Putnam
Arizona
Tax Exempt
Income Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-04
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the past several months, Putnam has introduced a number of
reforms for the benefit of shareholders, including increasing the amount
of disclosure for our funds. For example, in the spring of this year we
began showing expense and risk comparisons in shareholder reports. We
are now including in this report portfolio turnover information for your
fund, which explains how the rate at which a fund buys and sells
portfolio securities might affect its return and its taxable
distributions to shareholders. We are also including additional
disclosure about your fund's management team. Following the Outlook for
Your Fund, we list any changes in your fund's Portfolio Leader and
Portfolio Members during the prior year period, as well as the current
Portfolio Leader's and Portfolio Members' other fund management
responsibilities at Putnam. We also show how much these individuals have
invested in the fund (in dollar ranges). Furthermore, fund ownership (in
dollar ranges) is now being shown for the members of Putnam's Executive
Board.
We are also pleased to announce that three new Trustees have joined your
fund's Board of Trustees. Nominated by your fund's independent Trustees,
these individuals have had outstanding careers as leaders in the
investment management industry. Myra R. Drucker is a Vice Chair of the
Board of Trustees of Sarah Lawrence College and serves as Chair of the
New York Stock Exchange (NYSE) Pension Managers Advisory Committee and
as a Trustee of Commonfund, a not-for-profit asset management firm.
Richard B. Worley is Managing Partner of Permit Capital LLC, an
investment management firm. Both Ms. Drucker and Mr. Worley are
independent Trustees (i.e., Trustees who are not "interested persons" of
your fund or its investment advisor). Charles E. Haldeman, Jr., the
third new Trustee, is President and Chief Executive Officer of Putnam
Investments.
During the period covered by the following report, Putnam Arizona Tax
Exempt Income Fund delivered respectable results. In the following
pages, the fund managers discuss fund performance, strategy, and their
outlook for the remainder of fiscal 2005.
We thank you for your support of the Putnam funds throughout 2004 and
wish you all the best in 2005.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
January 19, 2005
Report from Fund Management
Fund highlights
* For the six months ended November 30, 2004, Putnam Arizona Tax Exempt
Income Fund's total return on class A shares was 3.90% without sales
charges and -0.79% with maximum sales charges reflected.
* The fund's benchmark, the Lehman Municipal Bond Index, returned 4.29%
for the period.
* The average return for the fund's Lipper category, Arizona Municipal
Debt Funds, was 3.85%.
* See the Performance Summary beginning on page 10 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
The longer-term, higher-yielding bonds in your fund did well during the
first six months of its 2005 fiscal year, contributing to positive
returns at net asset value (NAV). These holdings included tobacco
settlement and hospital revenue bonds and Puerto Rico holdings, which
pay income exempt from both federal and Arizona income taxes. However,
the fund's defensive positioning throughout the period limited its
ability to benefit from rising bond prices. Although its results were in
line with the average results of its Lipper category, the fund lagged
its nationally diversified benchmark. We maintained a relatively short
portfolio duration because we expected rising interest rates to depress
bond prices. However, while the Federal Reserve Board (the Fed) boosted
the federal funds rate during the period, these increases were felt
primarily on the short end of the yield curve. Meanwhile, yield-hungry
investors bid up prices on long-term, higher-yielding bonds. While our
cautious strategy has held the fund back, we believe it remains
appropriate since we expect rising rates will depress bond prices.
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TOTAL RETURN FOR
PERIODS ENDED 11/30/04
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Class A
(inception 1/30/91) NAV POP
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6 months 3.90% -0.79%
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1 year 3.36 -1.27
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5 years 32.91 26.98
Annual average 5.85 4.89
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10 years 82.10 73.84
Annual average 6.18 5.69
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Annual average
(life of fund) 6.02 5.67
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Data is historical. Past performance does not guarantee future results.
More recent returns may be less or more than those shown. Investment
return and principal value will fluctuate and you may have a gain or a
loss when you sell your shares. Performance assumes reinvestment of
distributions and does not account for taxes. Returns at NAV do not
reflect a sales charge of 4.50%. For the most recent month-end
performance, visit www.putnaminvestments.com. For a portion of the
period, this fund limited expenses, without which returns would have
been lower. A 2% short-term trading fee may be applied to shares
exchanged or sold within 5 days of purchase.
FUND PROFILE
Putnam Arizona Tax Exempt Income Fund seeks to provide as high a level
of current income free from federal income tax and state of Arizona
personal income tax as we believe to be consistent with the preservation
of capital. It may be suitable for Arizona investors seeking tax-free
income through a diversified portfolio of municipal bonds primarily
issued in Arizona.
Market overview
Over the past six months, most municipal yields fell and bond prices,
which move in the opposite direction of yields, rose. Early 2004 was
marked by rising yields, as bond market investors were anticipating that
the Federal Reserve Board would need to raise short-term interest rates.
Interestingly, when the Fed announced what had been a widely anticipated
25-basis-point (one quarter of a percentage point) increase at its June
30 meeting, the bond market changed course. Yields of bonds with
maturities greater than two years trended downward. At the same time,
yields rose for bonds with very short maturities (two years and
shorter). This resulted in a flattening of the yield curve -- that is,
short- and long-term interest rates began to converge.
Among uninsured bonds and bonds rated A and below, yield spreads
generally tightened and bond prices rose. These higher-yielding
securities continued to provide attractive income streams that also
contributed to the fund's total return. Municipal bonds issued by the
State of California were generally strong performers, as the economy
improved and rating agencies upgraded the state's credit rating. Yields
on tobacco settlement bonds varied with the results of ongoing legal
battles, but declined overall for the period and their prices rose
accordingly. Airline-related industrial development bonds (IDBs)
performed poorly in general as the industry continued to face financial
difficulties that were made worse by record high oil prices. New York
City general obligation bonds rose in price over the past six months,
reflecting a dearth of new issuance as well as investors' confidence in
improving economic prospects for the city.
