-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DVysX4cMCAFf7BSGsDCLu5mCThINLl2h0tNK6A4KefbhKNdCzWOZcL+KEbmTttxD yoWQ6C2Df3gRLHyvC1XqOg== 0000928816-98-000207.txt : 19980727 0000928816-98-000207.hdr.sgml : 19980727 ACCESSION NUMBER: 0000928816-98-000207 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980724 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM ARIZONA TAX EXEMPT INCOME FUND CENTRAL INDEX KEY: 0000869392 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046665534 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-06258 FILM NUMBER: 98670953 BUSINESS ADDRESS: STREET 1: PUTNAM INVESTMENTS INC STREET 2: ONE POST OFFICE SQUARE MAIL STOP A 14 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 8002251585 N-30D 1 PUTNAM ARIZONA TAX EXEMPT INCOME FUND Putnam Arizona Tax Exempt Income Fund ANNUAL REPORT May 31, 1998 [LOGO: BOSTON * LONDON * TOKYO] Fund highlights * "Positive trends appear to be in place, and we are confident that our investments in the state's diverse economic sectors -- many of which focus on improving the quality of life in Arizona -- can benefit as a result." -- Jerome J. Jacobs, manager Putnam Arizona Tax Exempt Income Fund * "Surging tax revenues in most states help bolster municipal credit bond ratings. Standard & Poor's says the number of rating upgrades in this year's first quarter was more than nine times the number of downgrades." -- The Wall Street Journal, April 8, 1998 CONTENTS 4 Report from Putnam Management 8 Fund performance summary 14 Portfolio holdings 18 Financial statements From the Chairman [GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM] [copyright] Karsh, Ottawa Dear Shareholder: Analyzing risk premiums, yield spreads, call dates, yield curves, credit ratings, supply-and-demand dynamics, taxable versus tax-exempt yield relationships, and a host of other factors is all in a day's work for Putnam's Tax-Exempt Bond Group. The result was another period of competitive performance for Putnam Arizona Tax Exempt Income Fund's fiscal year, which closed on May 31, 1998. I am pleased to inform you that Jerome J. Jacobs has been named the manager of your fund. Jerry, who joined Putnam in 1996, is also chief investment officer of the Tax-Exempt Fixed-Income Group. He was previously with the Vanguard Group of Investment Companies and Butcher and Singer and has 18 years of investment experience. In the following report, Jerry discusses the fund's performance during fiscal 1998 and then takes a look at prospects for the tax-exempt market, especially with regard to Arizona, in the months ahead. Respectfully yours, /S/GEORGE PUTNAM George Putnam Chairman of the Trustees July 15, 1998 Report from the Fund Manager Jerome J. Jacobs In any discussion of Arizona's economy, glowing reports of fast growth in the state's employment and private business sectors usually take the limelight. However, in reality, the growth in employment has little correlation with the economic well-being of the state. Nevertheless, positive trends appear to be in place, and we are confident that our investments in the state's diverse economic sectors -- many of which focus on improving the quality of life in Arizona -- can benefit as a result. Putnam Arizona Tax Exempt Income Fund's class A shares delivered returns of 8.28% at net asset value and 3.14% at public offering price for the 12-month period ended May 31, 1998. For complete performance details, please refer to the performance summaries that begin on page 8. * ATTRACTIVE PRICES FOR MUNI BOND INVESTORS Despite the relative calm that has fallen over the $1.3 trillion municipal bond market, prices on these bonds have actually become very attractive relative to the Treasury market -- a state of affairs that hasn't occurred since the flat-tax scare of 1996. Municipal bonds (as represented by 30-year insured municipals) are offering almost 90% of the yield of long-term Treasury bonds. Since the typical level is 84%, the current percentage makes municipal bond prices remarkably low. There is more to this market than just the unusually attractive prices. The tranquillity -- or lack of action -- in the overall U.S. bond market has also been making news. For example, the yield on the benchmark 30-year U.S. Treasury bond has hovered within a tight range of 5.6% to 6.1% during the past six months, making it the least volatile period since 1979. The first half of 1998 has also been notable for its huge supply, including the sale of the largest municipal bond issue in history -- $3.4 billion by the Long Island Power Authority in May. Before the bonds were sold in May, there were fears of an overabundance of supply, but because of prevailing attractive prices, the market easily absorbed this huge issue and the all-important supply-and-demand ratios have stayed in balance. Upon this quiet playing field, there have been fewer opportunities for profit, but your fund has continued to deliver what it has promised to shareholders: a reliable stream of income exempt from federal taxes along with relatively low share price volatility. * TARGETING BONDS WITH BEST VALUE Also noteworthy is the unusually flat tax-exempt yield curve. With the 30-year bond paying only a modest 30 to 40 basis points over a 10-year bond, investors are not compensated for taking on higher risk. For this reason, we have found the best value (attractive yield with minimal volatility) in the intermediate range of the yield curve -- anywhere from 10 to 15 years. Another way of providing shareholders with the best value is to improve the call risk within the fund. Noncallable bonds or bonds with distant call dates enable us to provide the highest and most durable level of income. Callable bonds have the option of being called away by the issuer at a certain future date usually if interest rates are lower than when the bonds were first issued. By avoiding callable bonds, the portfolio has a better chance of maintaining a reliable level of income. [GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Hospitals/health care 24.1% Education 13.3% Utilities 11.9% Housing 10.2% Transportation 9.8% Footnote reads: * Based on net assets as of 5/31/98. Holdings will vary over time. It is always important to highlight careful security selection and in-depth credit analysis as a fundamental investment strategy of the fund. This strategy becomes even more important when we invest in bonds that carry ratings below investment grade. These are the bonds that can add tremendously to a fund's