Putnam
Arizona
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Because of their limited attractiveness to non-U.S. investors, municipal
bonds did not experience the turbulence endured by taxable bonds in the
wake of last fall's global flight to quality. Instead, for U.S. investors,
municipals have provided unusually handsome current income both in real
terms, thanks to low inflation, and relative to after-tax returns on
taxable securities, especially for higher-bracket taxpayers.
In this environment, David Hamlin, who manages Putnam Arizona Tax Exempt
Income Fund, has been focusing on generating maximum current income
without undue risk to principal. He has done this primarily through
careful selection of portfolio holdings and strategies aimed at risk
reduction.
In the following report, Dave explains these strategies in detail as he
reviews your fund's performance during the fiscal year that ended on May
31, 1999. Then he offers his current thinking about prospects for the
fiscal year that has just begun.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 21, 1999
Report from the Fund Manager
David E. Hamlin
In an unusually volatile year for fixed-income investments, municipal
bonds fared better than most, escaping the dramatic swings in performance
that beset other areas of the market. True to its objective, Putnam
Arizona Tax Exempt Income Fund provided a modest total return but an
attractive level of income. On May 31, the fund's 4.23% 30-day SEC yield
for class A shares at NAV was equivalent to a 7.38% after-tax yield for
investors in Arizona's highest tax bracket.
Total return for 12 months ended 5/31/99
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------
3.57% -1.30% 3.01% -1.95% 3.26% -0.06%
- -----------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 6.
* MUNICIPALS DEMONSTRATE VIRTUES IN VOLATILE MARKET
The investment community was turned upside down in the fall of 1998 when
shaky foreign stock markets and an uncertain U.S. economic picture drove
investors to the security of U.S. Treasury bonds, which are backed by the
full faith and credit of the U.S. government. The overwhelming demand for
those securities drove their prices higher and their yields to record
lows.
For a brief period in the fall, fixed-income investors shunned bonds that
carried any degree of credit risk, including municipal bonds. Generally
the greater a bond's credit risk, the worse its performance relative to
Treasury bonds. At the same time, rapidly falling Treasury yields created
an unusual situation in which the yields offered by municipal bonds were
just as high as those offered by Treasury bonds of comparable maturity.
(Under normal market conditions, municipal bonds do not need to offer as
high a yield as taxable investments because their tax advantages make them
attractive to investors.) This anomaly represented a rare opportunity for
investors, stabilizing demand at a time when other segments of the bond
market, particularly higher-yielding corporate bonds, were suffering steep
declines.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/
health care 19.4%
Utilities 15.6%
Transportation 14.7%
Education 14.1%
Housing 10.9%
Footnote reads:
* Based on net assets as of 5/31/99. Portfolio holdings will vary over
time.
In the first five months of 1999, Treasury bonds gave back much of their
gains from 1998, and municipal bonds began to outperform on a total return
basis. The strength of the U.S. economy didn't peter out as feared.
Indeed, after a 6% annualized increase in gross domestic product in the
fourth quarter of 1998, the economy expanded at a robust 4.5% rate in the
first quarter of 1999. Signs began to point to higher interest rates and
possibly an increase in inflation. Some commodity prices began to rise --
including an almost 100% rise in the price of oil -- and the consumer
price index posted a stronger-than-expected 0.7% increase in April.
Municipal bonds benefited during this period as investors traded out of
U.S. Treasury bonds and into segments of the bond market that offered
higher yields and less sensitivity to rising interest rates.
Another positive for municipals: As rates edged higher in the first few
months of 1999, the issuance of municipal bonds slowed, reducing the
supply of bonds at the same time that demand for those bonds was surging.
