Putnam
Arizona
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-00
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years in which
Putnam has experienced tremendous growth and transformed itself from a
respected U.S. investment management firm to a financial institution
with a global presence.
As the organization makes its way into the new century, we are certain
that the changes that lie ahead will be even more breathtaking in their
scope. What will not change is the Trustees' dedication to serving the
best interests of our shareholders.
We embark upon this new era of Putnam's rich heritage with confidence
and we look forward to the opportunity of continuing to help you meet
your financial objectives for many years to come.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
July 19, 2000
REPORT FROM THE FUND MANAGER
Susan A. McCormack
The past year presented an unusually difficult environment for
fixed-income investors. An attractive stock market, rising interest
rates, and fears of inflation kept bond prices weak throughout the
period and resulted in a negative total return for Putnam Arizona Tax
Exempt Income Fund. With tax-free income as our objective, however, we
used the weakness to our advantage by securing a higher yield for the
fund, diversifying where possible, and by positioning the portfolio for
the next turn in the market.
Total return for 12 months ended 5/31/00
Class A Class B Class M
NAV POP NAV CDSC NAV POP
----------------------------------------------------
-2.28% -6.93% -2.93% -7.56% -2.57% -5.74%
----------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods and explanation of performance
calculation methods begin on page 6.
* HIGHER RATES CREATE STRONG HEADWINDS
The U.S. economy is in the midst of a record-breaking expansion, its
10th consecutive year of uninterrupted growth. Keys to the success of
this expansion are the proliferation of labor- saving technologies and
the strong business investment in those technologies. By increasing
worker productivity and reducing the cost of many goods and services,
these technological advances have helped keep inflation at bay for many
years despite accelerating economic growth. By 1999, however, the
economy was showing the strain of its rapid advancement. Labor costs
were rising alongside the consumer price index and investors feared that
more widespread inflation was not far behind.
To combat a potential outbreak of inflation, the Federal Reserve Board
embarked on a program of interest-rate increases that should eventually
slow the economy to a more sustainable pace. The Fed raised short-term
rates six times during the course of the fund's fiscal year, adding 1.75
percentage points to the federal funds rate. Rising rates make the
income from existing bonds appear less attractive, and bonds of all
types suffered during the year as investors sold to take their chances
elsewhere. As prices declined, yields rose. For example, the yields on
long-term AAA-rated municipal bonds rose nearly a full percentage point
during the period.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 23.5%
Transportation 17.2%
Education 16.7%
Utilities 11.6%
Housing 10.5%
Footnote reads:
*Based on net assets as of 5/31/00. Holdings will vary over time.
* INVESTING FOR INCOME AND OPPORTUNITY
Your fund is designed to seek a high level of tax-free income. The
setback in the bond market afforded us the opportunity to achieve this
objective and also position the fund for the inevitable reversal in the
direction of interest rates. One facet of our strategy was to purchase
bonds that matured further in the future. These bonds generally offer
more income to compensate investors for the risk that rates will rise
before the bonds reach maturity.
In addition to higher yields, however, these bonds also offer a
heightened sensitivity to changes in interest rates. We believe a higher
degree of interest-rate sensitivity will help the fund's performance
when rates stop rising and begin to fall. Among the purchases we made
this year was a bond issued by the Arizona Health Facilities Authority
to finance renovations at the Phoenix Children's Hospital. The bond
matures in 2022, carries an investment-grade rating of A2, and yielded
6.28% at the time of purchase. Unlike many other hospitals, Phoenix
Children's has a healthy amount of cash on hand from private donations
and is therefore better equipped to make timely payments of interest and
principal. To purchase this and other long-maturity bonds, we sold bonds
in the intermediate-maturity range, which generally offers lower yields
and is less sensitive to changes in rates.
[GRAPHIC OMITTED: vertical bar chart AVERAGE EFFECTIVE MATURITY AND DURATION]
AVERAGE EFFECTIVE MATURITY AND DURATION
Years 5/31/99 5/31/00
Average effective maturity 9.07 12.91
Duration 6.36 8.27
Footnote reads:
This chart depicts the fund's average effective maturity and duration over
the 12 months ended 5/31/00. Average effective maturity and duration stated
in years are derived from calculations that incorporate assumptions about
prepayment rates and cash flow of mortgage-backed securities. Measures of
effective maturity duration and the assumptions on which they are based will
vary over time.
