads
between higher- and lower-yielding bonds as a result of the Philadelphia
Healthcare System bankruptcy. We are viewing the situation
opportunistically, comfortable with the knowledge that our credit research
will add value as we seek out issues of the more profitable hospitals.
We also purchased the city of Tucson water bonds, which just came to
market in November. Interestingly the bonds are structured as a forward
transaction. Tucson is issuing bonds that will not settle until October
1999 in order to take advantage of today's low interest rates. The city
must pay an above-market rate to attract investors to the bonds, since the
income payout will not start until after settlement. The bonds are also
self-funding, with user fees paid by consumers of water as the source of
the bonds' payment to investors. Because the issuers have the ability to
set user fees, income from this type of bond is relatively stable and the
bonds carry a lower risk of default than other types of municipal bonds.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
A -- 5.6%
Aa/AA -- 10.6%
Aaa/AAA -- 56.7%
B -- 1.4%
Ba/BB -- 12.0%
Baa/BBB -- 13.7%
Footnote reads:
*As a percentage of market value as of 11/30/98. A bond rated Baa or higher
is considered investment grade. Ratings reflect Moody's and Standard &
Poor's(Registered Trademark) descriptions; percentages may include unrated
bonds considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
* PRO-GROWTH FED CALMS FINANCIAL MARKETS
The bond markets are moving away from their obsession with performance on
international markets, reassured by indications that the Federal Reserve
Board is prepared to step in to stabilize the U.S. financial markets when
required. As of period's end, the Fed had cut interest rates three times
in seven weeks, for a reduction of three quarters of a percentage point.
The board's relaxed monetary policy is sending a reassuring message both
to the world and to Wall Street that the Fed is willing to do its part to
keep U.S. economic growth on track. Strong consumer spending is also
likely to contribute to a slowing but still strong economy well into 1999.
The Arizona bond market will likely continue to benefit from the
multiplier effect of an ever-increasing population. Schools, hospitals,
and new roads are contributing to the ongoing strength of the state's
economy. Every phase of these large-scale projects, from the purchase of
materials to the hiring of workers, has a positive effect on the market
and we are working to take advantage of it.
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 11/30/98, 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 or current income free from federal and state income tax consistent
with preservation of capital.
TOTAL RETURN FOR PERIODS ENDED 11/30/98
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 2.59% -2.24% 2.37% -2.64% 2.54% -0.76%
- ------------------------------------------------------------------------------
1 year 6.16 1.11 5.65 0.65 5.84 2.41
- ------------------------------------------------------------------------------
5 years 29.41 23.24 25.45 23.46 27.60 23.41
Annual average 5.29 4.27 4.64 4.31 5.00 4.30
- ------------------------------------------------------------------------------
Life of fund 71.72 63.64 62.37 62.37 67.32 61.89
Annual average 7.15 6.49 6.39 6.39 6.79 6.35
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/98
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 3.84% 0.74%
- ------------------------------------------------------------------------------
1 year 7.77 1.55
- ------------------------------------------------------------------------------
5 years 34.96 12.48
Annual average 6.29 2.38
- ------------------------------------------------------------------------------
Life of fund 82.47 21.84
Annual average 7.98 2.56
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Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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. 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 11/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.208943 $0.178199 $0.195188
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Total $0.208943 $0.178199 $0.195188
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/98 $9.32 $9.78 $9.30 $9.33 $9.64
- ------------------------------------------------------------------------------
11/30/98 9.35 9.82 9.34 9.37 9.68
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 4.32% 4.11% 3.67% 4.02% 3.89%
- ------------------------------------------------------------------------------
Taxable equivalent3 7.54 7.18 6.41 7.02 6.79
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 3.79 3.61 3.05 3.45 3.34
- ------------------------------------------------------------------------------
Taxable equivalent3 6.62 6.30 5.32 6.02 5.83
- ------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 42.72% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(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
- ------------------------------------------------------------------------------
6 months 2.91% -1.95% 2.46% -2.54% 2.86% -0.46%
- ------------------------------------------------------------------------------
1 year 4.86 -0.16 4.36 -0.64 4.77 1.41
- ------------------------------------------------------------------------------
5 years 27.26 21.27 23.23 21.27 25.72 21.64
Annual average 4.94 3.93 4.27 3.93 4.68 4.00
- ------------------------------------------------------------------------------
Life of fund (1/30/91) 72.35 64.25 62.71 62.71 68.07 62.62
Annual average 7.11 6.47 6.34 6.34 6.78 6.33
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. 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.
