Putnam
Arizona
Tax Exempt
Income Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
This is the last letter to you and the other shareholders of Putnam
Arizona Tax Exempt Income Fund that I will be signing. After more than 30
years as Chairman of the Trustees and President of the Putnam Funds, the
time has come for me to step aside.
In June, John Hill will become Chairman. John is currently an independent
Trustee and has served on the board for the past 14 years. In addition, my
son, George Putnam, III, will take on the role of President. I am
confident that the leadership of the funds will be in exceptionally strong
hands.
I will become Chairman Emeritus, remain a shareholder, and stay in close
touch with the funds. It has been my privilege to serve you.
In one final piece of news, I am pleased to announce the appointment of
Susan A. McCormack as your fund's manager. Before joining Putnam as a
tax-exempt bond analyst in 1994, Susan was with Merrill Lynch. She has 13
years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 19, 2000
Report from the Fund Manager
Susan A. McCormack
Volatility in municipal bond funds makes most investors uncomfortable and
can, on occasion, prompt a reevaluation of investment choices. However,
most people choose state-specific municipal bond funds to receive a steady
monthly income free from federal and state income taxes. Your fund has
continued to deliver this despite the impact of three interest-rate
increases within the last six months.
Municipal bond prices decline as interest rates rise, and Putnam Arizona
Tax Exempt Income Fund's returns for the six months ended November 30,
1999, reflect this relationship. Nevertheless, the fact that your fund
outperformed most other Arizona municipal bond funds with similar
investment objectives (see page 3) continues to make it one of the most
attractive choices for Arizona investors seeking tax-free income.
Total return 6 months ended 11/30/99
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------
-2.56% -7.19% -2.89% -7.63% -2.70% -5.86%
- ---------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance calculation
methods begin on page 6.
* MUNICIPAL YIELDS ON PAR WITH TREASURY YIELDS
If history tells us anything about bond investing, it is that buying a
bond fund or staying in a bond fund after a bad year is often a smart
thing to do. The bond market has endured its toughest year since 1994, but
we believe that investors are faced with considerable opportunities just
as they were following the bond bear markets of 1989 and 1994.
As of the middle of December, a long-term municipal bond offered a 6%
yield, a superb level of tax-free income almost 100% of the yield on
long-term taxable Treasury bonds. Traditionally, municipal bonds offer
about 85% of the yield on long-term Treasury bonds. With inflation still
remarkably low at 3% or less, after-tax and after-inflation income levels
are the highest investors have seen in years.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/
health care 22.7%
Education 17.7%
Transportation 16.3%
Utilities 13.4%
Housing 9.8%
Footnote reads:
*Based on net assets as of 11/30/99. Holdings will vary over time.
* FUND SEEKS TO LOCK IN HIGHER YIELDS, INCREASE DIVERSIFICATION
When the semiannual period began in June, we were buying intermediate-term
bonds for the portfolio. However, as the yield curve steepened and
interest rates rose, we began to sell the intermediate-term bonds and buy
longer maturities to lock in the higher yields. Evidence of this strategy
can be seen by the lengthening of the portfolio's average duration, which
increased from 6.3 years to almost 8 years by the end of the period.
Duration is a measure of bond price sensitivity to changes in interest
rates and reflects the portfolio's maturity structure.
In addition to Arizona municipal bonds, your fund is also able to invest
in securities issued by U.S. territories such as Guam and Puerto Rico.
Because of limited supply and selection in the Arizona municipal bond
market, we took advantage of this flexibility during the period.
We also continue to hold a Guam Power Authority revenue bond to enhance
diversification in the portfolio. Since there is only one power authority
supplying power in Guam, we felt that its Baa3/BBB investment-grade credit
rating was quite secure, and would provide an attractive yield for the
portfolio. However, during the last six months, the Authority obtained
municipal bond insurance, which guarantees its principal and interest
payments, and the bond is now rated AAA.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
Aa/AA -- 10.8%
A -- 4.2%
Baa/BBB -- 17.5%
Ba/BB and under -- 11.1%
Aaa/AAA -- 56.4%
Footnote reads:
*As a percentage of market value as of 11/30/99. A bond rated BBB/Baa 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.