For investors in Arizona's highest tax bracket, the fund's 5.26% 30-day SEC
yield at the end of May for class A shares was equivalent to a 9.17% yield
from a taxable investment.
See pages 6 and 7 for complete performance information.
A third facet of our strategy was to maintain the fund's diversification
by seeking opportunities outside Arizona. As long-time shareholders of
the fund know, we often purchase bonds from the Commonwealth of Puerto
Rico. With the supply of Arizona issues limited, we have used Puerto
Rican bonds to help diversify the fund's assets. At the end of the
period, we took advantage of an excellent buying opportunity for some
Baa2-rated bonds issued by the Puerto Rico Industrial, Tourist,
Educational, Medical, and Environmental Control Facilities. The bonds
were issued to finance construction of a coal-fired power plant that
will help ease the island's power shortage. With a maturity date of 2026
and a yield of 6.65% at the time of purchase, these bonds embodied all
three of our objectives: diversification, higher income, and greater
interest-rate sensitivity.
Fiscal policy? Monetary policy?
Fiscal policy refers to the federal government's use of spending and taxation
to control the economy. If the government raises taxes, people will have less
money to spend, therefore reducing demand. If the government lowers taxes,
people will be more inclined to spend money. The government can also spend
money to influence demand.
Monetary policy attempts to influence the economy by controlling the
money supply. Monetary policy is normally carried out by a central bank.
The U.S. central bank is the Federal Reserve. Monetary policy can
influence the economy by altering interest rates. By reducing the supply
of money, monetary policy can raise interest rates and discourage
lending. Decreased lending results in less investment and less
production.
Right now, the Federal Reserve's Board of Governors is implementing
tighter monetary policy and bond funds, including municipal bonds, are
not performing well in such an environment. This is because of the
inverse relationship of interest rates and bond prices. Treasury bonds
take the brunt of the impact when interest rates rise, while municipal
bonds (attracting only domestic investors) are somewhat insulated, but
by no means exempt. Rising interest rates also affect the supply of
municipal bonds because cities and towns do not want to float new bonds
or refund outstanding bonds when interest rates are rising.
* LOWER RATINGS DEMAND MORE VIGILANT RESEARCH
Another component of our income strategy was to increase the fund's
holdings of BBB/Baa-rated bonds. Bonds rated BBB/Baa are at the cusp of
what rating agencies consider investment grade. Investors who own these
bonds are compensated for the slightly higher risk with higher yields. A
year ago, a BBB/Baa-rated bond would have yielded about 40 basis points
(four tenths of a percentage point) more than AAA/Aaa-rated bonds, but
recently we have seen a difference of as much as 75 basis points.
Arizona's fiscal strength is reflected in the fact that well over half
your fund's investments are rated AA/Aa or better. The state's economy
is strong and diversified, and it enjoys sizable budget surpluses.
However, we believe that some exciting opportunities come from carefully
selected lower-rated bonds. For example, the health-care sector is your
fund's largest area of concentration, even though some hospitals and
extended care facilities are on difficult financial ground. The Balanced
Budget Act of 1996 had a negative impact on hospitals nationwide because
it changed medical reimbursement schedules. Some hospitals became
insolvent, but the stronger institutions survived and today Congress is
concerned that the decreased availability of hospital beds may harm
their constituents.
Putnam has an experienced team of credit analysts who add a great deal
of value to the fund by enabling us to consider lower-rated credits and
even those that are unrated by the major rating agencies. Their
expertise allows us to purchase securities whose current ratings may not
accurately reflect their performance potential, as well as undervalued
securities, with a higher degree of confidence. In addition to the
scrutiny that goes into each purchase, we receive quarterly or monthly
financial reports and we speak directly to the people managing each
facility so that we are alert to developments that may affect its
financial health.
* LOOKING AHEAD
After six rate increases, we believe the Fed is in the late stages of
its tightening cycle. The markets are likely to be unstable near term
and we may see another rate hike, but once economic reports show that
growth is slowing in earnest, bond markets, including the municipal bond
market, should perform better. It is difficult to know exactly when the
economy will slow and interest rates will begin to fall, but we do know
that the signs are there: 30-year mortgage interest rates are close to
9%, consumer spending has begun to slacken, and unemployment showed an
unexpected spike in May.