Arizona's municipal issuance totaled $4.2 billion in 1998, owing largely
to refinancing activity, as issuers sought to take advantage of lower
interest rates. By comparison, new issuance was just $940 million in the
first five months of 1999, a 50% reduction from the same period in 1998.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Ba/BB -- 12.5%
Baa/BBB -- 16.6%
A -- 2.8%
Aa/AA -- 11.9%
VMIG1 -- 0.8%
B -- 1.5%
Aaa/AAA --53.9%
Footnote reads:
* As a percentage of market value as of 5/31/99. A bond rated Ba/BBB or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
* CAREFULLY CONSTRUCTED PORTFOLIO SEEKS TO MANAGE RISK WHILE MAXIMIZING INCOME
Your fund's investment objective is high current income free from federal
and state income taxes and consistent with capital preservation. To
achieve this balanced objective, we generally temper higher-yielding,
riskier investments with other investments and strategies intended to have
a stabilizing effect on the portfolio. During the 12-month period covered
by this report, we pursued our investment objective with a multipronged
approach that included call protection, portfolio diversification, and a
prudent use of lower-rated, higher-yielding municipal bonds.
"Though municipal bonds aren't the conspicuous value they were last year --
when yields on Treasury bonds and municipals were nearly identical --
tax-free bonds are still attractive."
- -- Forbes, April 5, 1999
The fund's call protection strategy is ongoing. Issuers of municipal bonds
frequently refinance their bonds when interest rates are declining in
order to take advantage of lower interest rates. Such was the case in
1998. A refinanced bond can be disruptive to your fund's flow of income,
since the principal from the issue is returned to us and we must reinvest
the money at current interest rates, which are often lower than those at
which the bond was issued. However, not all bonds are issued with
refinancing provisions. To help achieve a more stable flow of income
during this period, we invested where possible in bonds that are not
callable as well as in bonds that have distant call dates.
A closer look at municipal credit ratings
Rating agencies such as Moody's Investors Service and Standard & Poor's Corp.
assign ratings to municipal issuers based on an in-depth analysis of the
issuer's financial condition and management, economic and debt
characteristics, and the specific revenue sources securing the bond. The
highest ratings are Aaa (Moody's) and AAA (Standard & Poor's). Bonds rated in
the Baa/BBB category or higher (A and Aa/AA) are considered to be investment
grade. Securities in the Ba/BB group and below are considered to be below
investment grade or high yield. If you look at "The fund's portfolio" in the
back of this report, you will see ratings next to each issuer's name. The pie
chart on page 3 summarizes this listing to give you a sense of the portfolio's
overall quality.
Sometimes smaller bonds are not rated because the cost of obtaining a rating is
not justifiable. Unrated bonds can still offer attractive investment
opportunities and may end up in your fund's portfolio. In such a case, Putnam's
analysts perform their own rating of the bonds, and they are identified in the
portfolio listing by a /P rating.
Taking a cue from the market's twists and turns, we also sought to broaden
the fund's diversification during the period and thereby limit unwanted
price volatility. At the end of May 1999, the fund's investments were
spread across more than 12 different segments of the municipal market,
from airport issues to hospitals and housing developments. Recent
purchases include a bond that helps finance a northern Arizona health-care
facility, a Phoenix general obligation bond, and a Baa3-rated issue from
the Guam Power Authority. With municipal issuance slowing so dramatically
this year, the Guam issue is an attempt to diversify the portfolio outside
the state. While these holdings were viewed favorably at the end of the
period, all are subject to review and adjustment in accordance with the
fund's investment strategy and may vary in the future.
Although the majority of the investments in the portfolio were rated BBB
or higher (the average was AA on May 31, 1999), we typically reserve a
portion of the portfolio for lower-rated higher-yielding bonds. In
addition to the extra income they provide, these bonds can lend a measure
of stability in times of rising interest rates because investors are less
willing to trade out of bonds that provide a premium yield. Another plus:
When the economy is strong, some lower-rated bonds are upgraded and
experience price gains as more investors seek to own the issues.
Nevertheless, we depend on the expertise of our credit research department
to scrutinize the financial background of high-yield issuers being
considered for the portfolio, regardless of the state of the economy.
Although our high-yield holdings dampened performance during last year's
brief flight to quality, this segment of the portfolio boosted income and
total return throughout the period and particularly in the first five
months of 1999.
On May 31, the fund's 4.23% 30-day SEC yield for class A shares at net asset
value was equivalent to a 7.38% after-tax yield for investors in Arizona's
highest income tax bracket.*
*See pages 6-8 for complete performance information.