The health-care industry continued to be an important contributor to your
fund's performance. Selectivity is crucial in this sector because
hospitals are going though some difficult times as a result of legislation
enacted several years ago. During the summer, a long-time holding, the
Cochise County Industrial Development revenue bonds (Sierra Vista
Community Hospital) were prerefunded by a new issue of bonds. Proceeds
from the new issue went into a Treasury bond escrow account that
guarantees payment of the principal and interest on the older issue of
bonds. When the new bonds came to market, Putnam successfully purchased
the entire issue. The newly purchased Cochise County Industrial
Development revenue bonds are noncallable over a 20-year period and
contribute a generous 6.20% coupon to the portfolio.
Putnam Arizona Tax Exempt Income Fund's class A shares ranked in the top
23% by Lipper for the 1-year period ended December 31, 1999. The fund
ranked 9 out of 39 municipal bond funds ranked.
Past performance is not indicative of future results. For the 3- and
5-year periods ended 12/31/99, the fund ranked 18 out of 37 (48%) and
15 out of 26 (56%) respectively. Lipper is an industry research firm
whose rankings are based on total return performance, vary over time,
and do not reflect the effects of sales charges. Performance of other
share classes will vary.
Thousands of projects financed by just two types of bonds
Municipal bonds are the most important means of financing thousands of
different public projects, but surprisingly, there are only two basic
types of bonds. General obligation bonds (Gos), secured by the full
faith and credit of the city or town, are repaid by either a limited
or an unlimited tax on property. Cities and towns usually issue general
obligation bonds for school, park, or public building projects. The voters
in a community must approve each issue of general obligation bonds.
Revenue bonds, on the other hand, are secured by fees derived from tolls,
charges or rents paid by the users of the facility. Highways, bridges,
and water and sewage treatment plants are typical projects financed or
improved by revenue bond proceeds. Industrial revenue bonds are issued
through an Industrial Development Authority to finance projects for a
private user (usually a corporation), that also guarantees repayment
of the principal and interest. Hospital, dormitory, airport, and
housing projects are commonly financed with industrial revenue bonds.
* STRENGTH OF NATIONAL AND LOCAL ECONOMY BODES WELL FOR ARIZONA MUNI BONDS
A strong national economy means that people will continue to travel for
business and leisure. That reality is good for Arizona's tourism industry
as well as for its aerospace companies such as Allied Signal and
Honeywell, whose equipment helps keep planes flying. Metro Phoenix remains
a haven for golfers, retirees, and tourists. But it has also emerged as a
center for the high-tech, aviation, manufacturing, and service industries.
This burgeoning local economy enhances the security of general obligation
and revenue bonds issued within the state.
With the Fed's third and much anticipated move to increase interest rates
in November, it has declared a neutral bias. For now, inflation seems to
be under control. However, the threat of inflation and the strong economy
will be the primary force driving volatility in both the bond and stock
markets in the months ahead. Even with an official neutral bias by the
Fed, we could see more Fed tightening in the coming months if the economy
doesn't begin to slow down.
After three interest-rate hikes and the end of the Y2K uncertainty, we
believe that the bond market's adverse behavior may be coming to an end in
the first half of the year. As such, we are inclined to take slightly more
risk in the portfolio while we concentrate on our two major themes of
continuing to reduce the level of intermediate holdings and extending the
price sensitivity of the portfolio. Both of these themes should also
enhance monthly income levels. Please remember that volatile markets,
though unpleasant, provide the opportunity to add yield, find exceptional
credits, and improve call protection in your fund -- strategies that are
very rewarding for shareholders over time.
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 11/30/99, 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.