As a result of our positioning during the course of the year, we believe
the fund is now much better prepared for a turn in interest rates. In
the coming months, we will continue to focus on those higher-yielding
areas of the municipal market to which we believe we can add value
through fundamental research on bonds that should outperform in a more
supportive market environment.
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 5/31/00, there is no guarantee the fund will
continue to hold these securities in the future.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Arizona Tax Exempt Income Fund is designed for investors seeking high
current income free from federal and Arizona state income taxes,
consistent with capital preservation.
TOTAL RETURN FOR PERIODS ENDED 5/31/00
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 -2.28% -6.93% -2.93% -7.56% -2.57% -5.74%
---------------------------------------------------------------------
5 years 21.82 16.03 18.11 16.21 20.11 16.24
Annual average 4.03 3.02 3.38 3.05 3.73 3.06
---------------------------------------------------------------------
Life of fund 69.40 61.43 58.60 58.60 64.18 58.85
Annual average 5.81 5.27 5.07 5.07 5.46 5.08
---------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 05/31/00
Lehman Brothers Municipal Consumer
Bond Index price index
--------------------------------------------------------------------
1 year -0.86% 3.07%
--------------------------------------------------------------------
5 years 28.55 12.55
Annual average 5.15 2.39
--------------------------------------------------------------------
Life of fund 82.36 27.27
Annual average 6.65 2.62
--------------------------------------------------------------------
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-year, 5-year, and
life-of-fund periods reflect the applicable contingent deferred sales
charge (CDSC), which is 5% in the first year, declines to 1% in the
sixth year, and is eliminated thereafter. Returns shown for class B and
class M shares for periods prior to their inception are derived from the
historical performance of class A shares, adjusted to reflect both the
initial sales charge or CDSC, if any, currently applicable to each class
and in the case of class B and class M shares the higher operating
expenses applicable to such shares. All returns assume reinvestment of
distributions at NAV. Investment return and principal value will
fluctuate so that an investor's shares when redeemed may be worth more
or less than their original cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 1/30/91
Lehman Brothers
Fund's class A Municipal Bond Consumer price
Date shares at POP Index index
1/30/91 9,529 10,000 10,000
5/31/91 9,841 10,316 10,074
5/31/92 10,851 11,329 10,379
5/31/93 12,128 12,685 10,713
5/31/94 12,314 12,998 10,958
5/31/95 13,252 14,186 11,308
5/31/96 13,700 14,834 11,634
5/31/97 14,731 16,064 11,895
5/31/98 15,951 17,572 12,095
5/31/99 16,521 18,394 12,348
5/31/00 $16,143 $18,236 $12,727
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 $15,860 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class M shares
would have been valued at $16,418 ($15,885 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/00
Class A Class B Class M
---------------------------------------------------------------------
Distributions (number) 12 12 12
---------------------------------------------------------------------
Income $0.467743 $0.410121 $0.442047
---------------------------------------------------------------------
Capital gains1 -- -- --
---------------------------------------------------------------------
Total $0.467743 $0.410121 $0.442047
---------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
---------------------------------------------------------------------
5/31/99 $9.22 $9.68 $9.21 $9.23 $9.54
---------------------------------------------------------------------
5/31/00 8.54 8.97 8.53 8.55 8.84
---------------------------------------------------------------------
Current return (end of period)
---------------------------------------------------------------------
Current dividend yield2 5.30% 5.05% 4.65% 5.00% 4.83%
---------------------------------------------------------------------
Taxable equivalent3 9.24 8.80 8.11 8.72 8.42
---------------------------------------------------------------------
Current 30-day SEC
yield4 5.26 5.00 4.61 4.96 4.80
---------------------------------------------------------------------
Taxable equivalent3 9.17 8.72 8.04 8.65 8.37
---------------------------------------------------------------------
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 42.64% 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 6/30/00 (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 1.64% -3.18% 0.99% -3.83% 1.34% -1.91%
----------------------------------------------------------------------
5 years 26.31 20.33 22.49 20.52 24.51 20.44
Annual average 4.78 3.77 4.14 3.80 4.48 3.79
----------------------------------------------------------------------
Life of fund 73.49 65.33 62.38 62.38 68.11 62.65
Annual average 6.02 5.48 5.28 5.28 5.67 5.30
----------------------------------------------------------------------
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 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 index 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.