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MARKET SECTOR PERFORMANCE 6 MONTHS ENDED 11/30/04
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Bonds
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Lehman Municipal Bond Index (tax-exempt bonds) 4.29%
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Lehman Aggregate Bond Index (broad bond market) 3.82%
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Lehman Intermediate Treasury Bond Index
(intermediate-maturity U.S. Treasury bonds) 1.92%
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JP Morgan Global High Yield Index (global high-yield
corporate bonds) 9.02%
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Equities
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S&P 500 Index (broad stock market) 5.68%
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Russell 2000 Index (stocks of small and midsize companies) 12.18%
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MSCI EAFE Index (international stocks) 12.58%
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These indexes provide an overview of performance in different market
sectors for the six months ended 11/30/04.
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Strategy overview
Because we believe that interest rates will rise, we are positioning the
portfolio more defensively. This involves shortening the fund's
duration, which means reducing its sensitivity to changes in interest
rates. Because we believe the yield curve will continue to flatten, we
have concentrated our bond sales in shorter and intermediate maturities,
which we believe will underperform. We also used interest rate swaps to
manage the fund's duration. Meanwhile, we continued to trim and
diversify the fund's positions in uninsured bonds and bonds rated A and
below, which have performed strongly. The fund maintained an overweight
position in tobacco settlement bonds relative to its benchmark. We
closely monitored developments in this sector. The fund had no exposure
to airline-related IDBs during the period, a positive amid continued
difficulty in this sector.
In previous fiscal years, the fund emphasized non-callable bonds --
bonds that the issuer is not permitted to redeem (or call) before the
maturity date. These issues performed well as rates fell through March
2004, but during the spring we began to moderate this position, selling
non-callable bonds and purchasing longer callable issues. We believe
these callable bonds may perform better than non-callable bonds if
interest rates rise and the yield curve flattens further.
[GRAPHIC OMITTED: horizontal bar chart THE FUND'S MATURITY AND DURATION
COMPARED]
THE FUND'S MATURITY AND DURATION COMPARED
5/31/04 11/30/04
Average effective
maturity in years 8.3 6.3
Duration in years 5.9 4.9
Footnotes read:
This chart compares changes in the fund's duration (a measure of its
sensitivity to interest-rate changes) and its average effective
maturity (a weighted average of the holdings' maturities).
Average effective maturity also takes into account put and call
features, where applicable, and reflects prepayments for mortgage-backed
securities.
How fund holdings affected performance
One of the holdings the fund acquired in June -- a Maricopa County,
Arizona, School District general obligation bond issued for the Dysart
Unified School District and maturing July 1, 2023 -- was prerefunded
shortly after we purchased it. Prerefunding occurs when an issuer raises
the money to refinance an older, higher-coupon bond by issuing new bonds
at current lower interest rates. This money is then invested in a secure
investment, usually U.S. Treasury securities, that mature at the older
bond's first call date, when it is used to pay off the old bonds. This
added security is often perceived as a credit upgrade by the market, and
can boost the price of the older bonds, which occurred in this case.
No other individual holding or sector had a strong influence on this
fund during the fiscal period, on either the positive or negative side.
In part, this reflects our emphasis on diversification, spreading out
risks over smaller positions among a larger number of holdings. The
best-performing bonds were higher-yielding issues maturing in the 15- to
20-year range. However, one position, Virgin Island's Tobacco Settlement
Financing bonds, which mature in 2031, benefited the fund. (Income from
bonds issued by U.S. protectorates, like the Virgin Islands and Puerto
Rico, is tax exempt in all U.S. states.) Payments from tobacco
settlement bonds are secured by income promised to various states
through settlements from tobacco companies. This income could be
jeopardized as a result of large judgments against the companies, and
market sentiment with regard to this sector has tended to shift from
concern about litigation to optimism based on their attractive yields.
The state of Arizona does not issue any tobacco settlement bonds, but
the fund's Virgin Island holdings allow shareholders to benefit from the
high yields on these bonds without incurring income tax liability.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW
Aaa (74.3%)
Aa (7.7%)
A (5.9%)
Baa (8.7%)
Ba (1.8%)
B or lower (0.2%)
VMIG1 (1.4%)
Footnote reads:
As a percentage of market value as of 11/30/04. A bond rated Baa or
higher is considered investment grade. The chart reflects Moody's
ratings; percentages may include bonds not rated by Moody's but
considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
The fund also benefited from some general obligation (GO) bonds issued
for the Commonwealth of Puerto Rico. These bonds had a number of
advantages in recent market conditions. First, they mature in 2023, and
bonds with approximately 20 years until maturity outperformed bonds with
shorter and longer maturities. Second, Puerto Rico bonds benefited
indirectly from the improvement in the California municipal bond market.
Investors began to bid up prices of California bonds a few months ago
when independent rating agencies upgraded that state's bond ratings.
When this made the market too rich for some investors who had been
considering California municipal bonds, they turned to Puerto Rico in
search of opportunities for tax-free income. While the insured status of
the Puerto Rico bonds did not help their performance this year, it
remains an attractive feature that can help bond performance in the
future when bonds with lower credit ratings underperform.
High-yielding industrial development bonds (IDBs) have also benefited
from increased investor demand. IDBs are issued by municipalities but
backed by the credit of the company benefiting from the financing.
Investor perceptions about the backing company's health, or that of its
industry group, affect the prices of these bonds, rather than the rating
of the issuing municipality. We have avoided the ailing airline
industry, but the health-care sector has provided several attractive
opportunities to earn high returns. Examples in the fund's current
portfolio include bonds issued for Scottsdale Healthcare, Yavapai
Regional Medical Center, and John C. Lincoln Regional Health Network. In
the past, the health-care industry has been troubled by prospects of
declining revenues that stem from Medicare and Medicaid cuts, but,
judging from the lack of discussion of this topic in the period leading
up to the recent U.S. elections, investors appear to have become more
comfortable with the status quo.
Other higher-yielding bonds in the portfolio include Midwestern
University revenue bonds, and Snowflake, Arizona Excise Tax revenue
bonds. Both of these holdings performed well for the fund, but neither
one is a large position, reflecting our policy of establishing smaller,
more diversified positions to help spread risk.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary
in the future.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
team's plans for responding to them.