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 11/30/99
Class A Class B Class M
(inception dates) (1/30/91) (7/15/93) (7/3/95)
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
6 months -2.56% -7.19% -2.89% -7.63% -2.70% -5.86%
- ---------------------------------------------------------------------------------
1 year -1.63 -6.34 -2.28 -6.95 -2.02 -5.16
- ---------------------------------------------------------------------------------
5 years 37.00 30.50 32.90 30.90 35.11 30.67
Annual average 6.50 5.47 5.85 5.53 6.20 5.50
- ---------------------------------------------------------------------------------
Life of fund 68.92 60.98 58.67 58.67 63.93 58.61
Annual average 6.12 5.54 5.37 5.37 5.76 5.36
- ---------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/99
Lehman Brothers Municipal Consumer
Bond Index price index
- --------------------------------------------------------------------
6 months -1.87% 1.32%
- --------------------------------------------------------------------
1 year -1.08 2.68
- --------------------------------------------------------------------
5 years 43.85 12.49
Annual average 7.54 2.38
- --------------------------------------------------------------------
Life of fund 80.50 25.11
Annual average 6.92 2.57
- --------------------------------------------------------------------
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-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.
</TABLE>
<TABLE>
<CAPTION>
PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 11/30/99
Class A Class B Class M
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Distributions (number) 6 6 6
- --------------------------------------------------------------------------------------
Income $0.234414 $0.205017 $0.221397
- --------------------------------------------------------------------------------------
Capital gains1 -- -- --
- --------------------------------------------------------------------------------------
Total $0.234414 $0.205017 $0.221397
- --------------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- --------------------------------------------------------------------------------------
5/31/99 $9.22 $9.68 $9.21 $9.23 $9.54
- --------------------------------------------------------------------------------------
11/30/99 8.75 9.19 8.74 8.76 9.05
- --------------------------------------------------------------------------------------
Current return (end of period)
- --------------------------------------------------------------------------------------
Current dividend rate2 5.35% 5.09% 4.70% 5.05% 4.88%
- --------------------------------------------------------------------------------------
Taxable equivalent3 9.33 8.88 8.20 8.81 8.51
- --------------------------------------------------------------------------------------
Current 30-day SEC yield4 5.05 4.81 4.40 4.75 4.60
- --------------------------------------------------------------------------------------
Taxable equivalent3 8.81 8.39 7.68 8.29 8.03
- --------------------------------------------------------------------------------------
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.
</TABLE>
<TABLE>
<CAPTION>
TOTAL RETURN FOR PERIODS ENDED 12/31/99 (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
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C
6 months -2.17% -6.81% -2.50% -7.26% -2.31% -5.45%
- --------------------------------------------------------------------------------------
1 year -3.11 -7.75 -3.65 -8.25 -3.60 -6.78
- --------------------------------------------------------------------------------------
5 years 32.18 25.88 28.22 26.22 30.33 26.12
Annual average 5.74 4.71 5.10 4.77 5.44 4.75
- --------------------------------------------------------------------------------------
Life of fund 66.99 59.14 56.77 56.77 62.02 56.77
Annual average 5.92 5.35 5.17 5.17 5.56 5.17
- --------------------------------------------------------------------------------------
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.
</TABLE>
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 class B 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 assumes reinvestment of all distributions
and interest payments and does not take into account brokerage fees or
taxes. 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 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 are determined. All investment and noninvestment 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 sources 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-end funds, a separate
table is provided for each share class.