* GREATER INCOME OPPORTUNITIES APPEAR TO LIE AHEAD
The rise in interest rates over the past several months has created
opportunities to achieve higher levels of income without sacrificing
credit quality. To make the most of this situation, we have begun to focus
on high-quality bonds with longer maturity dates. At the same time, the
reduction in municipal issuance in Arizona should bode well for the prices
of existing bonds, including those in your fund's portfolio.
Although the economy's strength continues unabated and some inflationary
pressures are evident, inflation is by no means widespread. Indeed, prices
continue to fall in such important segments of the economy as retail and
technology. In the coming months, we expect that economic and market
stability will be more the rule than the exception. If rates continue to
climb gradually as we expect, the fund's multipronged investment strategy
should continue to yield positive results in the coming fiscal year.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 5/31/99, 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 state income taxes, consistent with capital preservation.
TOTAL RETURN FOR PERIODS ENDED 5/31/99
Class A Class B Class M
(inception dates) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 3.57% -1.30% 3.01% -1.95% 3.26% -0.06%
- ------------------------------------------------------------------------
5 years 34.16 27.82 30.04 28.03 32.20 27.89
Annual average 6.05 5.03 5.39 5.07 5.74 5.04
- ------------------------------------------------------------------------
Life of fund 73.36 65.21 63.39 63.39 68.49 63.02
Annual average 6.83 6.21 6.07 6.07 6.46 6.04
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/99
Lehman Bros. Municipal Consumer
Bond Index price index
- ---------------------------------------------------------------------
1 year 4.67% 2.09%
- ---------------------------------------------------------------------
5 years 41.51 12.68
Annual average 7.19 2.42
- ---------------------------------------------------------------------
Life of fund 83.94 23.48
Annual average 7.59 2.56
- ---------------------------------------------------------------------
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 life-of-fund
periods reflect the applicable contingent deferred sales charge (CDSC),
which is 5% in the first year, declines to 1% in the sixth year, and is
eliminated thereafter. Returns shown for class B and class M shares for
periods prior to their inception are derived from the historical
performance of class A shares, adjusted to reflect both the initial sales
charge or CDSC, if any, currently applicable to each class and in the case
of class B and class M shares, the higher operating expenses applicable to
such shares. All returns assume reinvestment of distributions at NAV.
Investment return and principal value will fluctuate so that an investor's
shares when redeemed may be worth more or less than their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 1/31/91
Fund's class A Lehman Bros. Consumer price
Date shares at POP Municipal Bond Index index
1/31/91 9,525 10,000 10,000
5/31/91 9,840 10,316 10,074
5/31/92 10,850 11,329 10,379
5/31/93 12,128 12,685 10,713
5/31/94 12,313 12,998 10,958
5/31/95 13,251 14,186 11,308
5/31/96 13,700 14,834 11,634
5/31/97 14,730 16,064 11,895
5/31/98 15,591 17,572 12,095
5/31/99 $16,521 $18,394 $12,348
Footnote reads:
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have
been valued at $16,339 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $16,849 ($16,302 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/99
Class A Class B Class M
- ----------------------------------------------------------------------------
Distributions (number) 12 12 12
- ----------------------------------------------------------------------------
Income $0.427874 $0.366492 $0.400742
- ----------------------------------------------------------------------------
Capital gains1
Long-term -- -- --
- ----------------------------------------------------------------------------
Short-term -- -- --
- ----------------------------------------------------------------------------
Total $0.427874 $0.366492 $0.400742
- ----------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ----------------------------------------------------------------------------
5/31/98 $9.32 $9.78 $9.30 $9.33 $9.64
- ----------------------------------------------------------------------------
5/31/99 9.22 9.68 9.21 9.23 9.54
- ----------------------------------------------------------------------------
Current return (end of period)
- ----------------------------------------------------------------------------
Current dividend rate2 5.02% 4.78% 4.39% 4.72% 4.57%
- ----------------------------------------------------------------------------
Taxable equivalent3 8.76 8.34 7.66 8.23 7.97
- ----------------------------------------------------------------------------
Current 30-day SEC yield4 4.23 4.02 3.57 3.90 3.78
- ----------------------------------------------------------------------------
Taxable equivalent3 7.38 7.01 6.23 6.80 6.59
- ----------------------------------------------------------------------------
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 42.68% 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 6/30/99 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ----------------------------------------------------------------------------
1 year 1.81% -3.00% 1.12% -3.75% 1.40% -1.87%
- ----------------------------------------------------------------------------
5 years 32.85 26.51 28.73 26.73 30.88 26.56
Annual average 5.85 4.82 5.18 4.85 5.53 4.82
- ----------------------------------------------------------------------------
Life of fund 70.50 62.49 60.57 60.57 65.69 60.31
Annual average 6.55 5.94 5.79 5.79 6.19 5.77
- ----------------------------------------------------------------------------
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. See first
page of performance section for performance calculation method.