Judging from the flattened yield curve, the bond market appears to have
largely shrugged off the recent Fed rate hikes. However, we believe that
interest rates all along the yield curve are more likely to rise than
fall. The Fed has raised the federal funds rate four times in
25-basis-point increments since June 2004, bringing it to two percent at
the end of the period. We believe the Fed will continue to raise
short-term rates incrementally through mid-2005, actions that are likely
to cause rising yields among bonds with shorter maturities. This also
suggests further flattening of the yield curve. The fund is positioned
defensively in terms of duration, and we will continue to monitor and
adjust the fund's duration as seems appropriate. We believe inflation
will remain low, despite the threat posed by high oil prices. We also
anticipate that the rate of GDP growth will slow during the next two
quarters, as the effects of the Fed's tightening policy are felt.
In general, these signs indicate that we are headed into a potentially
more challenging environment for bond investing. Our task will be to
continue to search for the most attractive opportunities among
tax-exempt securities, and to balance the pursuit of attractive current
income with prudent risk management.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. This fund
concentrates its investments in one state and in fewer issuers and
involves more risk than a fund that invests more broadly. Capital gains,
if any, are taxable for federal and, in most cases, state purposes. For
some investors, investment income may be subject to the federal
alternative minimum tax. Income from federally exempt funds may be
subject to state and local taxes. Mutual funds that invest in bonds are
subject to certain risks, including interest-rate risk, credit risk, and
inflation risk. As interest rates rise, the prices of bonds fall.
Long-term bonds are more exposed to interest-rate risk than short-term
bonds. Unlike bonds, bond funds have ongoing fees and expenses. Tax-free
funds may not be suitable for IRAs and other non-taxable accounts.
Your fund's management
Your fund is managed by the members of the Putnam Tax Exempt
Fixed-Income Team. David Hamlin is the Portfolio Leader, and Paul Drury,
Susan McCormack, and James St. John are Portfolio Members of your fund.
The Portfolio Leader and Portfolio Members coordinate the team's
management of the fund.
For a complete listing of the members of the Putnam Tax Exempt
Fixed-Income Team, including those who are not Portfolio Leaders or
Portfolio Members of your fund, visit Putnam's Individual Investor Web
site at www.putnaminvestments.com.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Members have invested in the fund (in dollar ranges).
Information shown is for the current and prior year ended November 30.
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FUND PORTFOLIO LEADER AND PORTFOLIO MEMBERS
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$1 - $10,001 - $50,001- $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
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David Hamlin 2004 *
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Portfolio Leader 2003 *
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Paul Drury 2004 *
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Portfolio Member 2003 *
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Susan McCormack 2004 *
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Portfolio Member 2003 *
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James St. John 2004 *
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Portfolio Member 2003 *
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Other funds managed by the Portfolio Leader and Portfolio Members
David Hamlin is the Portfolio Leader and Paul Drury, Susan McCormack,
and James St. John are Portfolio Members for Putnam's tax-exempt funds
for the following states: California, Florida, Massachusetts, Michigan,
Minnesota, New Jersey, New York, Ohio, and Pennsylvania. The same group
also manages Putnam AMT-Free Insured Municipal Fund*, Putnam California
Investment Grade Municipal Trust, Putnam High Yield Municipal Trust,
Putnam Investment Grade Municipal Trust, Putnam Managed Municipal Income
Trust, Putnam Municipal Bond Fund, Putnam Municipal Income Fund, Putnam
Municipal Opportunities Trust, Putnam New York Investment Grade
Municipal Trust, Putnam Tax Exempt Income Fund, Putnam Tax-Free Health
Care Fund, and Putnam Tax-Free High Yield Fund.
David Hamlin, Paul Drury, Susan McCormack, and James St. John may also
manage other accounts advised by Putnam Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended November 30, 2004, Portfolio Member Richard Wyke
left your fund's management team.
* Formerly Putnam Tax-Free Insured Fund.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is for
the current and prior year ended December 31.
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PUTNAM EXECUTIVE BOARD
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$1 - $10,001 - $50,001- $100,001
Year $0 $10,000 $50,000 $100,000 and over
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Philippe Bibi 2004 *
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Chief Technology Officer 2003 *
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John Boneparth 2004 *
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Head of Global Institutional Mgmt 2003 *
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Kevin Cronin 2004 *
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Deputy Head of Investments N/A
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Charles Haldeman, Jr. 2004 *
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President and CEO 2003 *
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Amrit Kanwal 2004 *
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Chief Financial Officer N/A
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Steven Krichmar 2004 *
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Chief of Operations N/A
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Francis McNamara, III 2004 *
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General Counsel N/A
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Richard Monaghan 2004 *
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Head of Retail Management 2003 *
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Stephen Oristaglio 2004 *
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Head of Investments 2003 *
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Richard Robie, III 2004 *
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Chief Administrative Officer N/A
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N/A indicates the individual was not a member of Putnam's Executive
Board as of 12/31/03.
Performance summary
This section shows your fund's performance during the first half of its
fiscal year, which ended November 30, 2004. In accordance with
regulatory requirements, we also include performance for the most
current calendar quarter-end. Performance should always be considered in
light of a fund's investment strategy. Data represents past performance.
Past performance does not guarantee future results. More recent returns
may be less or more than those shown. Investment return and principal
value will fluctuate and you may have a gain or a loss when you sell
your shares. For the most recent month-end performance, please visit
www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 11/30/04
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Class A Class B Class M
(inception dates) (1/30/91) (7/15/93) (7/3/95)
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NAV POP NAV CDSC NAV POP
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6 months 3.90% -0.79% 3.57% -1.43% 3.87% 0.43%
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1 year 3.36 -1.27 2.58 -2.38 3.07 -0.25
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5 years 32.91 26.98 28.68 26.68 31.06 26.87
Annual average 5.85 4.89 5.17 4.84 5.56 4.88
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10 years 82.10 73.84 71.01 71.01 77.14 71.29
Annual average 6.18 5.69 5.51 5.51 5.88 5.53
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Annual average
(life of fund) 6.02 5.67 5.30 5.30 5.69 5.43
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 4.50% and 3.25%, respectively. Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Performance for class B and M shares
before their inception is derived from the historical performance of
class A shares, adjusted for the applicable sales charge (or CDSC) and
higher operating expenses for such shares.
For a portion of the period, this fund limited expenses, without which
returns would have been lower.