income level, but they also mean greater credit risk and require the most meticulous research efforts. Health-care issues, representing 24.1% of the fund's net assets and the largest sector, continue to perform well in spite of forthcoming reductions in the Medicare budget. Because of the inherently lower quality ratings of the bonds in this sector, we look for potential merger/acquisition candidates as we select the fund's holdings. When the supply of local municipal bonds is low, one option available to the managers of all single-state municipal bond funds is to purchase municipal bonds issued by the Commonwealth of Puerto Rico or other tax-exempt entities on the island. Puerto Rican municipal bonds are free from federal, state, and local income taxes in Arizona. Well-structured Puerto Rican bonds are easier to find and can offer the positive attributes that may not be readily available in the scarce Arizona market. Currently our analysis indicates that Puerto Rico is in solid fiscal and economic shape and the bonds we own either are insured by a municipal insurance agency or have an attractive credit rating without insurance. * DESPITE LOW INTEREST RATES, ROOM FOR CAUTION While the Asian crisis has been widely publicized as negative for economic growth around the world, it has produced some positive effects in the United States. Fears of the financial turmoil in Asia and in other emerging markets have helped keep interest rates low. In turn, low interest rates have helped improve corporate balance sheets, encouraged construction, and contributed to low unemployment. Although we are quite satisfied with the financial condition of Arizona, there is room for caution. Governor Hull is wise to acknowledge that this economic growth cycle can't last forever. In preparation for the inevitable slowdown, a budget stabilization fund -- the so-called Rainy Day Fund -- has been established from revenues to help protect Arizona residents from financial setbacks during economic downturns. [GRAPHIC OMITTED: pie chart of CREDIT QUALITY OVERVIEW] CREDIT QUALITY OVERVIEW* Ba -- 12.1% Baa -- 16.5% A -- 5.6% Aa -- 15.3% Aaa -- 49.1% B -- 1.4% Footnote reads: * Based on percentage of market value as of 5/31/98. A bond rated Baa or higher is considered investment grade. All ratings reflect Moody's descriptions unless noted otherwise; percentages may include unrated bonds considered by Putnam Management to be of comparable quality. Ratings will vary over time. We may begin to see slightly higher inflation during the second half of the year. In our opinion, this is not a good time to expose the portfolio to bonds with longer maturities and higher interest-rate risk. We believe that a cautious strategy emphasizing intermediate maturities, low call risk, and in-depth credit research will produce the best returns in the months ahead. 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 5/31/98, there is no guarantee the fund will continue to hold these securities in the future. Performance summary This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam Arizona Tax Exempt Income Fund is designed for investors seeking a high level of current income free from federal and state income tax consistent with preservation of capital. TOTAL RETURN FOR PERIODS ENDED 5/31/98 Class A Class B Class M (inception date) (1/30/91) (7/15/93) (7/3/95) NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 1 year 8.28% 3.14% 7.47% 2.47% 7.96% 4.48% - ------------------------------------------------------------------------------ 5 years 31.34 25.12 26.58 24.58 29.41 25.25 Annual average 5.60 4.58 4.83 4.49 5.29 4.61 - ------------------------------------------------------------------------------ Life of fund 67.15 59.29 58.16 58.16 62.96 57.67 Annual average 7.26 6.56 6.45 6.45 6.89 6.41 - ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98 Lehman Bros. Municipal Consumer Bond Index Price Index - ------------------------------------------------------------------------------ 1 year 9.39% 1.69% - ------------------------------------------------------------------------------ 5 years 38.53 12.90 Annual average 6.74 2.46 - ------------------------------------------------------------------------------ Life of fund 75.72 20.95 Annual average 8.00 2.63 - ------------------------------------------------------------------------------ Past performance is not indicative of future results. 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. [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 Plot Points Lehman Bros. Municipal Bond Consumer Price Fund's class A Date Index Index shares at POP 1/30/91 10,000 10,000 9,529 5/31/91 10,316 10,074 9,841 5/31/92 11,329 10,378 10,851 5/31/93 12,685 10,712 12,128 5/31/94 12,998 10,958 12,313 5/31/95 14,187 11,307 13,251 5/31/96 14,835 11,634 13,699 5/31/97 16,064 11,893 14,730 5/31/98 17,572 12,095 15,929 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 $15,816 and no contingent deferred sales charges would apply; a $10,000 investment in the fund's class M shares would have been valued at $16,296 ($15,767 at public offering price). See first page of performance section for performance calculation method. PRICE AND DISTRIBUTION INFORMATION 12 months ended 5/31/98 Class A Class B Class M - ------------------------------------------------------------------------------ Distributions (number) 12 12 12 - ------------------------------------------------------------------------------ Income $0.444270 $0.383575 $0.417099 - ------------------------------------------------------------------------------ Capital gains1 -- -- -- - ------------------------------------------------------------------------------ Total $0.444270 $0.383575 $0.417099 - ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV POP - ------------------------------------------------------------------------------ 5/31/97 $9.03 $9.48 $9.02 $9.04 $9.34 - ------------------------------------------------------------------------------ 5/31/98 9.32 9.78 9.30 9.33 9.64 - ------------------------------------------------------------------------------ Current return (end of period) - ------------------------------------------------------------------------------ Current dividend rate2 4.60% 4.39% 3.95% 4.30% 4.17% - ------------------------------------------------------------------------------ Taxable equivalent3 8.03 7.66 6.90 7.51 7.28 - ------------------------------------------------------------------------------ Current 30-day SEC yield4 4.22 4.02 3.57 3.92 3.79 - ------------------------------------------------------------------------------ Taxable equivalent3 7.37 7.02 6.23 6.84 6.62 - ------------------------------------------------------------------------------ 1Capital 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. 