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
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 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.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended May 31, 2000
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, 2000, and the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United
States. 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 auditing standards
generally accepted in the United States, 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,
2000, by correspondence with the custodian, provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 6, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
May 31, 2000
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
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (99.0%) (a)
PRINCIPAL AMOUNT RATING (RAT) VALUE
<S> <C> <C> <C>
Arizona (87.9%)
-------------------------------------------------------------------------------------------------------------------
AZ Hlth. Facs. Auth. Hosp. Syst. Rev. Bonds
$ 975,000 (Phoenix Mem. Hosp.), 8.2s, 6/1/21 BB $ 978,656
1,500,000 (Phoenix Children's Hosp.), Ser. A,
6 1/8s, 11/15/22 A2 1,430,620
3,000,000 (Northern AZ Healthcare Syst.), AMBAC,
4 3/4s, 10/1/30 Aaa 2,411,250
AZ State Hlth. Facs. Auth. Rev. Bonds
(Bethesda Foundation), Ser. A
2,000,000 6.4s, 8/15/27 BB/P 1,732,500
1,315,000 6 3/8s, 8/15/15 BB/P 1,191,719
1,500,000 AZ Student Loan Acquisition Auth. Rev. Bonds,
Ser. B, 6.6s, 5/1/10 Aa3 1,537,500
1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,738,188
1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,328,250
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC,
8s, 7/1/14 (SEG) Aaa 2,660,625
Cochise Cnty., Indl. Dev. Rev. Bonds
(Sierra Vista Cmnty. Hosp.)
1,995,000 Ser. B, 8 1/2s, 12/1/21 AAA 2,109,713
2,485,000 Ser. C, 8 1/4s, 12/1/14 AAA 2,665,163
1,100,000 (Sierra Vista Regl. Hlth.), Ser. A, 6.2s, 12/1/21 BB/P 947,375
Coconino Cnty., Poll. Control Rev. Bonds
(Nevada Power Co.)
4,000,000 6 3/8s, 10/1/36 BBB 3,720,000
3,000,000 Ser. B, 5.8s, 11/1/32 BBB 2,565,000
1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds,FGIC, 6 1/2s, 7/1/22 Aaa 1,040,000
Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds
340,000 6 7/8s, 4/1/14 BB+/P 340,806
1,160,000 6 7/8s, 4/1/14, Prerefunded BB+/P 1,168,166
1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds,
CLI Insd., 7 1/8s, 7/1/20 AAA 1,098,750
4,500,000 Maricopa Cnty., Hosp. Rev. Bonds
(Sun Health Corp.), 6 1/8s, 4/1/18 Baa1 4,111,875
3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac.
Rev. Bonds (Samaritan Hlth. Svcs.), Ser. A,
MBIA, 7s, 12/1/16 Aaa 3,959,375
2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg.
Rev. Bonds (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,753,438
5,000,000 Maricopa Cnty., Poll. Control Rev. Bonds
(Public Service Co.), Ser. A, 6.3s, 12/1/26 Baa3 4,743,750
Maricopa Cnty., School Dist. G.O. Bonds
2,000,000 (Dist. No. 69 Paradise Valley), Ser. B, MBIA,
7s, 7/1/12 Aaa 2,272,500
1,500,000 (Dist. No. 69 Paradise Valley), MBIA,
6.35s, 7/1/10 Aaa 1,612,500
3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,373,438
1,500,000 Mesa, Indl. Dev. Auth. Rev. Bonds
(Discovery Hlth. Syst.), Ser. A, 5 3/4s, 1/1/25 AAA 1,432,500
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 AAA 1,148,750
1,425,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge.
Rev. Bonds (Coopers Ridge Apts.), FHA Insd.,
7 3/8s, 4/1/32 AAA 1,492,688
1,725,000 Northern AZ U. Rev. Bonds, FGIC, 6 1/2s, 6/1/09 Aaa 1,865,156
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 3,373,988
Phoenix G.O. Bonds
1,000,000 6 3/8s, 7/1/13 Aa1 1,030,000
1,000,000 6s, 7/1/10 Aa1 1,053,750
1,300,000 4 3/4s, 7/1/23 Aa1 1,066,000
1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds,
Ser. A, MBIA, 6.9s, 1/1/23 Aaa 1,628,000
2,150,000 Phoenix, Indl. Dev. Auth. Rev. Bonds
(Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 AAA 2,193,000
1,000,000 Phoenix, Wastewater Syst. Rev. Bonds
(Civic Impt. Corp.), FGIC, 6s, 7/1/24 Aaa 1,000,000
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 1,661,569
2,000,000 Pima Cnty., Indl. Dev. Auth. VRDN (Tucson Elec.