<TABLE>
<CAPTION>
The fund's portfolio
November 30, 1999 (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 (96.9%) (a)
PRINCIPAL AMOUNT RATING(RAT) VALUE
<S> <C> <C> <C>
Arizona (88.7%)
- --------------------------------------------------------------------------------------------------------------------------
AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds
$ 1,975,000 (Phoenix Mem. Hosp.), 8.2s, 6/1/21 BB $ 2,014,500
1,500,000 (Phoenix Children's Hosp.), Ser. A,
6 1/8s, 11/15/22 A2 1,462,500
3,000,000 (Northern AZ Healthcare Syst.), AMBAC,
4 3/4s, 10/1/30 Aaa 2,475,000
AZ State Hlth. Facs. Auth. Rev. Bonds
(Bethesda Foundation), Ser. A
2,000,000 6.4s, 8/15/27 BB/P 1,887,500
1,315,000 6 3/8s, 8/15/15 BB/P 1,280,481
1,500,000 AZ Student Loan Acquisition Auth. Rev. Bonds,
Ser. B, 6.6s, 5/1/10 Aa3 1,561,875
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,772,625
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,368,125
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s, 7/1/14 (SEG) Aaa 2,714,375
Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
1,995,000 Ser. B, 8 1/2s, 12/1/21 AAA 2,154,600
2,485,000 Ser. C, 8 1/4s, 12/1/14 AAA 2,761,456
1,100,000 Ser. A, 6.2s, 12/1/21 BBB-/P 1,038,125
Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.)
4,000,000 6 3/8s, 10/1/36 BBB 3,905,000
3,000,000 Ser. B, 5.8s, 11/1/32 BBB 2,688,750
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC, 6 1/2s, 7/1/22 Aaa 1,061,250
Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds
1,075,000 6 7/8s, 4/1/14 BB+/P 1,084,697
425,000 6 7/8s, 4/1/14, Prerefunded BB+/P 435,030
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
CLI Insd., 7 1/8s, 7/1/20 AAA 1,127,500
4,500,000 Maricopa Cnty., Hosp. Rev.Bonds
(Sun Health Corp.), 6 1/8s, 4/1/18 Baa1 4,393,125
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds (Samaritan Hlth. Svcs.), Ser. A,
MBIA, 7s, 12/1/16 Aaa 4,033,750
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg.
Rev. Bonds (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,810,175
5,000,000 Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co.), Ser. A, 6.3s, 12/1/26 Baa3 4,806,250
Maricopa Cnty., School Dist. G.O. Bonds
2,000,000 (Dist. No. 69 Paradise Valley), Ser. B, MBIA,
7s, 7/1/12 Aaa 2,302,500
960,000 (School Dist. No. 11 Peoria U.), MBIA,
6.4s, 7/1/10 Aaa 992,400
1,500,000 (Dist. No. 69 Paradise Valley), MBIA, 6.35s, 7/1/10 Aaa 1,640,625
3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,409,156
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 1,186,250
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 1,522,894
2,725,000 Northern AZ U. Rev. Bonds, FGIC, 6 1/2s, 6/1/09 Aaa 3,034,966
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 3,489,338
Phoenix, G.O. Bonds
1,000,000 6 3/8s, 7/1/13 Aa1 1,046,250
1,000,000 6s, 7/1/10 Aa1 1,077,500
1,300,000 4 3/4s, 7/1/23 Aa1 1,098,500
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds, Ser. A,
MBIA, 6.9s, 1/1/23 Aaa 1,634,000
2,150,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 AAA 2,214,500
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 1,694,269
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds, FGIC,
7 1/2s, 7/1/08 Aaa 1,166,250
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,115,000
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 2,025,000
1,325,000 Pinal Cnty., School Dist. G.O. Bonds (AZ U.,
Apache Junction), Ser. A, FGIC, 6.8s, 7/1/08 Aaa 1,482,344
3,250,000 Salt River, Rev. Bonds (Project Agric.), 6s, 1/1/09 Aa2 3,457,188
1,140,000 Scottsdale, G.O. Bonds, 5 1/2s, 7/1/12 Aa1 1,162,800
1,740,000 Scottsdale, Indl. Dev. Auth. Hosp. Rev. Bonds
(Scottsdale Memorial Hosp.), Ser. A, AMBAC,
6 1/8s, 9/1/17 Aaa 1,796,550
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds (First Mtge.