2Income portion of most recent distribution, annualized and divided by NAV or POP at end of period. 3Assumes maximum 42.72% combined federal and state tax rate. Results for investors subject to lower tax rates would not be as advantageous. 4Based only on investment income, calculated using SEC guidelines. TOTAL RETURN FOR PERIODS ENDED 6/30/98 (most recent calendar quarter) Class A Class B Class M (inception date) (1/30/91) (7/15/93) (7/3/95) NAV POP NAV CDSC NAV POP - ------------------------------------------------------------------------------ 1 year 7.20% 2.15% 6.63% 1.63% 7.00% 3.47% - ------------------------------------------------------------------------------ 5 years 29.31 23.13 24.83 22.85 27.53 23.34 Annual average 5.28 4.25 4.54 4.20 4.98 4.28 - ------------------------------------------------------------------------------ Life of fund 67.31 59.44 58.39 58.39 63.24 57.95 Annual average 7.19 6.50 6.40 6.40 6.84 6.36 - ------------------------------------------------------------------------------ Performance data represent past results, do not reflect future performance, and will differ for each share class. Investment returns and principal value will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. See first page of performance section for performance calculation method. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Class A shares are generally subject to an initial sales charge. Class B shares may be subject to a sales charge upon redemption. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares, not including any initial or contingent deferred sales charge. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 4.75%maximum sales charge for class A shares and 3.25% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund's CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. COMPARATIVE BENCHMARKS Lehman Brothers Municipal Bond Index is an unmanaged list of long-term fixed-rate investment-grade tax-exempt bonds representative of the municipal bond market. The index does not take into account brokerage commissions or other costs, may include bonds different from those in the fund, and may pose different risks than the fund. 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 Report of independent accountants For the fiscal year ended May 31, 1998 To the Trustees and Shareholders of Putnam Arizona Tax Exempt Income Fund In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments owned, (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, 1998, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits, which included confirmation of investments owned at May 31, 1998 by correspondence with the custodian and the application of alternative auditing procedures where investments purchased were not yet received by the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts July 14, 1998 Portfolio of investments owned May 31, 1998 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 Collaterized 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 (98.1%) (a) PRINCIPAL AMOUNT RATINGS(RAT) VALUE Arizona (87.2%) - ------------------------------------------------------------------------------------------------------------- $ 1,975,000 AZ Hlth. Fac. Auth. Hosp. Syst. Rev. Bonds (Phoenix Mem. Hosp.), 8.2s, 6/1/21 BBB $ 2,145,342 1,500,000 AZ Student Loan Acquisition Auth. Rev. Bonds, Ser. B, 6.6s, 5/1/10 Aa 1,629,375 AZ, State Hlth. Facs. Auth. Rev. Bonds (Bethesda Foundation), Ser. A 2,000,000 6.4s, 8/15/27 BB/P 2,115,000 1,315,000 6 3/8s, 8/15/15 BB/P 1,398,831 1,750,000 Central AZ Wtr. Consv. Dist. Contract Rev. Bonds (Central AZ), Ser. A, 5 1/2s, 11/1/10 AA- 1,885,625 1,450,000 Chandler, G.O. Bonds, FGIC, 8s, 7/1/10 Aaa 1,908,563 1,100,000 Chandler, St. & Hwy. Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,450,625 2,150,000 Chandler, Wtr. & Swr. Rev. Bonds, FGIC, 8s, 7/1/14 (SEG) Aaa 2,932,063 Cochise Cnty., Indl. Dev. Rev. Bonds (Sierra Vista Cmnty. Hosp.) 1,995,000 Ser. B, 8 1/2s, 12/1/21 BBB-/P 2,284,275 2,625,000 Ser. C, 8 1/4s, 12/1/14 BBB-/P 3,123,750 Coconino Cnty., Poll. Control Rev. Bonds (Nevada Power Co.) 4,000,000 6 3/8s, 10/1/36 BBB 4,330,000 3,000,000 Ser. B, 5.8s, 11/1/32 BBB- 3,063,750 4,000,000 Gila Cnty., Indl. Dev. Auth. Rev. Bonds (Asarco, Inc.), 5.55s, 1/1/27 Baa2 4,055,000 1,000,000 Gilbert, Wtr. & Swr. Rev. Bonds, FGIC, 6 1/2s, 7/1/22 Aaa 1,105,000 1,500,000 Gilbert, Wtr. & Wastewtr. Syst. Rev. Bonds (Connection Dev. Fee), 6 7/8s, 4/1/14 BB+ 1,554,375 1,000,000 Glendale, Indl. Dev. Auth. Edl. Fac. Rev. Bonds, CLI Insd., 7 1/8s, 7/1/20 AAA 1,181,250 5,000,000 Maricopa Cnty., Poll. Control Rev. Bonds (Public Service Co.), Ser. A, 6.3s, 12/1/26 Ba1 5,356,250 4,500,000 Maricopa Cnty., Hosp. Rev. Bonds (Sun Health Corp.), 6 1/8s, 4/1/18 Baa1 4,781,250 2,670,000 Maricopa Cnty., Indl. Dev. Auth. Multi-Fam. Hsg. Rev. Bonds (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,930,325 3,500,000 Maricopa Cnty., Indl. Dev. Auth. Hosp. Fac. Rev. Bonds (Samaritan Hlth. Svcs.), Ser. A, MBIA, 7s, 12/1/16 Aaa 4,392,500 2,000,000 Maricopa Cnty., Poll. Control Rev. Bonds (Public Service Co.), Ser. A, 5 3/4s, 11/1/22 Ba1 2,047,500 Maricopa Cnty., School Dist. G.O. Bonds 2,000,000 (Dist. No. 69 Paradise Valley), Ser. B, MBIA, 7s, 7/1/12 Aaa 2,465,000 1,500,000 (Dist. No. 69 Paradise Valley), MBIA, 6.35s, 7/1/10 Aaa 1,747,500 1,500,000 (No. 11 Peoria U.), MBIA, 6.4s, 7/1/10 Aaa 1,605,000 3,175,000 Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 3,679,031 1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC, 7 1/4s, 7/1/12 Aaa 1,253,750 1,445,000 Mohave Cnty., Indl. Dev. Auth. Multi-Fam. Mtge. Rev. Bonds (Coopers Ridge Apts.), FHA Insd., 7 3/8s, 4/1/32 AAA 1,571,438 2,725,000 Northern AZ U. Rev. Bonds, FGIC, 6 1/2s, 6/1/09 Aaa 3,195,063 Phoenix G.O. Bonds 1,000,000 6 3/8s, 7/1/13 AA+ 1,090,000 1,000,000 6s, 7/1/10 AA+ 1,098,750 2,845,000 Phoenix, Civic Impt. Corp. Waste Wtr. Syst. Rev. Bonds, MBIA, 6 1/2s, 7/1/08 Aaa 3,268,194 1,600,000 Phoenix, Hsg. Fin. Corp. Mtge. Rev. Bonds, Ser. A, MBIA, 6.9s, 1/1/23 Aaa 1,698,000 2,150,000 Phoenix, Indl. Dev. Auth. Rev. Bonds (Chris Ridge Village), FHA Insd., 6.8s, 11/1/25 Aaa 2,270,938 4,000,000 Pima Cnty., Indl. Dev. Auth. Multi-Fam. Rev. Bonds (Willowick Apts.), 