A 2% short-term trading fee may be applied on shares exchanged or sold
within 5 days of purchase.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/04
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Lehman Lipper Arizona
Municipal Municipal Debt Funds
Bond Index category average*
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6 months 4.29% 3.85%
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1 year 4.07 3.49
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5 years 38.84 30.97
Annual average 6.78 5.54
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10 years 99.68 84.11
Annual average 7.16 6.28
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Annual average
(life of fund) 6.86 6.10
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 6-month and 1-, 5-, and 10-year periods ended 11/30/04, there
were 35, 35, 31, and 18 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 6 MONTHS ENDED 11/30/04
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Class A Class B Class M
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Distributions (number) 6 6 6
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Income1 $0.192937 $0.162642 $0.179328
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Capital gains 1 -- -- --
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Total $0.192937 $0.162642 $0.179328
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Share value: NAV POP NAV NAV POP
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5/31/04 $9.10 $9.53 $9.09 $9.11 $9.42
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11/30/04 9.26 9.70 9.25 9.28 9.59
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Current return (end of period)
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Current dividend rate 2 4.26% 4.07% 3.61% 3.96% 3.83%
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Taxable equivalent 3 6.90 6.59 5.85 6.42 6.21
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Current 30-day SEC yield
(with expense limitation) 4,5 3.21 3.06 2.56 2.91 2.81
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Taxable equivalent 3 5.20 4.96 4.15 4.71 4.55
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Current 30-day SEC yield
(without expense limitation) 4 3.07 2.93 2.42 2.77 2.68
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1 Capital gains, if any, are taxable for federal and, in most cases,
state purposes. For some investors, investment income may be subject to
the federal alternative minimum tax. Income from federally exempt funds
may be subject to state and local taxes.
2 Most recent distribution, excluding capital gains, annualized and
divided by NAV or POP at end of period.
3 Assumes maximum 38.28% federal and state combined tax rate for 2004.
Results for investors subject to lower tax rates would not be
advantageous.
4 Based only on investment income, calculated using SEC guidelines.
5 For a portion of the period, this fund limited expenses, without which
yields would have been lower.
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TOTAL RETURN FOR PERIODS ENDED 12/31/04 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class M
(inception dates) (1/30/91) (7/15/93) (7/3/95)
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NAV POP NAV CDSC NAV POP
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6 months 4.79% 0.06% 4.34% -0.66% 4.52% 1.07%
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1 year 3.50 -1.11 2.83 -2.14 3.20 -0.21
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5 years 35.95 29.76 31.61 29.61 33.89 29.55
Annual average 6.34 5.35 5.65 5.32 6.01 5.31
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10 years 79.66 71.68 68.71 68.71 74.51 68.91
Annual average 6.03 5.55 5.37 5.37 5.73 5.38
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Annual average
(life of fund) 6.07 5.72 5.34 5.34 5.72 5.47
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Understanding your
fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. In the most
recent six-month period, your fund limited these expenses; had it not
done so, expenses would have been higher. Using the information below,
you can estimate how these expenses affect your investment and compare
them with the expenses of other funds. You may also pay one-time
transaction expenses, including sales charges (loads) and redemption
fees, which are not shown in this section and would have resulted in
higher total expenses. For more information, see your fund's prospectus
or talk to your financial advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000
investment in Putnam Arizona Tax Exempt Income Fund from June 1, 2004,
to November 30, 2004. It also shows how much a $1,000 investment would
be worth at the close of the period, assuming actual returns and
expenses.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 11/30/04
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Class A Class B Class M
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Expenses paid per
$1,000* $4.29 $7.60 $5.83
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Ending value (after
expenses) $1,039.00 $1,035.70 $1,038.70
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* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended
11/30/04. The expense ratio may differ for each share class (see the
table at the bottom of the next page). Expenses are calculated by
multiplying the expense ratio by the average account value for the
period; then multiplying the result by the number of days in the period;
and then dividing that result by the number of days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended
November 30, 2004, use the calculation method below. To find the value
of your investment on June 1, 2004, go to www.putnaminvestments.com and
log on to your account. Click on the "Transaction History" tab in your
Daily Statement and enter 06/01/2004 in both the "from" and "to" fields.
Alternatively, call Putnam at 1-800-225-1581.
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HOW TO CALCULATE THE EXPENSES YOU PAID
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Total
Value of your Expenses paid expenses
investment on 6/1/04 [DIV] $1,000 X per $1,000 = paid
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Example Based on a $10,000 investment in class A shares of your fund.
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$10,000 [DIV] $1,000 X $4.29 (see table above) = $42.90
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Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines
to help investors assess fund expenses. Per these guidelines, the table
below shows your fund's expenses based on a $1,000 investment, assuming
a hypothetical 5% annualized return. You can use this information to
compare the ongoing expenses (but not transaction expenses or total
costs) of investing in the fund with those of other funds. All mutual
fund shareholder reports will provide this information to help you make
this comparison. Please note that you cannot use this information to
estimate your actual ending account balance and expenses paid during the
period.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended
11/30/04
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Class A Class B Class M
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Expenses paid per
$1,000* $4.26 $7.54 $5.77
- ------------------------------------------------------------------------
Ending value (after
expenses) $1,020.86 $1,017.60 $1,019.35
- ------------------------------------------------------------------------
* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended
11/30/04. The expense ratio may differ for each share class (see the
table at the bottom of this page). Expenses are calculated by
multiplying the expense ratio by the average account value for the
period; then multiplying the result by the number of days in the period;
and then dividing that result by the number of days in the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with industry averages, as
determined by Lipper, an independent fund-rating agency that ranks funds
relative to others that Lipper considers to have similar investment
styles or objectives. The expense ratio for each share class shown below
indicates how much of your fund's net assets have been used to pay
ongoing expenses during the period.
- ------------------------------------------------------------------------
EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
- ------------------------------------------------------------------------
Class A Class B Class M
- ------------------------------------------------------------------------
Your fund's annualized
expense ratio 0.84% 1.49% 1.14%
- ------------------------------------------------------------------------
Average annualized expense
ratio for Lipper peer
group+ 0.81% 1.46% 1.11%
- ------------------------------------------------------------------------
+ Average of the expenses of front-end load funds viewed by Lipper as having
the same investment classification or objective as the fund, as of 9/30/04,
calculated in accordance with Lipper's standard reporting methodology for
comparing expenses within a given universe (excluding 12b-1 fees and without
giving effect to any expense offset and brokerage service arrangements that
may reduce fund expenses). To facilitate comparison, Putnam has adjusted
this average to reflect the 12b-1 fees carried by each class of shares. The
peer group may include funds that are significantly larger or smaller than
the fund, which may limit the comparability of the fund's expenses to the
Lipper average.