Pwr. Co.-Irvington), Ser. A, 3.75s, 10/1/22 VMIG1 2,000,000
1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds, FGIC,
7 1/2s, 7/1/08 Aaa 1,143,750
2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,077,500
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 1,942,500
1,325,000 Pinal Cnty., School Dist. G.O. Bonds
(AZ U., Apache Junction),
Ser. A, FGIC, 6.8s, 7/1/08 Aaa 1,454,188
1,140,000 Scottsdale, G.O. Bonds, 5 1/2s, 7/1/12 Aa1 1,140,000
1,000,000 Scottsdale, Indl. Dev. Auth. Hosp. Rev. Bonds
(Scottsdale Memorial Hosp.),
Ser. A, AMBAC, 6 1/8s, 9/1/17 AAA 1,023,750
4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds
(First Mtge. Westminster Village),
Ser. A, 8 1/4s, 6/1/15 BB-/P 4,165,000
1,000,000 Sedona, COP, 7.2s, 4/1/12 BBB 1,005,000
1,985,000 Tucson G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 2,133,875
4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds
(Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 Baa3 4,105,920
500,000 Tucson, COP, MBIA, 5.7s, 7/1/20 Aaa 486,875
840,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds
(La Entrada), FHA Insd., 7.4s, 7/1/26 AAA 858,900
3,765,000 Tucson, St. & Hwy. User Rev. Bonds, Sr. Lien,
MBIA, 6s, 7/1/10 Aaa 3,957,956
1,250,000 Tucson, Wtr. Rev. Bonds, Ser. A, FGIC, 5s, 7/1/10 Aaa 1,201,563
U. of AZ, COP
1,000,000 (Telecommunications Syst.), 6 1/2s, 7/15/12 A2 1,043,750
2,000,000 (U. of AZ Parking & Student Hsg.), AMBAC,
5 3/4s, 6/1/24 A1 1,937,500
1,000,000 U. of AZ, Rev. Bonds, 6 1/4s, 6/1/11 A1 1,036,250
----------------
105,150,835
Guam (0.7%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Guam, Pwr. Auth. Rev. Bonds, Ser. A, MBIA,
5 1/8s, 10/1/29 AAA 876,250
Puerto Rico (10.4%)
-------------------------------------------------------------------------------------------------------------------
1,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,081,250
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
5,470,000 Ser. 396, 7.1s, 7/1/09 (acquired 7/30/98,
cost $6,353,264) (RES) AAA/P 5,736,663
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,078,750
1,500,000 Cmnwlth. of PR, Pub. Bldg. Auth. Gtd. Ed. & Hlth.
Fac. Rev. Bonds, Ser. L, 6 7/8s, 7/1/21 Aaa 1,582,500
1,000,000 PR Indl. Tourist Edl. Med. & Env. Control Facs.
Rev. Bonds (Cogen Facs.--AES PR Project),
6 5/8s, 6/1/26 Baa2 1,006,250
2,000,000 PR Muni. Fin Agcy. G.O. Bonds, Ser. A, FSA,
5 1/2s, 8/1/23 AAA 1,895,000
----------------
12,380,413
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $121,497,408) (b) $ 118,407,498
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $119,607,388.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at May 31, 2000 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, 2000. 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 $121,497,408
resulting in gross unrealized appreciation and depreciation of
$2,007,295 and $5,097,205, respectively, or net unrealized depreciation
of $3,089,910.
(RES) Restricted, excluding 144A securities, as to public resale. The
total market value of restricted securities held at May 31, 2000 was
$9,110,651 or 7.6% of net assets.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contacts at May 31,
2000.
The rates shown on VRDNs are the current interest rates at May 31, 2000.