5 1/2s, 3/1/28 AA 4,035,000 2,015,000 Pima Cnty., Indl. Dev. Auth. Single Family Mtge. Stepped-Coupon Rev. Bonds, FNMA Coll., GNMA Coll., FHLMC Coll., 6.15s, (6.95s, 11/1/23) (STP) AAA 2,145,208 4,100,000 Pima Cnty., Indl. Dev. Auth. VRDN (Tucson Elec.), 3.45s, 12/1/22 Aa2 4,100,000 1,000,000 Pima Cnty., School Dist. No. 1 Rev. Bonds, FGIC, 7 1/2s, 7/1/08 Aaa 1,238,750 2,000,000 Pinal Cnty., COP, 6 1/2s, 6/1/09 AA 2,145,000 2,000,000 Pinal Cnty., Indl. Dev. Auth. Rev. Bonds (Casa Grande Regl. Med. Ctr.), Ser. A, 8 1/8s, 12/1/22 B 2,150,000 1,325,000 Pinal Cnty., School Dist. Pinal Cnty., School Dist. (AZ U., Apache Junction), Ser. A, FGIC, 6.8s, 7/1/08 Aaa 1,573,438 3,250,000 Salt River, Rev. Bonds (Project Agric.), 6s, 1/1/09 Aa 3,672,500 1,140,000 Scottsdale G.O. Bonds, 5 1/2s, 7/1/12 Aa1 1,236,900 4,000,000 Scottsdale, Indl. Dev. Auth. Rev. Bonds (First Mtge. Westminster Village), Ser. A, 8 1/4s, 6/1/15 BB-/P 4,550,000 1,740,000 Scottsdale, Indl. Dev. Auth. Hosp. Rev. Bonds (Scottsdale Memorial Hosp.), Ser. A, AMBAC, 6 1/8s, 9/1/17 Aaa 1,929,225 1,000,000 Sedona COP, 7.2s, 4/1/12 BBB/P 1,040,000 1,800,000 Sierra Vista, Indl. Dev. Auth. Hosp. Rev. Bonds (Sierra Vista Cmnty. Hosp.), 8 3/4s, 12/1/16 AAA 1,897,884 1,000,000 South Tucson, Muni. Property Corp. Fac. Rev. Bonds, 8 1/2s, 6/1/05 BB 1,080,000 3,985,000 Tucson G.O. Bonds, FGIC, 6.4s, 7/1/08 Aaa 4,602,675 1,000,000 Tucson Wtr Rev. Bonds, FGIC, 5 1/2s, 7/1/14 AAA 1,085,000 4,000,000 Tucson, Arpt. Auth. Special Fac. Rev. Bonds (Lockheed Aermod Ctr. Inc.), 8.7s, 9/1/19 A3 4,450,000 880,000 Tucson, Indl. Dev. Auth. Multi-Fam. Rev. Bonds (La Entrada), FHA Insd., 7.4s, 7/1/26 Aaa 933,900 3,765,000 Tuscon, St. & Hwy. User Rev. Bonds, Sr. Lien, MBIA, 6s, 7/1/10 Aaa 4,254,450 1,000,000 U. of AZ COP (Telecommunications Syst.), 6 1/2s, 7/15/12 A2 1,081,250 U. of AZ Rev. Bonds 1,000,000 Ser. B, 6.9s, 6/1/16 AA 1,073,750 1,000,000 6 1/4s, 6/1/11 AA 1,076,250 1,450,000 U. of AZ Med. Ctr. Corp. Hosp. Rev. Bonds, MBIA, 6 7/8s, 7/1/21 Aaa 1,595,000 -------------- 133,559,493 Puerto Rico (10.9%) - ------------------------------------------------------------------------------------------------------------- 1,000,000 Cmnwlth. of PR, G.O. Bonds, MBIA, 6 1/4s, 7/1/12 Aaa 1,162,500 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds 3,225,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 AAA 3,745,031 1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/09 Aaa 1,157,500 4,000,000 Cmnwlth of PR, Muni. Fin. Agcy. Rev. Bonds, Ser. A, FSA, 6s, 7/1/11 Aaa 4,530,000 Cmnwlth of PR, Pub. Bldg. Auth. Gtd. Ed. & Hlth. Fac. Rev. Bonds 1,500,000 Ser. L, 6 7/8s, 7/1/21 AAA 1,680,000 4,000,000 Ser. M, AMBAC, 5 3/4s, 7/1/10 Aaa 4,445,000 -------------- 16,720,031 - ------------------------------------------------------------------------------------------------------------- Total Municipal Bonds and Notes (cost $141,634,294) $ 150,279,524 - ------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $153,216,172. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at May 31, 1998 for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings do not necessarily represent what the agencies would ascribe to these securities at May 31, 1998. 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 $141,637,817, resulting in gross unrealized appreciation and depreciation of $8,839,688 and $197,981, respectively, or net unrealized appreciation of $8,641,707. (STP) The interest rate and date shown parenthetically represent the new interest rate to be paid and the date the fund will begin receiving interest at this rate. (SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts at May 31, 1998. The rates shown on VRDN's are the current interest rates at May 31, 1998. The fund had the following industry group concentrations greater than 10% at May 31, 1998 (as a percentage of net assets): Hospitals/Health care 24.1% Education 13.3 Utilities 11.9 Housing 10.2 The fund had the following insurance concentrations greater than 10% at May 31, 1998 (as a percentage of net assets): MBIA 19.0% FGIC 11.5
- -------------------------------------------------------------------------------------------- Futures Contracts Outstanding at May 31, 1998 Unrealized Aggregate Face Expiration Appreciation/ Total Value Value Date Depreciation - -------------------------------------------------------------------------------------------- Municipal Bond Index (long) $ 4,590,313 $ 4,496,438 Jun-98 $ 93,875 US Treasury Notes 20 yr. (short) 14,606,250 14,442,344 Jun-98 (163,906) - -------------------------------------------------------------------------------------------- $ (70,031) - -------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of assets and liabilities May 31, 1998 Assets - --------------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $141,634,294) (Note 1) $150,279,524 - --------------------------------------------------------------------------------------------------- Cash 276,073 - --------------------------------------------------------------------------------------------------- Interest receivable 3,252,645 - --------------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 36,910 - --------------------------------------------------------------------------------------------------- Total assets 153,845,152 Liabilities - --------------------------------------------------------------------------------------------------- Payable for variation margin 23,062 - --------------------------------------------------------------------------------------------------- Distributions payable to shareholders 204,500 - --------------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 55,740 - --------------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 230,187 - --------------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 29,558 - --------------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 7,428 - --------------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,011 - --------------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 63,580 - --------------------------------------------------------------------------------------------------- Other accrued expenses 13,914 - --------------------------------------------------------------------------------------------------- Total liabilities 628,980 - --------------------------------------------------------------------------------------------------- Net assets $153,216,172 Represented by - --------------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $147,157,832 - --------------------------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 3,189 - --------------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (2,520,048) - --------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 8,575,199 - --------------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $153,216,172 Computation of net asset value and offering price - --------------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($120,649,062 divided by 12,950,156 shares) $9.32 - --------------------------------------------------------------------------------------------------- Offering price per class A share (100/95.25 of $9.32)* $9.78 - --------------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($32,046,457 divided by 3,444,754 shares)+ $9.30 - --------------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($520,653 divided by 55,795 shares) $9.33 - --------------------------------------------------------------------------------------------------- Offering price per class M share (100/96.75 of $9.33)** $9.64 - --------------------------------------------------------------------------------------------------- * 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 offerring price is reduced. + Redemption price per share is equal to net asset value less any applicable contingent deferred sale charge. The accompanying notes are an integral part of these financial statements.
Statement of operations Year ended May 31, 1998 Tax exempt interest income: $8,742,647 - -------------------------------------------------------------------------------------------------- Expenses: - -------------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 919,202 - -------------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 203,604 - -------------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 7,914 - -------------------------------------------------------------------------------------------------- Administrative services (Note 2) 6,164 - -------------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 245,415 - -------------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 254,553 - -------------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 2,682 - -------------------------------------------------------------------------------------------------- Reports to shareholders 16,431 - -------------------------------------------------------------------------------------------------- Registration fees 75 - -------------------------------------------------------------------------------------------------- Auditing 26,339 - -------------------------------------------------------------------------------------------------- Legal 18,512 - -------------------------------------------------------------------------------------------------- Postage 8,636 - -------------------------------------------------------------------------------------------------- Other 7,536 - -------------------------------------------------------------------------------------------------- Total expenses 1,717,063 - -------------------------------------------------------------------------------------------------- Expense reduction (Note 2) (61,988) - -------------------------------------------------------------------------------------------------- Net expenses 1,655,075 - -------------------------------------------------------------------------------------------------- Net investment income 7,087,572 - -------------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 1,489,318 - -------------------------------------------------------------------------------------------------- Net realized loss on futures contracts (Note 1) (1,147,723) - -------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and futures contracts during the year 4,477,721 - -------------------------------------------------------------------------------------------------- Net gain on investments 4,819,316 - -------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $11,906,888 - -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Statement of changes in net assets Year ended May 31 -------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Increase in net assets - ---------------------------------------------------------------------------------------------------------------------- Operations: - ---------------------------------------------------------------------------------------------------------------------- Net investment income $ 7,087,572 $ 7,518,550 - ---------------------------------------------------------------------------------------------------------------------- Net realized gain on investments 341,595 21,107 - ---------------------------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 4,477,721 3,350,238 - ---------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 11,906,888 10,889,895 - ---------------------------------------------------------------------------------------------------------------------- Distributions to shareholders: - ---------------------------------------------------------------------------------------------------------------------- From net investment income Class A (5,914,397) (6,368,622) - ---------------------------------------------------------------------------------------------------------------------- Class B (1,243,648) (1,175,109) - ---------------------------------------------------------------------------------------------------------------------- Class M (24,352) (19,547) - ---------------------------------------------------------------------------------------------------------------------- Decrease from capital share transactions (Note 4) (3,094,187) (2,799,875) - ---------------------------------------------------------------------------------------------------------------------- Total increase in net assets 1,630,304 526,742 Net assets - ---------------------------------------------------------------------------------------------------------------------- Beginning of year 151,585,868 151,059,126 - ---------------------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $3,189 and $98,014, respectively) $ 153,216,172 $ 151,585,868 - ---------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