Westminster Village), Ser. A, 8 1/4s, 6/1/15 BB-/P 4,315,000
1,000,000 Sedona COP, 7.2s, 4/1/12 BBB/P 1,015,000
1,000,000 South Tucson, Muni. Property Corp. Fac.
Rev. Bonds, 8 1/2s, 6/1/05 BB 1,031,670
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 Baa3 4,191,880
3,985,000 Tucson, G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 4,363,575
845,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 AAA 869,294
3,765,000 Tucson, St. & Hwy. User Rev. Bonds, Sr. Lien, MBIA,
6s, 7/1/10 Aaa 4,052,081
Tucson, Wtr Rev. Bonds,
1,000,000 FGIC, 5 1/2s, 7/1/14 Aaa 1,012,500
1,750,000 Ser. A, FGIC, 5s, 7/1/10 Aaa 1,719,375
1,000,000 U. of AZ COP (Telecommunications Syst.),
6 1/2s, 7/15/12 A+ 1,055,000
1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds, MBIA,
6 7/8s, 7/1/21 Aaa 1,535,188
U. of AZ Rev. Bonds
1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,033,970
1,000,000 6 1/4s, 6/1/11 AA 1,047,500
--------------
115,627,002
Guam (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Guam, Pwr. Auth. Rev. Bonds, Ser. A, MBIA,
5 1/8s, 10/1/29 AAA 890,000
Puerto Rico (7.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,097,500
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 5,914,438
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,101,250
1,500,000 Cmnwlth. of PR, Pub. Bldg. Auth. Gtd. Ed. & Hlth.
Fac. Rev. Bonds, Ser. L, 6 7/8s, 7/1/21 Aaa 1,618,125
--------------
9,731,313
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $126,382,124) (b) $126,248,315
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $130,313,463.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
November 30, 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 November 30, 1999. Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $126,385,647, resulting in gross unrealized appreciation and
depreciation of $3,074,292 and $3,211,624, respectively, or net unrealized depreciation of $137,332.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at
November 30, 1999 was $9,403,776 or 7.2% 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, 1999.
The fund had the following industry group concentrations greater than 10% at November 30, 1999 (as a percentage of
net assets):
Hospitals/health care 22.7%
Education 17.7
Transportation 16.3
Utilities 13.4
The fund had the following insurance concentrations greater than 10% at November 30, 1999
(as a percentage of net assets):
MBIA 15.8%
FGIC 15.0
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1999 (Unaudited)
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
Muni Bond Index (Long) $2,090,000 $2,072,440 Dec-99 $17,560
Muni Bond Index (Long) 935,625 935,816 Mar-00 (191)
- -------------------------------------------------------------------------------
$17,369
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1999 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $126,382,124) (Note 1) $126,248,315
- -----------------------------------------------------------------------------------------------
Cash 1,613,447
- -----------------------------------------------------------------------------------------------
Interest and other receivables 2,929,844
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 12,530
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 75,000
- -----------------------------------------------------------------------------------------------
Receivable for variation margin 11,752
- -----------------------------------------------------------------------------------------------
Total assets 130,890,888
Liabilities
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 148,944
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 196,944
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 132,150
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 5,069
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 9,765
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,037
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 55,946
- -----------------------------------------------------------------------------------------------
Other accrued expenses 27,570
- -----------------------------------------------------------------------------------------------
Total liabilities 577,425
- -----------------------------------------------------------------------------------------------
Net assets $130,313,463
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $132,929,957
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 220,694
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,720,748)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (116,440)
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $130,313,463
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($97,572,481 divided by 11,154,084 shares) $8.75
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.75)* $9.19
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($31,883,034 divided by 3,648,825 shares)+ $8.74
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($857,948 divided by 97,931 shares) $8.76
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.76)** $9.05
- -----------------------------------------------------------------------------------------------
* 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, 1999 (Unaudited)
<S> <C>
Tax exempt interest income: $ 4,098,555
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 289,456
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 73,124
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,228
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,068
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 102,505
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 139,384
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,791
- -----------------------------------------------------------------------------------------------
Reports to shareholders 1,617
- -----------------------------------------------------------------------------------------------
Auditing 22,572
- -----------------------------------------------------------------------------------------------
Legal 3,807
- -----------------------------------------------------------------------------------------------
Postage 3,267
- -----------------------------------------------------------------------------------------------
Other 10,383
- -----------------------------------------------------------------------------------------------
Total expenses 656,202
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (23,119)
- -----------------------------------------------------------------------------------------------
Net expenses 633,083
- -----------------------------------------------------------------------------------------------
Net investment income 3,465,472