Understanding your fund's
portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries,
economies, and markets. Portfolio turnover is a measure of how often a
fund's managers buy and sell securities for your fund. A portfolio
turnover of 100%, for example, means that the managers sold and replaced
securities valued at 100% of a fund's assets within a one-year period.
Funds with high turnover may be more likely to generate capital gains
and dividends that must be distributed to shareholders as taxable
income. High turnover may also cause a fund to pay more brokerage
commissions and other transaction costs, which may detract from
performance.
Funds that invest in bonds may have higher turnover than funds that
invest only in stocks. Short-term bond funds tend to have higher
turnover than longer-term bond funds, because shorter-term bonds will
mature or be sold more frequently than longer-term bonds. You can use
the table below to compare your fund's turnover with the average
turnover for funds in its Lipper category.
- ------------------------------------------------------------------------------
TURNOVER COMPARISONS
percentage of holdings that change every year
- ------------------------------------------------------------------------------
2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------
Putnam Arizona Tax Exempt
Income Fund 6% 37% 21% 24% 11%
- ------------------------------------------------------------------------------
Lipper Arizona Municipal
Debt Funds category
average 29% 31% 35% 41% 45%
- ------------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on May 31. Turnover data for the fund's Lipper
category is calculated based on the average of the turnover of each fund
in the category for its fiscal year ended during the indicated year.
Fiscal years vary across funds in the Lipper category, which may limit
the comparability of the fund's portfolio turnover rate to the Lipper
average. Comparative data for 2004 is based on information available as
of 9/30/04.
Risk comparison
As part of new initiatives to enhance disclosure, we are including a
risk comparison to help you understand how your fund compares with other
funds. The comparison utilizes a risk measure developed by Morningstar,
an independent fund-rating agency. This risk measure is referred to as
the fund's Overall Morningstar Risk.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 0.19
Municipal bond
fund average 0.21
0% INCREASING RISK 100%
Your fund's Overall Morningstar Risk is shown alongside that of the
average fund in its broad asset class, as determined by Morningstar. The
risk bar broadens the comparison by translating the fund's Overall
Morningstar Risk into a percentile, which is based on the fund's ranking
among all funds rated by Morningstar as of December 31, 2004. A higher
Overall Morningstar Risk generally indicates that a fund's monthly
returns have varied more widely.
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those
measures are weighted and averaged to produce the fund's Overall
Morningstar Risk. The information shown is provided for the fund's class
A shares only; information for other classes may vary. Overall
Morningstar Risk is based on historical data and does not indicate
future results. Morningstar does not purport to measure the risk
associated with a current investment in a fund, either on an absolute
basis or on a relative basis. Low Overall Morningstar Risk does not mean
that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein
(1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate,
complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information.
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.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of pur chase. POP performance
figures shown here assume the 4.50% maximum sales charge for class A
shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B shares and assumes redemption at the end of
the period. Your fund's class B CDSC declines from a 5% maximum during
the first year to 1% during the sixth year. After the sixth year, the
CDSC no longer applies.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without 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 (except on certain
redemptions of shares bought without an initial sales charge).
Comparative indexes
JP Morgan Global High Yield Index is an unmanaged index used to mirror
the investable universe of the U.S. dollar global high-yield corporate
debt market of both developed and emerging markets.
Lehman Aggregate Bond Index is an unmanaged index used as a general
measure of U.S. fixed-income securities.
Lehman Intermediate Treasury Bond Index is an unmanaged index of
Treasury bonds with maturities between 1 and 10 years.
Lehman Municipal Bond Index is an unmanaged index of long-term
fixed-rate investment-grade tax-exempt bonds.
Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged
index of international stocks from Europe, Australasia, and the Far
East.
Russell 2000 Index is an unmanaged index of common stocks that generally
measure performance of small to midsize companies within the Russell
3000 Index.
S&P 500 Index is an unmanaged index of common stock performance.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
A note about duplicate mailings
In response to investors' requests, the SEC has modified mailing
regulations for proxy statements, semiannual and annual reports, and
prospectuses. Putnam is now able to send a single copy of these
materials to customers who share the same address. This change will
automatically apply to all shareholders except those who notify us. If
you would prefer to receive your own copy, please call Putnam at
1-800-225-1581.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
For periods ending on or after July 9, 2004, the fund will file a
complete schedule of its portfolio holdings with the SEC for the first
and third quarters of each fiscal year on Form N-Q. Shareholders may
obtain the fund's Forms N-Q on the SEC's Web site at www.sec.gov. In
addition, the fund's Forms N-Q may be reviewed and copied at the SEC's
public reference room in Washington, D.C. You may call the SEC at
1-800-SEC-0330 for information about the SEC's Web site or the operation
of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
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.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or loss
the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal period.
Statement of changes in net assets shows how the fund's net assets were
affected by the fund's net investment gain or loss, 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.
The fund's portfolio
November 30, 2004 (Unaudited)
Key to Abbreviations
- -------------------------------------------------------------------------------
AMBAC AMBAC Indemnity Corporation
CLI Insd. Connie Lee Insurance Insured
COP Certificate of Participation
FGIC Financial Guaranty Insurance Company
FHA Insd. Federal Housing Administration Insured
FHLMC Coll. Federal Home Loan Mortgage Corporation Collateralized
FNMA Coll. Federal National Mortgage Association Collateralized
FSA Financial Security Assurance
GNMA Coll. Government National Mortgage Association Collateralized
G.O. Bonds General Obligation Bonds
MBIA MBIA Insurance Company
U.S. Govt. Coll. U.S. Government Collateralized
VRDN Variable Rate Demand Notes
Municipal bonds and notes (96.4%) (a)
Principal amount Rating (RAT) Value
Arizona (90.5%)
- -------------------------------------------------------------------------------
$750,000 Apache Cnty., Indl. Dev. Auth. Poll.
Control Rev. Bonds (Tucson Elec.
Pwr. Co.), Ser. A, 5.85s, 3/1/28 Ba3 $750,083
1,500,000 AZ Agricultural Impt. & Pwr. Dist.