Terms and definitions
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 4.75% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time of
the redemption of class B shares and assumes redemption at the end of the
period. Your fund's CDSC declines from a 5% maximum during the first year
to 1% during the sixth year. After the sixth year, the CDSC no longer
applies.
Comparative benchmarks
Lehman Brothers Municipal Bond Index is an unmanaged list of long-term
fixed-rate investment-grade tax-exempt bonds representative of the
municipal bond market. The index does not take into account brokerage
commissions or other costs, may include bonds different from those in the
fund, and may pose different risks than the fund. 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.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as of
the last day of the reporting period. Holdings are organized by asset type
and industry sector, country, or state to show areas of concentration and
diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment income
or realized capital gains) over the current reporting period and the most
recent fiscal year-end. The distributions listed here may not match the
amounts listed in the Statement of Operations because the distributions are
determined on a tax basis and may be paid in a different period from the one
in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
Report of independent accountants
For the fiscal year ended May 31, 1999
To the Trustees and Shareholders of
Putnam Arizona Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, except for bond ratings, and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial
position of Putnam Arizona Tax Exempt Income Fund (the "fund") at May 31,
1999, and the results of its operations, the changes in its net assets and
the financial highlights for the periods indicated, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at May 31,
1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 12, 1999
<TABLE>
<CAPTION>
The fund's portfolio
May 31, 1999
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
G.O. Bonds -- General Obligation Bonds
GNMA Coll. -- Government National Mortgage Association Collateralized
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (100.3%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C>
Arizona (89.0%)
- --------------------------------------------------------------------------------------------------------------------------
AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
$ 1,975,000 (Phoenix Mem. Hosp.), 8.2s, 6/1/21 BB $ 2,061,406
3,000,000 (Northern AZ Healthcare Syst.), AMBAC,
4 3/4s, 10/1/30 Aaa 2,752,500
AZ State Hlth. Facs. Auth. Rev. Bonds
(Bethesda Foundation), Ser. A
2,000,000 6.4s, 8/15/27 BB/P 2,087,500
1,315,000 6 3/8s, 8/15/15 BB/P 1,379,106
1,500,000 AZ Student Loan Acquisition Auth. Rev. Bonds,
Ser. B, 6.6s, 5/1/10 Aa 1,599,375
1,750,000 Central AZ Wtr. Consv. Dist. Contract Rev. Bonds
(Central AZ), Ser. A, 5 1/2s, 11/1/10 AA- 1,870,313
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,863,250
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,425,875
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds,
FGIC, 8s, 7/1/14 (SEG) Aaa 2,872,938
Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
1,995,000 Ser. B, 8 1/2s, 12/1/21 BBB-/P 2,224,425
2,560,000 Ser. C, 8 1/4s, 12/1/14 BBB-/P 2,979,200
Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.)
4,000,000 6 3/8s, 10/1/36 BBB- 4,280,000
3,000,000 Ser. B, 5.8s, 11/1/32 BBB- 3,026,250
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC,
6 1/2s, 7/1/22 Aaa 1,098,750
1,500,000 Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds
(Connection Dev. Fee), 6 7/8s, 4/1/14 BB+/P 1,528,125
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
CLI Insd., 7 1/8s, 7/1/20 AAA 1,161,250
5,000,000 Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co.), Ser. A, 6.3s, 12/1/26 Ba1 5,306,250
4,500,000 Maricopa Cnty., Hosp. Rev. Bonds
(Sun Health Corp.), 6 1/8s, 4/1/18 Baa1 4,831,875
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg.