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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<TABLE>
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Portfolio of investments owned
November 30, 1998 (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
MUNICIPAL BONDS AND NOTES (100.2%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
Arizona (86.0%)
- --------------------------------------------------------------------------------------------------------------------------
$ 1,975,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
(Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB $ 2,120,656
1,500,000 AZ Student Loan Acquisition Auth. Rev. Bonds,
Ser. B, 6.6s, 5/1/10 Aa 1,616,250
AZ, State Hlth. Facs. Auth. Rev. Bonds
(Bethesda Foundation), Ser. A
2,000,000 6.4s, 8/15/27 BB/P 2,107,500
1,315,000 6 3/8s, 8/15/15 BB/P 1,393,900
1,750,000 Central AZ Wtr. Consv. Dist. Contract Rev. Bonds
(Central AZ), Ser. A, 5 1/2s, 11/1/10 AA- 1,929,375
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,930,313
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,474,000
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s, 7/1/14 (SEG) Aaa 2,918,625
Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
1,995,000 Ser. B, 8 1/2s, 12/1/21 BBB-/P 2,256,844
2,495,000 Ser. C, 8 1/4s, 12/1/14 BBB-/P 2,940,981
Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.)
4,000,000 6 3/8s, 10/1/36 BBB- 4,350,000
3,000,000 Ser. B, 5.8s, 11/1/32 BBB- 3,052,500
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC,
6 1/2s, 7/1/22 Aaa 1,117,500
1,500,000 Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds
(Connection Dev. Fee), 6 7/8s, 4/1/14 BB+/P 1,543,125
2,500,000 Glendale G.O. Bonds (High School Dist. No. 205),
FGIC, 4.7s, 7/1/14 Aaa 2,471,875
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
CLI Insd., 7 1/8s, 7/1/20 AAA 1,190,000
4,500,000 Maricopa Cnty., Hosp. Rev. Bonds
(Sun Health Corp.), 6 1/8s, 4/1/18 Baa1 4,871,250
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 4,383,750
Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co.)
5,000,000 Ser. A, 6.3s, 12/1/26 Ba1 5,375,000
2,000,000 Ser. A, 5 3/4s, 11/1/22 Ba1 2,055,000
Maricopa Cnty., School Dist. G.O. Bonds
2,000,000 (Dist. No. 69 Paradise Valley), Ser. B, MBIA,
7s, 7/1/12 Aaa 2,512,500
960,000 (School Dist. No. 11 Peoria U.), MBIA,
6.4s, 7/1/10 Aaa 1,024,800
1,500,000 (Dist. No. 69 Paradise Valley), MBIA,
6.35s, 7/1/10 Aaa 1,773,750
3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,754,438
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 1,267,500
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 1,587,694
2,725,000 Northern AZ U. Rev. Bonds, FGIC, 6 1/2s, 6/1/09 Aaa 3,232,531
Phoenix G.O. Bonds
1,000,000 6 3/8s, 7/1/13 AA+ 1,097,500
1,000,000 6s, 7/1/10 Aa1 1,116,250
3,845,000 Phoenix, Civic Impt. Corp. Rev. Bonds, Ser. 405,
6.6s, 7/1/15 (acquired 8/7/98, cost $4,056,744) AAA/P 4,219,888
2,845,000 Phoenix, Civic Impt. Corp. Waste Wtr. Syst.
Rev. Bonds, MBIA, 6 1/2s, 7/1/08 Aaa 3,300,200
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds, Ser. A,
MBIA, 6.9s, 1/1/23 Aaa 1,690,000
2,150,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 AAA 2,270,938
1,000,000 Pima Cnty., Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(Willowick Apts.), 5 1/2s, 3/1/28 AA 1,017,500
1,635,000 Pima Cnty., Indl. Dev. Auth. Single Family Mtge.
Rev. Bonds, FNMA Coll., GNMA Coll.,
FHLMC Coll., 6.95s, 11/1/23 AAA 1,729,013
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds, FGIC,
7 1/2s, 7/1/08 Aaa 1,255,000
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,140,000
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 2,142,500
1,325,000 Pinal Cnty., School Dist. Pinal Cnty., School Dist.