Elec. Syst. Rev. Bonds (Salt River),
Ser. B, 5s, 1/1/22 Aa2 1,572,015
1,000,000 AZ Hlth. Fac. Auth. Hosp. Syst.
Rev. Bonds (John C. Lincoln Hlth.
Network), 7s, 12/1/25 BBB 1,104,210
400,000 AZ Hlth. Fac. Auth.
Rev. Bonds (Bethesda Foundation),
Ser. A, 6.4s, 8/15/27 BB-/P 395,236
AZ School Fac. Board Rev. Bonds
(State School Impt.)
1,000,000 5 1/4s, 7/1/20 Aaa 1,080,990
1,050,000 5 1/4s, 7/1/14 Aaa 1,158,854
AZ State U. COP
1,000,000 (AZ State U. Project-2002), MBIA,
5.1s, 7/1/25 Aaa 1,036,830
1,000,000 (Research Infrastructure), AMBAC,
5s, 9/1/30 Aaa 1,015,350
500,000 AZ State U. Rev. Bonds, FGIC,
5 7/8s, 7/1/25 Aaa 554,975
1,000,000 AZ Tourism & Sports Auth. Tax
Rev. Bonds (Multi-Purpose Stadium
Fac.), Ser. A, MBIA, 5 3/8s, 7/1/19 Aaa 1,103,560
1,750,000 AZ Wtr. Infrastructure Fin. Auth.
Rev. Bonds (Wtr. Quality), Ser. A,
5s, 10/1/22 Aaa 1,848,683
150,000 Casa Grande, Indl. Dev. Auth.
Rev. Bonds (Casa Grande Regl. Med.
Ctr.), Ser. A, 7 1/4s, 12/1/19 B-/P 156,026
1,450,000 Chandler, G.O. Bonds, FGIC, 8s,
7/1/10 Aaa 1,803,742
1,100,000 Chandler, St. & Hwy. User
Rev. Bonds, MBIA, 8s, 7/1/11 Aaa 1,396,703
2,150,000 Chandler, Wtr. & Swr. Rev. Bonds,
FGIC, 8s, 7/1/14 Aaa 2,830,604
Cochise Cnty., Indl. Dev. Auth.
Rev. Bonds
2,015,000 (Sierra Vista Cmnty. Hosp.), Ser. C,
8 1/4s, 12/1/14 AAA 2,095,761
490,000 (Sierra Vista Regl. Hlth. Ctr.),
Ser. A, 6.2s, 12/1/21 BB+/P 498,257
1,000,000 Glendale, Dev. Auth. Edl. Fac.
Rev. Bonds (American Graduate School
Intl.), CLI Insd., U.S. Govt. Coll.,
7 1/8s, 7/1/20 AAA 1,039,340
1,500,000 Glendale, Indl. Dev. Auth. Hosp.
Rev. Bonds (Midwestern U.), Ser. A,
5 7/8s, 5/15/31 A- 1,581,705
1,600,000 Glendale, Wtr. & Swr. Rev. Bonds,
AMBAC, 5s, 7/1/28 Aaa 1,635,776
1,000,000 Greenlee Cnty., Indl. Dev. Auth.
Poll. Control Rev. Bonds (Phelps
Dodge Corp.), 5.45s, 6/1/09 Baa3 1,020,000
500,000 Maricopa Cnty., Hosp. Rev. Bonds
(Sun Hlth. Corp.), 6 1/8s, 4/1/18 Baa1 521,425
3,500,000 Maricopa Cnty., Indl. Dev. Auth.
Hosp. Fac. Rev. Bonds (Samaritan
Hlth. Svcs.), Ser. A, MBIA, 7s,
12/1/16 Aaa 4,360,230
Maricopa Cnty., Indl. Dev. Auth.
Multi-Fam. Hsg. Rev. Bonds
2,670,000 (Laguna Point Apt.), 6 3/4s, 7/1/19 A 2,726,230
1,000,000 (Villas at Augusta), GNMA Coll.,
5.95s, 10/20/40 Aaa 1,053,160
1,000,000 Maricopa Cnty., Poll. Control
Rev. Bonds (Public Service Co. NM),
Ser. A, 6.3s, 12/1/26 Baa2 1,039,410
1,000,000 Maricopa Cnty., Pub. Fin. Corp.
Rev. Bonds, AMBAC, 5 1/2s, 7/1/14 Aaa 1,107,900
Maricopa Cnty., School Dist. G.O.
Bonds
2,000,000 (No. 69 Paradise Valley-Project of
1994), Ser. B, MBIA, 7s, 7/1/12 Aaa 2,462,320
1,500,000 (No. 69 Paradise Valley), MBIA,
6.35s, 7/1/10 Aaa 1,748,745
1,500,000 (No. 69 Paradise Valley-Project of
1994), Ser. C, FSA, 6 1/4s, 7/1/14 Aaa 1,800,690
305,000 (No. 41 Gilbert), FSA, 5.8s, 7/1/14 Aaa 355,179
320,000 (No. 006 WA Elementary 2004 School
Impt.), FSA, 5s, 7/1/17 Aaa 340,947
505,000 (No. 006 WA Elementary 2004 School
Impt.), FSA, 5s, 7/1/17
(Prerefunded) Aaa 558,565
175,000 (No. 006 WA Elementary 2004 School
Impt.), Ser. A, FSA, 5s, 7/1/17 Aaa 193,562
665,000 (No. 11 Peoria Unified 2003 School
Impt.), FGIC, 5s, 7/1/09 Aaa 726,240
20,000 (No. 11 Peoria Unified 2003 School
Impt.), FGIC, 5s, 7/1/09
(Prerefunded) Aaa 21,932
315,000 (No. 11 Peoria Unified School
Impt.), FGIC, U.S. Govt. Coll., 5s,
7/1/09 Aaa 345,426
1,000,000 (No. 89 Dysart Unified School Impt.
2002), Ser. B, FSA, 5s, 7/1/23 AAA 1,109,970
1,500,000 Mesa, Indl. Dev. Auth. Rev. Bonds
(Discovery Hlth. Syst.), Ser. A,
MBIA, 5 3/4s, 1/1/25 Aaa 1,616,700
1,000,000 Mesa, Util. Syst. Rev. Bonds, FGIC,
7 1/4s, 7/1/12 Aaa 1,247,680
2,000,000 Mohave Cnty., COP (Mohave
Administration Bldg.), AMBAC,
5 1/4s, 7/1/19 Aaa 2,198,900
1,380,000 Mohave Cnty., Indl. Dev. Auth.