Rev. Bonds (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,893,613
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds (Samaritan Hlth. Svcs.), Ser. A,
MBIA, 7s, 12/1/16 Aaa 4,287,500
Maricopa Cnty., School Dist. G.O. Bonds
2,000,000 (Dist. No. 69 Paradise Valley), Ser. B, MBIA,
7s, 7/1/12 Aaa 2,430,000
960,000 (School Dist. No. 11 Peoria U.), MBIA,
6.4s, 7/1/10 Aaa 1,009,200
1,500,000 (Dist. No. 69 Paradise Valley), MBIA,
6.35s, 7/1/10 Aaa 1,721,250
3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,635,375
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 1,240,000
1,435,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds (Coopers Ridge Apts.), FHA Insd.,
7 3/8s, 4/1/32 AAA 1,558,769
2,725,000 Northern AZ U. Rev. Bonds, FGIC, 6 1/2s, 6/1/09 Aaa 3,150,781
Phoenix G.O. Bonds
1,000,000 6 3/8s, 7/1/13 AA+ 1,083,750
1,000,000 6s, 7/1/10 Aa1 1,106,250
1,300,000 4 3/4s, 7/1/23 Aa1 1,215,500
3,845,000 Phoenix, Civic Impt. Corp. Rev. Bonds, Ser. 405,
6.6s, 7/1/15 (acquired 8/7/98, cost $4,056,744) (RES) AAA/P 4,018,025
2,845,000 Phoenix, Civic Impt. Corp. Waste Wtr. Syst.
Rev. Bonds, MBIA, 6 1/2s, 7/1/08 Aaa 3,239,744
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds, Ser. A,
MBIA, 6.9s, 1/1/23 Aaa 1,666,000
2,150,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 AAA 2,254,813
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,162,500
1,000,000 Pima Cnty., Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(Willowick Apts.), 5 1/2s, 3/1/28 AA 1,007,500
2,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds
(Casa Grande Regl. Med. Ctr.), Ser. A,
8 1/8s, 12/1/22 B/P 2,125,000
1,635,000 Pima Cnty., Indl. Dev. Auth. Single Family Mtge.
Rev. Bonds, FHLMC Coll., FNMA Coll.,
GNMA Coll., 6.15s, 11/1/23 AAA 1,735,144
200,000 Pima Cnty., Indl. Dev. Auth. VRDN (Tucson Elec.
Pwr. Co.-Irvington), Ser. A, 3.4s, 10/1/22 VMIG1 200,000
1,325,000 Pinal Cnty., School Dist. G.O. Bonds (AZ U.,
Apache Junction), Ser. A, FGIC, 6.8s, 7/1/08 Aaa 1,550,250
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds,
FGIC, 7 1/2s, 7/1/08 Aaa 1,221,250
3,250,000 Salt River, Rev. Bonds (Project Agric.), 6s, 1/1/09 Aa 3,583,125
1,140,000 Scottsdale G.O. Bonds, 5 1/2s, 7/1/12 Aa1 1,212,675
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village),
Ser. A, 8 1/4s, 6/1/15 BB-/P 4,465,000
1,740,000 Scottsdale, Indl. Dev. Auth. Hosp. Rev. Bonds
(Scottsdale Memorial Hosp.), Ser. A,
AMBAC, 6 1/8s, 9/1/17 Aaa 1,927,050
1,000,000 Sedona COP, 7.2s, 4/1/12 BBB/P 1,027,500
1,000,000 South Tucson, Muni. Property Corp. Fac. Rev. Bonds,
8 1/2s, 6/1/05 BB 1,059,830
3,985,000 Tucson G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 4,557,844
1,000,000 Tucson Wtr Rev. Bonds, FGIC, 5 1/2s, 7/1/14 Aaa 1,071,250
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 Baa1 4,295,000
850,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 AAA 893,563
2,720,000 Tucson, Wtr. Rev. Bonds, Ser. A, FGIC, 5s, 7/1/10 (FWC/WIS) Aaa 2,767,600
3,765,000 Tuscon, St. & Hwy. User Rev. Bonds, MBIA,
6s, 7/1/10 Aaa 4,235,625
1,000,000 U. of AZ COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A+ 1,062,500
U. of AZ Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,054,500
1,000,000 6 1/4s, 6/1/11 AA 1,071,250
1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds, MBIA,
6 7/8s, 7/1/21 Aaa 1,566,000
--------------
126,710,914
Guam (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Guam, Pwr. Auth. Rev. Bonds, Ser. A, 5 1/8s, 10/1/29 Baa3 962,500
Puerto Rico (10.6%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,148,750
500,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA,
3s, 12/1/15 VMIG1 500,000
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 6,399,897
3,225,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 AAA 3,716,813
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,140,000
500,000 Cmnwlth. of PR, Hwy. Trans. Auth. VRDN, AMBAC,
3s, 7/1/28 VMIG1 500,000
1,500,000 Cmnwlth. of PR, Pub. Bldg. Auth. Gtd. Ed. &
Hlth. Fac. Rev. Bonds, Ser. L, 6 7/8s, 7/1/21 Aaa 1,655,625
--------------
15,061,085
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $135,934,481) (b) $ 142,734,499
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $142,255,207.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
May 31, 1999 for the securities listed. Ratings are generally ascribed to securities at the time of issuance.
While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings
do not necessarily represent what the agencies would ascribe to these securities at May 31, 1999. Securities rated
by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of independent
accountants.
(b) The aggregate identified cost on a tax basis is $135,938,004, resulting in gross unrealized appreciation and
depreciation of $7,328,759 and $532,264, respectively, or net unrealized appreciation of $6,796,495.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
May 31, 1999 was $10,417,922 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 May 31, 1999.
(FWC) When-issued or delayed delivery securities (Note 1).
The rates shown on VRDN's are the current interest rates at May 31, 1999.
The fund had the following industry group concentrations greater than 10% at May 31, 1999 (as a percentage of net
assets):
Hospitals/health care 19.4%
Utilities 15.6
Transportation 14.7
Education 14.1
Housing 10.9
The fund had the following insurance concentrations greater than 10% at May 31, 1999 (as a percentage of net
assets):
MBIA 19.7%
FGIC 15.0
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1999
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
- -------------------------------------------------------------------------------
Muni Bond
Index (Short) $7,318,125 $7,408,130 June-99 $90,005
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $135,934,481) (Note 1) $142,734,499