(AZ U., Apache Junction), Ser. A, FGIC,
6.8s, 7/1/08 Aaa 1,596,625
3,250,000 Salt River, Rev. Bonds (Project Agric.), 6s, 1/1/09 Aa 3,692,813
1,140,000 Scottsdale G.O. Bonds, 5 1/2s, 7/1/12 Aa1 1,249,725
1,740,000 Scottsdale, Indl. Dev. Auth. Hosp. Rev. Bonds
(Scottsdale Memorial Hosp.), Ser. A, AMBAC,
6 1/8s, 9/1/17 Aaa 1,959,675
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village), Ser. A,
8 1/4s, 6/1/15 BB-/P 4,520,000
1,000,000 Sedona COP, 7.2s, 4/1/12 BBB/P 1,033,750
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev. Bonds,
8 1/2s, 6/1/05 BB 1,067,500
3,985,000 Tucson G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 4,677,394
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A3 4,385,000
860,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 AAA 908,375
3,765,000 Tucson, St. & Hwy. User Rev. Bonds, Sr. Lien, MBIA,
6s, 7/1/10 Aaa 4,339,163
Tucson Wtr Rev. Bonds
1,000,000 FGIC, 5 1/2s, 7/1/14 Aaa 1,087,500
2,720,000 Ser. A, FGIC, 5s, 7/1/10 (FWC/WIS) Aaa 2,781,200
1,000,000 U. of AZ COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A+ 1,077,500
U. of AZ Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,068,750
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 1,593,188
--------------
129,275,179
Puerto Rico (14.2%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,191,250
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
5,470,000 Ser. 396, 7.1s, 7/1/09 (acquired 7/30/98,
cost $6,353,624) (RES) AAA/P 6,700,750
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,173,750
3,225,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 AAA 3,817,590
2,000,000 Cmnwlth of PR, Muni. Fin. Agcy. Rev. Bonds, Ser. A,
FSA, 6s, 7/1/11 Aaa 2,322,500
Cmnwlth of PR, Pub. Bldg. Auth. Gtd. Ed. & Hlth.
Fac. Rev. Bonds
1,500,000 Ser. L, 6 7/8s, 7/1/21 Aaa 1,680,000
4,000,000 Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 4,545,000
--------------
21,430,840
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Total Investments (cost $140,866,164) (b) $ 150,706,019
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $150,377,745.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
November 30, 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 November 30, 1998. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $140,801,163, resulting in gross unrealized appreciation and
depreciation of $10,149,711 and $244,855, respectively, or net unrealized appreciation of $9,904,856.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at November 30, 1998 was $10,920,638, or 7.3% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at November 30, 1998.
(WIS) When-issued securities (Note 1)
The fund had the following industry group concentrations greater than 10% at November 30, 1998 (as a
percentage of net assets):
Hospitals/Health care 19.1%
Transportation 17.4
Utilities 10.9
The fund had the following insurance concentrations greater than 10% at November 30, 1998 (as a percentage of
net assets):
MBIA 18.8%
FGIC 16.2
<CAPTION>
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1998 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes
20 yr. (Short) $2,073,500 $2,064,758 Mar-99 ($8,742)
Municipal Bond
Index (Short) 7,588,125 7,686,911 Dec-98 98,786
U.S. Treasury Notes
20 yr. (Short) 4,414,688 4,323,281 Dec-98 (91,407)
- -------------------------------------------------------------------------------
($1,363)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $140,866,164) (Note 1) $150,706,019
- -----------------------------------------------------------------------------------------------
Interest receivable 2,902,897
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 65,000
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 298,466
- -----------------------------------------------------------------------------------------------
Total assets 153,972,382
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 249,220
- -----------------------------------------------------------------------------------------------
Payable for variation margin 97,492
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 2,776,467
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 136,661
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 77,173
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 150,644
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 18,069
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 79
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,009
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 62,719
- -----------------------------------------------------------------------------------------------
Other accrued expenses 25,104
- -----------------------------------------------------------------------------------------------
Total liabilities 3,594,637
- -----------------------------------------------------------------------------------------------
Net assets $150,377,745
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $143,782,224
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (90,695)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (3,152,276)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 9,838,492
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $150,377,745
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($116,561,399 divided by 12,466,876 shares) $9.35
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.35)* $9.82
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($33,293,911 divided by 3,565,964 shares)+ $9.34
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($522,435 divided by 55,779 shares) $9.37
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.37)** $9.68
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group
sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended November 30, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $3,931,060
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 354,202
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 104,604
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 2,967
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,022
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 118,671
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 138,363
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,311
- -----------------------------------------------------------------------------------------------
Reports to shareholders 5,800
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 14,317
- -----------------------------------------------------------------------------------------------
Legal 914
- -----------------------------------------------------------------------------------------------
Postage 9,008
- -----------------------------------------------------------------------------------------------
Other 4,351
- -----------------------------------------------------------------------------------------------
Total expenses 757,605
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (13,884)
- -----------------------------------------------------------------------------------------------
Net expenses 743,721
- -----------------------------------------------------------------------------------------------
Net investment income 3,187,339
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 219,867
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (852,095)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts during the period 1,263,293
- -----------------------------------------------------------------------------------------------
Net gain on investments 631,065
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $3,818,404
- -----------------------------------------------------------------------------------------------
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
1998* 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 3,187,339 $ 7,087,572
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (632,228) 341,595
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,263,293 4,477,721
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,818,404 11,906,888
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (2,699,516) (5,914,397)
- ---------------------------------------------------------------------------------------------------------------
Class B (571,698) (1,243,648)
- ---------------------------------------------------------------------------------------------------------------
Class M (10,009) (24,352)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (3,375,608) (3,094,187)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (2,838,427) 1,630,304
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 153,216,172 151,585,868
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess and
undistributed net investment income of $90,695
and $3,189, respectively) $150,377,745 $153,216,172