Financial highlights (For a share outstanding throughout the period) CLASS A - ------------------------------------------------------------------------------------------------------------------------------------ For the nine months Per-share ended operating performance Year ended May 31 May 31 Year ended August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995++ 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $9.03 $8.84 $9.01 $8.84 $9.47 $9.07 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .44 .46 .47 .38 .51 .54 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .29 .19 (.17) .17 (.61) .47 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .73 .65 .30 .55 (.10) 1.01 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.44) (.46) (.47) (.38) (.50) (.55) - ------------------------------------------------------------------------------------------------------------------------------------ From net realized gain on investments -- -- -- -- -- (.06) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net realized gain on investments -- -- -- -- (.03) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.44) (.46) (.47) (.38) (.53) (.61) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.32 $9.03 $8.84 $9.01 $8.84 $9.47 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 8.28 7.52 3.38 6.45* (1.07) 11.54 - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $120,649 $122,743 $126,716 $136,598 $142,950 $145,304 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .99 .98 1.03 .70* .97 .89 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 4.76 5.11 5.20 4.42* 5.55 5.82 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 29.63 73.61 108.68 51.48* 34.68 5.72 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. ++ The fiscal year end advanced from August 31 to May 31. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charge. (b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2). (c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
Financial highlights (For a share outstanding throughout the period) CLASS B - ------------------------------------------------------------------------------------------------------------------------------------ For the nine months For the period Per-share ended Year ended July 15, 1993+ operating performance Year ended May 31 May 31 August 31 to August 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1995++ 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $9.02 $8.82 $9.00 $8.83 $9.47 $9.39 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .38 .40 .41 .34 .45 .11 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .28 .20 (.18) .17 (.61) .03 - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .66 .60 .23 .51 (.16) .14 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.38) (.40) (.41) (.34) (.45) (.06) - ------------------------------------------------------------------------------------------------------------------------------------ In excess of net realized gain on investments -- -- -- -- (.03) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.38) (.40) (.41) (.34) (.48) (.06) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.30 $9.02 $8.82 $9.00 $8.83 $9.47 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 7.47 6.94 2.60 5.99* (1.80) 1.45* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $32,046 $28,340 $24,050 $21,538 $16,247 $2,974 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.64 1.63 1.67 1.19* 1.60 .19* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 4.10 4.44 4.52 3.89* 4.82 .43* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 29.63 73.61 108.68 51.48* 34.68 5.72 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. ++ The fiscal year end advanced from August 31 to May 31. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charge. (b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2). (c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
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 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period $9.04 $8.85 $8.86 - ------------------------------------------------------------------------------------------------------------------------------------ Investment operations - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income .41 .43 (c) .41 - ------------------------------------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments .30 .19 (.02) - ------------------------------------------------------------------------------------------------------------------------------------ Total from investment operations .71 .62 .39 - ------------------------------------------------------------------------------------------------------------------------------------ Less distributions: - ------------------------------------------------------------------------------------------------------------------------------------ From net investment income (.42) (.43) (.40) - ------------------------------------------------------------------------------------------------------------------------------------ Total distributions (.42) (.43) (.40) - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.33 $9.04 $8.85 - ------------------------------------------------------------------------------------------------------------------------------------ Ratios and supplemental data - ------------------------------------------------------------------------------------------------------------------------------------ Total investment return at net asset value (%)(a) 7.96 7.19 4.44* - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $521 $503 $293 - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.29 1.28 1.09* - ------------------------------------------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 4.47 4.75 4.28* - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio turnover (%) 29.63 73.61 108.68 - ------------------------------------------------------------------------------------------------------------------------------------ + Commencement of operations. * Not annualized. ++ The fiscal year end advanced from August 31 to May 31. (a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charge. (b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2). (c) Per share net investment income has been determined on the basis of the weighted average number of shares outstanding during the period.