- -----------------------------------------------------------------------------------------------
Cash 599,763
- -----------------------------------------------------------------------------------------------
Interest and other receivables 3,039,830
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 230,839
- -----------------------------------------------------------------------------------------------
Total assets 146,604,931
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 20,625
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 3,747,363
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 207,878
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 97,351
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 144,884
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 18,461
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,806
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,032
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 61,013
- -----------------------------------------------------------------------------------------------
Other accrued expenses 42,491
- -----------------------------------------------------------------------------------------------
Total liabilities 4,349,904
- -----------------------------------------------------------------------------------------------
Net assets $142,255,027
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $137,683,810
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 209,305
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,528,111)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 6,890,023
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $142,255,027
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($108,204,887 divided by 11,738,398 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
($33,480,363 divided by 3,635,793 shares)+ $9.21
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($569,777 divided by 61,709 shares) $9.23
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.23)** $9.54
- -----------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group
sales, the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales, the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1999
<S> <C>
Tax exempt interest income: $8,268,582
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 894,534
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 211,915
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 7,634
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,044
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 230,912
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 280,986
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,583
- -----------------------------------------------------------------------------------------------
Reports to shareholders 18,854
- -----------------------------------------------------------------------------------------------
Registration fees 75
- -----------------------------------------------------------------------------------------------
Auditing 28,731
- -----------------------------------------------------------------------------------------------
Legal 5,495
- -----------------------------------------------------------------------------------------------
Postage 16,121
- -----------------------------------------------------------------------------------------------
Other 18,355
- -----------------------------------------------------------------------------------------------
Management fee waiver (Note 2) (247,488)
- -----------------------------------------------------------------------------------------------
Total expenses 1,474,751
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (21,053)
- -----------------------------------------------------------------------------------------------
Net expenses 1,453,698
- -----------------------------------------------------------------------------------------------
Net investment income 6,814,884
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 499,055
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (507,118)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures contracts during the year (1,685,176)
- -----------------------------------------------------------------------------------------------
Net loss on investments (1,693,239)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $5,121,645
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 6,814,884 $ 7,087,572
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (8,063) 341,595
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (1,685,176) 4,477,721
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 5,121,645 11,906,888
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (5,293,888) (5,914,397)
- ---------------------------------------------------------------------------------------------------------------
Class B (1,292,666) (1,243,648)
- ---------------------------------------------------------------------------------------------------------------
Class M (22,214) (24,352)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (9,474,022) (3,094,187)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (10,961,145) 1,630,304
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 153,216,172 151,585,868
- ---------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $209,305 and $3,189, respectively) $142,255,027 $153,216,172
- ---------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 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 .44(a) .44 .46 .47
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.11) .29 .19 (.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .33 .73 .65 .30
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.43) (.44) (.46) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.43) (.44) (.46) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.22 $9.32 $9.03 $8.84