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (381,065)
- -----------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 188,428
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the period (7,006,463)
- -----------------------------------------------------------------------------------------------
Net loss on investments (7,199,100)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(3,733,628)
- -----------------------------------------------------------------------------------------------
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
1999* 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 3,465,472 $ 6,814,884
- ---------------------------------------------------------------------------------------------------------------
Net realized loss on investments (192,637) (8,063)
- ---------------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (7,006,463) (1,685,176)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (3,733,628) 5,121,645
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (2,727,994) (5,293,888)
- ---------------------------------------------------------------------------------------------------------------
Class B (709,402) (1,292,666)
- ---------------------------------------------------------------------------------------------------------------
Class M (16,687) (22,214)
- ---------------------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (4,753,853) (9,474,022)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets (11,941,564) (10,961,145)
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 142,255,027 153,216,172
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $220,694 and $209,305, respectively) $130,313,463 $142,255,027
- ---------------------------------------------------------------------------------------------------------------
* 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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.22 $9.32 $9.03 $8.84 $9.01
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .23 .44(c) .44 .46 .47
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.47) (.11) .29 .19 (.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.24) .33 .73 .65 .30
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.23) (.43) (.44) (.46) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized
gain on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.23) (.43) (.44) (.46) (.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.75 $9.22 $9.32 $9.03 $8.84
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.56)* 3.57 8.28 7.52 3.38
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $97,572 $108,205 $120,649 $122,743 $126,716
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .40* .84 (c) .99 .98 1.03
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.63* 4.71 (c) 4.76 5.11 5.20
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 2.55* 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) Total 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) 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.
(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 (%)(a) 6.45* (1.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $136,598 $142,950
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .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) Total 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) 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.
(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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share Nov. 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.21 $9.30 $9.02 $8.82 $9.00
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .21 .38(c) .38 .40 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.47) (.10) .28 .20 (.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.26) .28 .66 .60 .23
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.21) (.37) (.38) (.40) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.21) (.37) (.38) (.40) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.74 $9.21 $9.30 $9.02 $8.82
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.89)* 3.01 7.47 6.94 2.60
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $31,883 $33,480 $32,046 $28,340 $24,050
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .73* 1.49 (c) 1.64 1.63 1.67
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.31* 4.09 (c) 4.10 4.44 4.52
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 2.55* 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) Total 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) 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.
(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 (%)(a) 5.99* (1.80)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $21,538 $16,247
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 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) Total 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) 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.
(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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 July 3, 1995+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.23 $9.33 $9.04 $8.85 $8.86
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 .41(c) .41 .43(d) .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.47) (.11) .30 .19 (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (.25) .30 .71 .62 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.40) (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.40) (.42) (.43) (.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.76 $9.23 $9.33 $9.04 $8.85
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.70)* 3.26 7.96 7.19 4.44*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $858 $570 $521 $503 $293
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .55* 1.14(c) 1.29 1.28 1.09*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.50* 4.44(c) 4.47 4.75 4.28*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 2.55* 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) Total 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) 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.
(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
November 30, 1999 (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 higher than class A but lower than class B
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
of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period.
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. Restricted
securities are stated at fair value following procedures approved by the
Trustees. 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). Gains or losses on securities sold are determined on
the identified cost basis.