The fund had the following industry group concentrations greater
than 10% at May 31, 2000 (as a percentage of net assets):
Health care 23.5%
Transportation 17.2
Education 16.7
Utilities 11.6
Housing 10.5
The fund had the following insurance concentrations greater than
10% at May 31, 2000 (as a percentage of net assets):
MBIA 15.3%
FGIC 12.9
-----------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
-----------------------------------------------------------------------------
Muni Bond Index
(Long) $1,592,156 $1,562,674 Jun-00 $29,482
-----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $121,497,408) (Note 1) $118,407,498
-------------------------------------------------------------------------------------------
Cash 23,471
-------------------------------------------------------------------------------------------
Interest and other receivables 2,696,241
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 8,259
-------------------------------------------------------------------------------------------
Receivable for securities sold 1,084,152
-------------------------------------------------------------------------------------------
Receivable for variation margin 13,813
-------------------------------------------------------------------------------------------
Total assets 122,233,434
Liabilities
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 152,612
-------------------------------------------------------------------------------------------
Payable for securities purchased 1,991,570
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 223,152
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 153,243
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 10,704
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 940
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 51,192
-------------------------------------------------------------------------------------------
Other accrued expenses 42,633
-------------------------------------------------------------------------------------------
Total liabilities 2,626,046
-------------------------------------------------------------------------------------------
Net assets $119,607,388
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $125,213,089
-------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 355,608
-------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (2,900,881)
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (3,060,428)
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $119,607,388
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($90,601,631 divided by 10,612,320 shares) $8.54
-------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $8.54)* $8.97
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($28,157,116 divided by 3,301,337shares) + $8.53
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($848,641 divided by 99,248 shares) $8.55
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $8.55)** $8.84
-------------------------------------------------------------------------------------------
* 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, 2000
<S> <C>
Tax exempt interest income: $ 7,997,684
-------------------------------------------------------------------------------------------
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 666,665
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 136,442
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,099
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 5,792
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 196,354
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 264,228
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 3,933
-------------------------------------------------------------------------------------------
Reports to shareholders 6,165
-------------------------------------------------------------------------------------------
Registration fees 2,870
-------------------------------------------------------------------------------------------
Auditing 39,908
-------------------------------------------------------------------------------------------
Legal 7,418
-------------------------------------------------------------------------------------------
Postage 6,414
-------------------------------------------------------------------------------------------
Other 13,991
-------------------------------------------------------------------------------------------
Management fee waiver (Note 2) (34,406)
-------------------------------------------------------------------------------------------
Total expenses 1,326,873
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (65,927)
-------------------------------------------------------------------------------------------
Net expenses 1,260,946
-------------------------------------------------------------------------------------------
Net investment income 6,736,738
-------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (650,129)
-------------------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 277,359
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (9,950,451)
-------------------------------------------------------------------------------------------
Net loss on investments (10,323,221)
-------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (3,586,483)
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended May 31
-------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income $ 6,736,738 $ 6,814,884
--------------------------------------------------------------------------------------------------
Net realized loss on investments (372,770) (8,063)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (9,950,451) (1,685,176)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations (3,586,483) 5,121,645
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (5,239,775) (5,293,888)
--------------------------------------------------------------------------------------------------
Class B (1,447,275) (1,292,666)
--------------------------------------------------------------------------------------------------
Class M (39,688) (22,214)
--------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (12,334,418) (9,474,022)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (22,647,639) (10,961,145)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 142,255,027 153,216,172
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $355,608 and $209,305, respectively) $119,607,388 $142,255,027
--------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------
2000 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 .47(c) .44(c) .44 .46 .47
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.68) (.11) .29 .19 (.17)
------------------------------------------------------------------------------------------------
Total from
investment operations (.21) .33 .73 .65 .30
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.47) (.43) (.44) (.46) (.47)
------------------------------------------------------------------------------------------------
Total distributions (.47) (.43) (.44) (.46) (.47)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.54 $9.22 $9.32 $9.03 $8.84
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.28) 3.57 8.28 7.52 3.38
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $90,602 $108,205 $120,649 $122,743 $126,716
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .86(c) .84(c) .99 .98 1.03
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.34(c) 4.71(c) 4.76 5.11 5.20
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.44 21.60 29.63 73.61 108.68
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) Includes amounts paid through expense offset arrangements (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,
2000, reflect a reduction of less than $.01 per share for each class.