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.57 8.28 7.52 3.38
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $108,205 $120,649 $122,743 $126,716
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .84(a) .99 .98 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.71(a) 4.76 5.11 5.20
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 21.60 29.63 73.61 108.68
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ The fiscal year end advanced from August 31 to May 31.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02, $.01 and $.01 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charge.
(c) 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).
(d) 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 Year
Per-share ended ended
operating performance May 31 August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995++ 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.84 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .38 .51
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .55 (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.38) (.50)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.38) (.53)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.01 $8.84
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 6.45* (1.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $136,598 $142,950
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) .70* .97
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.42* 5.55
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.48* 34.68
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ The fiscal year end advanced from August 31 to May 31.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02, $.01 and $.01 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charge.
(c) 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).
(d) 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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 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 .38(a) .38 .40 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.10) .28 .20 (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .28 .66 .60 .23
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.37) (.38) (.40) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.37) (.38) (.40) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.21 $9.30 $9.02 $8.82
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.01 7.47 6.94 2.60
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $33,480 $32,046 $28,340 $24,050
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.49(a) 1.64 1.63 1.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.09(a) 4.10 4.44 4.52
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 21.60 29.63 73.61 108.68
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ The fiscal year end advanced from August 31 to May 31.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02, $.01 and $.01 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charge.
(c) 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).
(d) 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 Year
Per-share ended ended
operating performance May 31 August 31
- ------------------------------------------------------------------------------------------------------------------------------------
1995++ 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value,
beginning of period $8.83 $9.47
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .34 .45
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.61)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .51 (.16)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.34) (.45)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.34) (.48)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.00 $8.83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 5.99* (1.80)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $21,538 $16,247
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.19* 1.60
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 3.89* 4.82
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 51.48* 34.68
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ The fiscal year end advanced from August 31 to May 31.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02, $.01 and $.01 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charge.
(c) 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).
(d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 3, 1995+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 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 .41(a) .41 .43(d) .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.11) .30 .19 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .30 .71 .62 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.40) (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.40) (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.23 $9.33 $9.04 $8.85
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 3.26 7.96 7.19 4.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $570 $521 $503 $293
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.14(a) 1.29 1.28 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.44(a) 4.47 4.75 4.28*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 21.60 29.63 73.61 108.68
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
++ The fiscal year end advanced from August 31 to May 31.
(a) Reflects a management fee waiver during the period (Note 2). As a result of such waiver, expenses of the Fund for the
year ended May 31, 1999, reflect a reduction of $.02, $.01 and $.01 per share for Class A, Class B and Class M, respectively.
(b) Total return assumes dividend reinvestment and does not reflect the effect of sales charge.
(c) 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).
(d) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding
during the period.