Notes to financial statements May 31, 1998 Note 1 Significant accounting policies Putnam Arizona Tax Exempt Income Fund (the "fund") is registered under the Investment Company Act of 1940, as amended, as a non-diversified, open-end management investment company. The fund seeks as high a level of current income exempt from federal income tax and Arizona state income tax as Putnam Investment Management, Inc. ("Putnam Management"), the fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. believes is consistent with preservation of capital by investing primarily in a portfolio of Arizona tax exempt securities. The fund offers class A, class B and class M shares. Class A shares are sold with a maximum front-end sales charge of 4.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge, but pay a higher ongoing distribution fee than class A shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class M shares are sold with a maximum front-end sales charge of 3.25% and pay an ongoing distribution fee that is lower than class B shares and higher than class A shares. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with generally accepted accounting principles and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. A) Security valuation Tax-exempt bonds and notes are stated on the basis of valuations provided by a pricing service, approved by the Trustees, which uses information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining value. The fair value of restricted securities is determined by the Manager following procedures approved by the Trustees, and such valuations and procedures are reviewed periodically by the Trustee. B) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. C) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. D) Line of credit The fund has entered into a committed line of credit with certain banks. This line of credit agreement includes restrictions that the fund maintain an asset coverage ratio of at least 300% and borrowings must not exceed prospectus limitations. For the year ended May 31, 1998, the fund had no borrowings against the line of credit. E) Federal taxes It is the policy of the fund to distribute all of its income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At May 31, 1998, the fund had a capital loss carryover of approximately $1,215,152 available to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration - ------------------ ------------------ $680,643 May 31, 2003 350,629 May 31, 2004 183,880 May 31, 2005 F) Distributions to shareholders Income dividends are recorded daily by the fund and are distributed monthly. Capital gain distributions if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of capital loss carryover, straddle loss deferrals, and unrealized gains and losses on certain futures contracts. 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, 1998, the fund required no such reclassifications. G) Amortization of bond premium and accretion of bond discount Any premium resulting from the purchase of securities in excess of maturity value is amortized on a yield-to-maturity basis. Discounts on original issue discount bonds are accreted according to the yield-to-maturity basis. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average net assets of the fund. Such fee is based on the following annual rates: 0.60% of the first $500 million of average net assets, 0.50% of the next $500 million, 0.45% of the next $500 million, and 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355% of the next of the next $5 billion, 0.34% of the next $5 billion and 0.33% thereafter. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. For the year ended May 31, 1998, fund expenses were reduced by $61,988 under expense offset arrangements with PFTC. Investor servicing and custodian fees reported in the Statement of operations exclude these credits. The fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if it had not entered into such arrangements. Each Trustee of the fund receives an annual Trustee fee, of which $320 has been allocated to the fund, and an additional fee for each Trustee's meeting attended. Trustees who are not interested persons of Putnam Management and who serve on committees of the Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain in the fund and are invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B and class M shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments Inc., for services provided and expenses incurred by it in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets attributable to class A, class B and class M shares, respectively. The Trustees currently limit payment by the fund to an annual rate of 0.20%, 0.85% and 0.50% of the average net assets attributable to class A, class B and class M shares respectively. For the year ended May 31, 1998, Putnam Mutual Funds Corp., acting as underwriter received net commissions of $20,714 and $53 from the sale of class A and class M shares, respectively and $71,193 in contingent deferred sales charges from redemptions of class B shares. A deferred sales charge of up to 1% is assessed on certain redemptions of class A shares that were purchased without an initial sales charge as part of an investment of $1 million or more. For the year ended May 31, 1998, Putnam Mutual Funds Corp., acting as underwriter received $3,552 on class A redemptions. Note 3 Purchase and sales of securities During the year ended May 31, 1998, purchases and sales of investment securities other than short-term investments aggregated $43,899,770 and $49,495,540, respectively. There were no purchases and sales of U.S. government obligations. In determining the net gain or loss on securities sold, the cost of securities has been determined on the identified cost basis. Note 4 Capital shares At May 31, 1998, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended May 31, 1998 - ------------------------------------------------------------ Class A Shares Amount - ------------------------------------------------------------ Shares sold 1,430,266 $13,242,339 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 291,066 2,692,593 - ------------------------------------------------------------ 1,721,332 15,934,932 Shares repurchased (2,361,394) (21,843,453) - ------------------------------------------------------------ Net decrease (640,062) $(5,908,521) - ------------------------------------------------------------ Year ended May 31, 1997 - ------------------------------------------------------------ Class A Shares Amount - ------------------------------------------------------------ Shares sold 1,483,127 $13,346,426 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 313,766 2,821,411 - ------------------------------------------------------------ 1,796,893 16,167,837 Shares repurchased (2,547,785) (22,902,316) - ------------------------------------------------------------ Net decrease (750,892) $(6,734,479) - ------------------------------------------------------------ Year ended May 31, 1998 - ------------------------------------------------------------ Class B Shares Amount - ------------------------------------------------------------ Shares sold 712,440 $6,592,978 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 67,218 620,900 - ------------------------------------------------------------ 779,658 7,213,878 Shares repurchased (477,346) (4,401,245) - ------------------------------------------------------------ Net increase 302,312 $2,812,633 - ------------------------------------------------------------ Year ended May 31, 1997 - ------------------------------------------------------------ Class B Shares Amount - ------------------------------------------------------------ Shares sold 762,312 $6,839,527 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 67,815 609,235 - ------------------------------------------------------------ 830,127 7,448,762 Shares repurchased (413,367) (3,714,173) - ------------------------------------------------------------ Net increase 416,760 $3,734,589 - ------------------------------------------------------------ Year ended May 31, 1998 - ------------------------------------------------------------ Class M Shares Amount - ------------------------------------------------------------ Shares sold 8,994 $82,408 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 1,677 15,530 - ------------------------------------------------------------ 10,671 97,938 Shares repurchased (10,451) (96,237) - ------------------------------------------------------------ Net increase 220 $1,701 - ------------------------------------------------------------ Year ended May 31, 1997 - ------------------------------------------------------------ Class M Shares Amount - ------------------------------------------------------------ Shares sold 36,584 $327,649 - ------------------------------------------------------------ Shares issued in connection with reinvestment of distributions 1,538 13,848 - ------------------------------------------------------------ 38,122 341,497 Shares repurchased (15,692) (141,482) - ------------------------------------------------------------ Net increase 22,430 $200,015 - ------------------------------------------------------------ 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 1999 will show the tax status of all distributions paid to your account in calendar 1998. PUTNAM GROWTH FUNDS Asia Pacific Growth Fund Capital Appreciation Fund [DBL. DAGGER] Capital Opportunities Fund Diversified Equity Trust Europe Growth Fund Global Growth Fund Global Natural Resources Fund Growth Opportunities Fund Health Sciences Trust International Growth Fund International New Opportunities Fund Investors Fund New Opportunities Fund [DBL. DAGGER] OTC & Emerging Growth Fund Research Fund Vista Fund Voyager Fund Voyager Fund II PUTNAM GROWTH AND INCOME FUNDS Balanced Retirement Fund Convertible Income-Growth Trust Equity Income Fund The George Putnam Fund of Boston Global Growth and Income Fund The Putnam Fund for Growth and Income Growth and Income Fund II International Growth and Income Fund New Value Fund Utilities Growth and Income Fund PUTNAM INCOME FUNDS American Government Income Fund Diversified Income Trust Strategic Income Fund * High Quality Bond Fund + Global Governmental Income Trust High Yield Advantage Fund [DBL. DAGGER] High Yield Total Return Fund High Yield Trust [DBL. DAGGER] High Yield Trust II Income Fund Money Market Fund ** Intermediate U.S. Government Income Fund Preferred Income Fund U.S. Government Income Trust PUTNAM TAX-FREE INCOME FUNDS Municipal Income Fund Tax Exempt Income Fund Tax Exempt Money Market Fund** Tax-Free High Yield Fund Tax-Free Insured Fund State tax-free income funds [SECTION MARK] Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio and Pennsylvania State tax-free money market funds [SECTION MARK] California, New York LIFESTAGE SM FUNDS Putnam Asset Allocation Funds--three investment portfolios that spread your money across a variety of stocks, bonds, and money market investments. The three portfolios: Asset Allocation: Balanced Portfolio Asset Allocation: Conservative Portfolio Asset Allocation: Growth Portfolio *Formerly Putnam Diversified Income Trust II +Formerly Putnam Federal Income Trust [DBL. DAGGER]Closed to new investors. Some exceptions may apply. Contact Putnam for details. [SECTION MARK] Not available in all states. **An investment in a money market fund is neither insured nor guaranteed by the U.S. government. These funds are managed to maintain a price of $1.00 per share, although there is no assurance that this price will be maintained in the future. Please call your financial advisor or Putnam at 1-800-225-1581 to obtain a prospectus for any Putnam fund. It contains more complete information, including charges and expenses. Please read it carefully before you invest or send money. Fund information INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Mutual Funds Corp. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP TRUSTEES George Putnam, Chairman William F. Pounds, Vice Chairman Jameson Adkins Baxter Hans H. Estin John A. Hill Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson Donald S. Perkins George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam President Charles E. Porter Executive Vice President Patricia C. Flaherty Senior Vice President John D. Hughes Senior Vice President and Treasurer Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President William J. Curtin Vice President Blake E. Anderson Vice President Jerome J. Jacobs Vice President and Fund Manager William N. Shiebler Vice President John R. Verani Vice President Beverly Marcus Clerk and Assistant Treasurer This report is for the information of shareholders of Putnam Arizona Tax Exempt Income Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary. For more information or to request a prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam Investments' website: http://www.putnaminv.com. Shares of mutual funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution; are not insured by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any other agency; and involve risk, including the possible loss of the principal amount invested. [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 - -------------------- Bulk Rate U.S. Postage PAID Putnam Investments - -------------------- AN044-43765 855/235/2AA 7/98 -----END PRIVACY-ENHANCED MESSAGE-----