- ---------------------------------------------------------------------------------------------------------------
* 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
ended
Per-share Nov. 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $9.32 $9.03 $8.84 $9.01
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .20 .44 .46 .47
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .04 .29 .19 (.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .24 .73 .65 .30
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.44) (.46) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.44) (.46) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.35 $9.32 $9.03 $8.84
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.59* 8.28 7.52 3.38
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $116,561 $120,649 $122,743 $126,716
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .43* .99 .98 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.18* 4.76 5.11 5.20
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.51* 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
For the
nine months
Per-share ended
operating performance May 31 Year ended August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995++ 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.84 $9.47 $9.07
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38 .51 .54
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.61) .47
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .55 (.10) 1.01
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.50) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- (.03) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.53) (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.01 $8.84 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 6.45* (1.07) 11.54
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $136,598 $142,950 $145,304
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .70* .97 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.42* 5.55 5.82
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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
ended
Per-share Nov. 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $9.30 $9.02 $8.82 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .17 .38 .40 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .05 .28 .20 (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .22 .66 .60 .23
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.18) (.38) (.40) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.18) (.38) (.40) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.34 $9.30 $9.02 $8.82
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.37* 7.47 6.94 2.60
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $33,294 $32,046 $28,340 $24,050
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .75* 1.64 1.63 1.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.85* 4.10 4.44 4.52
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.51* 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>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
For the
nine months For the period
Per-share ended Year ended July 15, 1993+
operating performance May 31 August 31 to August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995++ 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of period $8.83 $9.47 $9.39
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .34 .45 .11
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.61) .03
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .51 (.16) .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.34) (.45) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.34) (.48) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.00 $8.83 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 5.99* (1.80) 1.45*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $21,538 $16,247 $2,974
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.19* 1.60 .19*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.89* 4.82 .43*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 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 July 3, 1995+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $9.33 $9.04 $8.85 $8.86
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .19 .41 .43 (c) .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .05 .30 .19 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .24 .71 .62 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.20) (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments
Total distributions (.20) (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.37 $9.33 $9.04 $8.85
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.54* 7.96 7.19 4.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $522 $521 $503 $293
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .58* 1.29 1.28 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.03* 4.47 4.75 4.28*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 14.51* 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
November 30, 1998 (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 Putnam Management
following procedures approved by the Trustees, and such valuations and
procedures are reviewed periodically by the Trustees.
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.
Securities purchased or sold on a when-issued basis may be settled a month
or more after the trade date; interest income is accrued based on the
terms of the security. Losses may arise due to changes in the market value
of the underlying securities or if the counterparty does not perform under
the contract.
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, 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
$1,215,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------- ----------------
$680,000 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. 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. Effective August 1, 1998, the
trustees voted to reduce the annual fee for the first $500 million of
average net assets to 0.40%. This reduction will remain in effect until
January 31, 2000.
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.
As part of the subcustodian contract between the subcustodian bank and
PFTC, the subcustodian bank has a lien on the securities of the fund to
the extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At November 30, 1998, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
The fund reimburses Putnam Management 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.
For the six months ended November 30, 1998, fund expenses were reduced by
$13,884 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 $330 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, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $10,510 and no monies
from the sale of class A and class M shares, respectively and $39,974 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 six months ended November
30, 1998, Putnam Mutual Funds Corp., acting as underwriter received $5,356
on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended November 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$25,177,280 and $21,868,580, 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, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 496,850 $ 4,631,460
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 134,479 1,255,173
- -----------------------------------------------------------------------------
631,329 5,886,633
Shares
repurchased (1,114,609) (10,395,344)
- -----------------------------------------------------------------------------
Net decrease (483,280) $(4,508,711)
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 346,169 $ 3,228,199
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 33,036 307,962
- -----------------------------------------------------------------------------
379,205 3,536,161
Shares
repurchased (257,995) (2,402,895)
- -----------------------------------------------------------------------------
Net increase 121,210 $ 1,133,266
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 18 $ 168
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 738 6,896
- -----------------------------------------------------------------------------
756 7,064
Shares
repurchased (772) (7,227)
- -----------------------------------------------------------------------------
Net decrease (16) $ (163)
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
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
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic 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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
David E. Hamlin
Vice President and Fund Manager
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.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
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