</TABLE>
Notes to financial statements
May 31, 1999
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 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 delayed delivery 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 year ended May
31, 1999, 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, 1999, the fund had a capital loss carryover of approximately
$734,000 available to offset future capital gains, if any. The amount of
the carryover and the expiration dates are:
Loss Carryover Expiration
- -------------- ------------
$199,000 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. These differences include temporary
differences of dividends payable, unrealized gains on certain futures
contracts and straddle loss deferrals. Reclassifications are made to the
fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended May 31, 1999, the fund required no such
reclassifications.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on original issue
discount bonds are accreted according to the yield-to-maturity basis.
Note 2
Management fee, administrative
services and other transactions
Compensation of Putnam Management, for management and investment advisory
services is paid quarterly based on the average net assets of the fund.
Such fee is based on the following annual rates: 0.60% of the first $500
million of average net assets, 0.50% of the next $500 million, 0.45% of
the next $500 million, and 0.40% of the next $5 billion, 0.375% of the
next $5 billion, 0.355% of the next $5 billion, 0.34% of the next $5
billion and 0.33% thereafter. Effective August 1, 1998, the Trustees
approved a management fee waiver of 0.20% on each tier.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the year ended May 31, 1999, fund expenses were reduced by $21,053
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized in
connection with the expense offset arrangements in an income producing
asset if it had not entered into such arrangements.
Each Trustee of the fund receives an annual Trustee fee, of which $320 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of Trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees currently limit payment by the fund to an
annual rate of 0.20%, 0.85% and 0.50% of the average net assets
attributable to class A, class B and class M shares, respectively.
For the year ended May 31, 1999, Putnam Mutual Funds Corp., acting as
underwriter, received net commissions of $18,389 and $182 from the sale of
class A and class M shares, respectively, and $77,533 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares that were purchased without an initial sales charge as part of an
investment of $1 million or more. For the year ended May 31, 1999, Putnam
Mutual Funds Corp., acting as underwriter received $5,356 on class A
redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1999, purchases and sales of investment
securities other than short-term investments aggregated $32,161,531 and
$35,007,280, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on securities
sold, the cost of securities has been determined on the identified cost
basis.
Note 4
Capital shares
At May 31, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,016,562 $ 9,473,346
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 265,884 2,481,275
- -----------------------------------------------------------------------------
1,282,446 11,954,621
Shares
repurchased (2,494,204) (23,270,639)
- -----------------------------------------------------------------------------
Net decrease (1,211,758) $(11,316,018)
- -----------------------------------------------------------------------------
Year ended May 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,430,266 $ 13,242,339
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 291,066 2,692,593
- -----------------------------------------------------------------------------
1,721,332 15,934,932
Shares
repurchased (2,361,394) (21,843,453)
- -----------------------------------------------------------------------------
Net decrease (640,062) $ (5,908,521)
- -----------------------------------------------------------------------------
Year ended May 31, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 740,141 $ 6,904,800
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 68,850 641,600
- -----------------------------------------------------------------------------
808,991 7,546,400
Shares
repurchased (617,952) (5,758,768)
- -----------------------------------------------------------------------------
Net increase 191,039 $ 1,787,632
- -----------------------------------------------------------------------------
Year ended May 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 712,440 $ 6,592,978
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 67,218 620,900
- -----------------------------------------------------------------------------
779,658 7,213,878
Shares
repurchased (477,346) (4,401,245)
- -----------------------------------------------------------------------------
Net increase 302,312 $ 2,812,633
- -----------------------------------------------------------------------------
Year ended May 31, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 10,247 $95,194
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,074 10,031
- -----------------------------------------------------------------------------
11,321 105,225
Shares
repurchased (5,407) (50,861)
- -----------------------------------------------------------------------------
Net increase 5,914 $54,364
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 100% of dividends paid from net investment income
during the fiscal year as tax exempt for Federal income tax purposes.
The Form 1099 you receive in January 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Fund information
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
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
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
Richard A. Monaghan
Vice President
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Arizona Tax
Exempt Income Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For more
information or to request a prospectus, call toll free: 1-800-225-1581.
You can also learn more at Putnam Investments' Web site: 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
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN044-53210 855/235/2AA 7/99