Multi-Fam. Mtge. Rev. Bonds (Copper
Ridge Apts.), FHA Insd., 7 3/8s,
4/1/32 AAA 1,385,465
Northern AZ U. Rev. Bonds, FGIC
1,725,000 6 1/2s, 6/1/09 Aaa 1,989,632
1,000,000 5s, 6/1/34 Aaa 1,011,210
1,195,000 Oro Valley, Muni. Property Corp.
Rev. Bonds (Sr. Lien Wtr.), MBIA,
5s, 7/1/23 Aaa 1,243,995
Phoenix, Civic Impt. Corp. Arpt.
Rev. Bonds
1,000,000 (Sr. Lien), Ser. B, FGIC, 5 3/4s,
7/1/19 Aaa 1,099,670
1,970,000 Ser. A, FSA, 5 1/4s, 7/1/14 Aaa 2,116,115
1,620,000 Ser. A, FSA, 5 1/4s, 7/1/13 Aaa 1,744,708
2,010,000 Ser. A, FSA, 5 1/4s, 7/1/11 Aaa 2,174,659
1,000,000 Phoenix, Civic Impt. Corp. Excise
Tax Rev. Bonds (Sr. Lien-Muni.
Courthouse), Ser. A, 5 1/4s, 7/1/24 AAA 1,056,690
1,000,000 Phoenix, Civic Impt. Corp.
Wastewater Syst. Rev. Bonds, FGIC,
6s, 7/1/24 Aaa 1,158,120
Phoenix, G.O. Bonds
1,000,000 6s, 7/1/10 Aa1 1,042,500
1,000,000 5 3/8s, 7/1/25 Aa1 1,064,500
1,000,000 5 1/4s, 7/1/22 Aa1 1,064,990
1,500,000 Ser. B, 5s, 7/1/27 Aa1 1,528,350
1,600,000 Phoenix, Hsg. Mtge. Fin. Corp. Mtge.
Rev. Bonds (Section 8 Assistance),
Ser. A, MBIA, FHA Insd., 6.9s,
1/1/23 Aaa 1,618,720
1,000,000 Phoenix, Indl. Dev. Auth. Govt.
Office Lease Rev. Bonds (Capitol
Mall, LLC II), AMBAC, 5s, 9/15/28 Aaa 1,015,790
1,400,000 Phoenix, Indl. Dev. Auth. VRDN
(Valley of the Sun YMCA), 1.67s,
1/1/31 A-1+ 1,400,000
405,000 Pima Cnty., Indl Dev. Auth. Single
Fam. Mtge. Rev. Bonds, FHLMC Coll.,
FNMA Coll., GNMA Coll., 6.95s,
11/1/23 AAA 409,872
1,000,000 Pima Cnty., Unified School Dist.
G.O. Bonds (No. 1 Tucson), FGIC,
7 1/2s, 7/1/08 Aaa 1,164,110
1,500,000 Scottsdale, G.O. Bonds (Projects
1999 & 2000), 5s, 7/1/24 Aaa 1,545,690
Scottsdale, Indl. Dev. Auth. Hosp.
Rev. Bonds
1,000,000 (Scottsdale Memorial Hosp.), Ser. A,
AMBAC, 6 1/8s, 9/1/17 Aaa 1,101,790
500,000 (Scottsdale Hlth. Care), 5.8s,
12/1/31 A3 520,745
1,000,000 (Scottsdale Hlth. Care), 5.7s,
12/1/21 A3 1,066,000
700,000 Scottsdale, Indl. Dev. Auth.
Rev. Bonds (Westminster Village 1st.
Mtg.), Ser. A, U.S. Govt. Coll.,
8 1/4s, 6/1/15 AAA/P 734,846
1,210,000 Snowflake, Excise Tax Rev. Bonds,
5s, 7/1/18 BBB+ 1,220,878
South Campus Group, LLC Student Hsg.
Rev. Bonds (Arizona State U. South
Campus), MBIA
1,250,000 5 5/8s, 9/1/28 Aaa 1,361,013
640,000 5 5/8s, 9/1/23 Aaa 712,560
2,200,000 Tempe, Indl. Dev. Auth. Lease
Rev. Bonds (ASU Foundation), AMBAC,
5s, 7/1/28 Aaa 2,239,842
200,000 Tempe, Indl. Dev. Auth. Sr. Living
Rev. Bonds (Friendship Village),
Ser. A, 5 3/8s, 12/1/13 BB-/P 203,062
1,000,000 Tucson, Indl. Dev. Auth. Sr. Living
Fac. Rev. Bonds (Christian Care),
Ser. A, 6s, 7/1/30 AA 1,081,540
2,000,000 U. of AZ, COP (U. of AZ Parking &
Student Hsg.), AMBAC, 5 3/4s, 6/1/24 Aaa 2,196,980
1,500,000 U. of AZ, Rev. Bonds, FSA, 5 1/4s,
6/1/08 Aaa 1,634,055
1,000,000 Yavapai Cnty., Indl. Dev. Auth.
Rev. Bonds (Yavapai Regl. Med.
Ctr.), Ser. A, 6s, 8/1/33 Baa2 1,038,880
1,000,000 Yavapai Cnty., Indl. Dev. Auth.
Solid Waste Disposal Rev. Bonds
(Waste Management, Inc.), 4 5/8s,
6/1/27 BBB 1,006,690
--------------
94,167,578
Puerto Rico (5.2%)
- -------------------------------------------------------------------------------
500,000 Cmnwlth. of PR, G.O. Bonds, Ser. A,
MBIA, 5 1/2s, 7/1/29 AAA 568,215
2,000,000 Cmnwlth. of PR, Muni. Fin. Agcy.
G.O. Bonds, Ser. A, FSA, 5 1/2s,
8/1/23 Aaa 2,171,380
1,435,000 PR Elec. Pwr. Auth. Rev. Bonds,
MBIA, 5s, 7/1/23 Aaa 1,556,803
1,000,000 PR Indl. Tourist Edl. Med. & Env.