Expenses 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
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
------------------------------------------------------------------------------------------------
2000 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 .41(c) .38(c) .38 .40 .41
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.68) (.10) .28 .20 (.18)
------------------------------------------------------------------------------------------------
Total from
investment operations (.27) .28 .66 .60 .23
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.41) (.37) (.38) (.40) (.41)
------------------------------------------------------------------------------------------------
Total distributions (.41) (.37) (.38) (.40) (.41)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.53 $9.21 $9.30 $9.02 $8.82
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.93) 3.01 7.47 6.94 2.60
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $28,157 $33,480 $32,046 $28,340 $24,050
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.51(c) 1.49(c) 1.64 1.63 1.67
------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.69(c) 4.09(c) 4.10 4.44 4.52
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.44 21.60 29.63 73.61 108.68
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) Includes amounts paid through expense offset arrangements (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,
2000, reflect a reduction of less than $.01 per share for each class.
Expenses 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
------------------------------------------------------------------------------------------------------
For the period
Per-share July 3, 1995+
operating performance Year ended May 31 to May 31
------------------------------------------------------------------------------------------------------
2000 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 .44(c) .41(c) .41 .43(d) .41
------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.68) (.11) .30 .19 (.02)
------------------------------------------------------------------------------------------------------
Total from
investment operations (.24) .30 .71 .62 .39
------------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.40) (.42) (.43) (.40)
------------------------------------------------------------------------------------------------------
Total distributions (.44) (.40) (.42) (.43) (.40)
------------------------------------------------------------------------------------------------------
Net asset value,
end of period $8.55 $9.23 $9.33 $9.04 $8.85
------------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) (2.57) 3.26 7.96 7.19 4.44*
------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $849 $570 $521 $503 $293
------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.16(c) 1.14(c) 1.29 1.28 1.09*
------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.08(c) 4.44(c) 4.47 4.75 4.28*
------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.44 21.60 29.63 73.61 108.68
------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charge.
(b) Includes amounts paid through expense offset arrangements (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,
2000, reflect a reduction of less than $.01 per share for each class.
Expenses 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
May 31, 2000
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 shares 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 year ended
May 31, 2000, 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, 2000, the fund had a capital loss carryover of approximately
$1,691,000 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
957,000 May 31, 2008
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.
These differences include temporary and permanent differences of post-October
loss deferrals, dividends payable, unrealized gains and losses on certain
futures contracts and straddle loss deferral. 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, 2000, the fund reclassified
$136,303 to increase undistributed net investment income and $136,303 to
decrease paid-in-capital. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
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 lesser of (i) an annual rate of 0.50%
of the average net assets of the fund or (ii) 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 $5 billion, 0.34% of the next $5 billion
and 0.33% thereafter. Prior to July 16, 1999, the management fee was based
on (ii) above. Through July 16, 1999, a management fee waiver of 0.20% on
each tier was in effect.
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, 2000, fund expenses were reduced by $65,927
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 $530
has been allocated to the fund, and an additional fee for each Trustees
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 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 Retail Management, Inc., 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 Retail Management, Inc. 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 payments 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, 2000, Putnam Retail Management, Inc., acting
as underwriter received net commissions of $11,190 and $670 from the
sale of class A and class M shares, respectively and $117,139 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 year ended May 31, 2000, Putnam Retail
Management, Inc., acting as underwriter received no monies on class A
redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 2000, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $14,740,710 and $29,106,922, respectively. There were no
purchases and sales of U.S. government obligations.
Note 4
Capital shares
At May 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 1,227,768 $10,748,677
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 289,722 2,532,446
---------------------------------------------------------------------------
1,517,490 13,281,123
Shares
repurchased (2,643,568) (23,099,427)
---------------------------------------------------------------------------
Net decrease (1,126,078) $(9,818,304)
---------------------------------------------------------------------------
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, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 548,388 $ 4,848,935
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 84,826 740,484
---------------------------------------------------------------------------
633,214 5,589,419
Shares
repurchased (967,670) (8,441,148)
---------------------------------------------------------------------------
Net decrease (334,456) $(2,851,729)
---------------------------------------------------------------------------
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, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 38,588 $345,301
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 3,432 29,853
---------------------------------------------------------------------------
42,020 375,154
Shares
repurchased (4,481) (39,539)
---------------------------------------------------------------------------
Net increase 37,539 $335,615
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
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 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
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
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 Century Growth Fund
New Opportunities Fund
OTC & Emerging Growth Fund
Research Fund
Tax Smart Equity Fund
Vista Fund
Voyager Fund
Voyager Fund II
GROWTH AND INCOME FUNDS
Balanced Retirement Fund
Classic Equity 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
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 Growth and Income Fund 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 Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, 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, III
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
Richard G. Leibovitch
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
---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN044-62255 855/235/2AA 7/00