Interest income is recorded on the accrual basis.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on securities
it owns or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of
the underlying instruments, if there is an illiquid secondary market for
the contracts, or if the counterparty to the contract is unable to
perform. When the contract is closed, the fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices supplied
by dealers.
D) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended November 30, 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 paid monthly. Capital gain distributions, if any, are
recorded on the ex-dividend date and paid at least annually. The amount
and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations.
G) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. The premium in excess of the call
price, if any, is amortized to the call date; thereafter, the remaining
excess premium is amortized to maturity. Discounts on zero coupon bonds
and 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, 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
approved a management fee waiver of 0.10% on each tier. On June 4, 1999,
the Trustees approved a management fee schedule which became effective on
July 1, 1999, based upon the lesser of (i) an annual rate of 0.50% of the
average net asset value of the fund or (ii) the initial tiers mentioned
above.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The aggregate
amount of all such reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended November 30, 1999, fund expenses were reduced by
$23,119 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 $525 has
been allocated to the fund, and an additional fee for each Trustee's
meeting attended. 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
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 a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and meeting
fees for the three years preceding retirement. Pension expense for the
fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund 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, 1999, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $6,507 and $648 from the
sale of class A and class M shares, respectively and $44,910 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the six months ended November 30, 1999, Putnam Mutual Funds
Corp., acting as underwriter, received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended November 30, 1999, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $3,432,605 and $11,220,780, respectively. There
were no purchases and sales of U.S. government obligations.
Note 4
Capital shares
At November 30, 1999, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended November 30, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 466,570 $ 4,176,456
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 144,672 1,287,642
- -----------------------------------------------------------------------------
611,242 5,464,098
Shares
repurchased (1,195,556) (10,672,415)
- -----------------------------------------------------------------------------
Net decrease (584,314) $ (5,208,317)
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
Six months ended November 30, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 355,064 $ 3,188,474
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 41,636 370,142
- -----------------------------------------------------------------------------
396,700 3,558,616
Shares
repurchased (383,668) (3,428,504)
- -----------------------------------------------------------------------------
Net increase 13,032 $ 130,112
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended November 30, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 37,590 $ 336,673
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,342 11,887
- -----------------------------------------------------------------------------
38,932 348,560
Shares
repurchased (2,710) (24,208)
- -----------------------------------------------------------------------------
Net increase 36,222 $ 324,352
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Welcome to www.putnaminv.com
Now you can use your PC to get up-to-date information about your funds,
learn more about investing and retirement planning, and access market
news and economic outlooks from Putnam.
VISIT PUTNAM'S SITE ON THE WORLD WIDE WEB FOR:
* the benefits of investing with Putnam
* Putnam's money management philosophy
* complete fund information, daily pricing and long-term
performance
* your current account value, portfolio value and transaction history
* the latest on new funds and other Putnam news
You can also read Putnam economist Dr. Robert Goodman's commentary and
Putnam's Capital Markets outlook, search for a particular fund by name
or objective, use our glossary to decode investment terms . . . and much more.
The site can be accessed through any of the major online services
(America Online, CompuServe, Prodigy) that offer web access. Of course, you
can also access it via Netscape or Microsoft Internet Explorer, using an
independent Internet service provider.
New features will be added to the site regularly. So be sure
to bookmark us at
http://www.putnaminv.com
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
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.
GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Europe Growth Fund
Global Equity 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
Tax Smart Equity Fund
Vista Fund
Voyager Fund
Voyager Fund II
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
Small Cap Value Fund
Utilities Growth and Income Fund
INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
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
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
ASSET ALLOCATION 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
[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 not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government
agency. Although the funds seek to preserve your investment at
$1.00 per share, it is possible to lose money by investing in the fund.
Check your account balances and current performance at www.putnaminv.com.
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
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
Susan A. McCormack
Vice President and Fund Manager
Richard A. Monaghan
Vice President
John R. Verani
Vice President
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
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For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
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