Control Fac. Rev. Bonds (Cogen.
Fac.-AES), 6 5/8s, 6/1/26 Baa3 1,078,860
--------------
5,375,258
Virgin Islands (0.7%)
- -------------------------------------------------------------------------------
845,000 VI Tobacco Settlement Fin. Corp.
Rev. Bonds, 5s, 5/15/31 Baa3 728,635
- -------------------------------------------------------------------------------
Total Investments (cost $94,442,918) $100,271,471
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $103,999,989.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to
be the most recent ratings available at November 30, 2004 for the
securities listed. Ratings are generally ascribed to securities at the
time of issuance. While the agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings do not
necessarily represent what the agencies would ascribe to these
securities at November 30, 2004. Securities rated by Putnam are
indicated by "/P". Security ratings are defined in the Statement of
Additional Information.
The rates shown on VRDN are the current interest rates at November 30,
2004.
The fund had the following industry group concentrations greater than
10% at November 30, 2004
(as a percentage of net assets):
Health care 14.8%
Education 11.5
The fund had the following insurance concentrations greater than 10% at
November 30, 2004
(as a percentage of net assets):
MBIA 20.0%
FSA 13.7
FGIC 13.4
AMBAC 12.0
Interest rate swap contracts outstanding at November 30, 2004
(Unaudited)
Unrealized
Notional Termination appreciation/
amount date (depreciation)
- ----------------------------------------------------------------------------
Agreement with Citibank, N.A.
dated November 4, 2004 to receive
quarterly the notional amount
multiplied by 4.067% and pay
quarterly the notional amount
multiplied by the Bond Market
Association Municipal Swap Index. $2,000,000 2/8/25 $(48,014)
Agreement with JP Morgan Chase
Bank dated November 4, 2004 to
receive quarterly the notional
amount multiplied by 2.946%
and pay quarterly the notional
amount multiplied by the Bond
Market Association Municipal
Swap Index. 7,000,000 2/8/14 83,697
- ----------------------------------------------------------------------------
$35,683
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
November 30, 2004 (Unaudited)
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value (identified cost
$94,442,918) (Note 1) $100,271,471
- -------------------------------------------------------------------------------
Cash 1,932,025
- -------------------------------------------------------------------------------
Interest and other receivables 2,186,104
- -------------------------------------------------------------------------------
Receivable for open swap contracts (Note 1) 83,697
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 10,064
- -------------------------------------------------------------------------------
Receivable for securities sold 115,000
- -------------------------------------------------------------------------------
Total assets 104,598,361
Liabilities
- -------------------------------------------------------------------------------
Distributions payable to shareholders 91,033
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 200,994
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 112,234
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 24,000
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 29,740
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,425
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 42,016
- -------------------------------------------------------------------------------
Payable for open swap contracts (Note 1) 48,014
- -------------------------------------------------------------------------------
Other accrued expenses 48,916
- -------------------------------------------------------------------------------
Total liabilities 598,372
- -------------------------------------------------------------------------------
Net assets $103,999,989
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (Unlimited shares authorized) (Notes 1 and 4) $99,273,380
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 249
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (1,137,876)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 5,864,236
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $103,999,989
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($86,379,023 divided by 9,326,353 shares) $9.26
- -------------------------------------------------------------------------------
Offering price per class A share (100/95.50 of $9.26)* $9.70
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($16,259,189 divided by 1,757,150 shares)** $9.25
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($1,361,777 divided by 146,792 shares) $9.28
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.28)*** $9.59
- -------------------------------------------------------------------------------
* 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.
** Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
*** 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.
The accompanying notes are an integral part of these financial
statements.
Statement of operations
Six months ended November 30, 2004 (Unaudited)
Interest income: $2,637,967
- -------------------------------------------------------------------------------
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 273,485
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 48,250
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 25,978
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 6,077
- -------------------------------------------------------------------------------
Administrative services (Note 2) 4,252
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 89,844
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 76,446
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 3,337
- -------------------------------------------------------------------------------
Other 51,637
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 5) 4,180
- -------------------------------------------------------------------------------
Costs assumed by Manager (Notes 2 and 5) (4,180)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 2) (57,663)
- -------------------------------------------------------------------------------
Total expenses 521,643
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (14,827)
- -------------------------------------------------------------------------------
Net expenses 506,816
- -------------------------------------------------------------------------------
Net investment income 2,131,151
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 599,251
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments and swap
contracts during the period 1,501,632
- -------------------------------------------------------------------------------
Net gain on investments 2,100,883
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $4,232,034
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
Decrease in net assets 2004* 2004
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $2,131,151 $4,835,595
- -------------------------------------------------------------------------------
Net realized gain on investments 599,251 1,432,341
- -------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments 1,501,632 (7,079,607)
- -------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 4,232,034 (811,671)
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From tax-exempt income
Class A (1,883,896) (4,036,650)
- -------------------------------------------------------------------------------
Class B (318,534) (728,841)
- -------------------------------------------------------------------------------
Class M (25,926) (45,674)
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (8,868,995) (26,584,567)
- -------------------------------------------------------------------------------
Total decrease in net assets (6,865,317) (32,207,403)
Net assets
- -------------------------------------------------------------------------------
Beginning of period 110,865,306 143,072,709
- -------------------------------------------------------------------------------
End of period (including undistributed net
investment income of $249 and $97,454,
respectively) $103,999,989 $110,865,306
- -------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
Six months
ended
November 30
Per-share (Unaudited) Year ended May 31
operating performance 2004 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $9.10 $9.51 $9.06 $8.94 $8.54 $9.22
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income .18 (c) .37 (c) .37 .43 .46 .47 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.42) .46 .13 .40 (.68)
- -----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .35 (.05) .83 .56 .86 (.21)
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
From net
investment income (.19) (.36) (.38) (.44) (.46) (.47)
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (.19) (.36) (.38) (.44) (.46) (.47)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.26 $9.10 $9.51 $9.06 $8.94 $8.54
- -----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.90* (.52) 9.41 6.36 10.18 (2.28)
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $86,379 $90,981 $115,322 $113,783 $104,424 $90,602
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .42* (c) .88 (c) .91 .88 .88 .86 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.01* (c) 3.91 (c) 4.02 4.77 5.21 5.34 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.07* 5.91 37.41 20.63 23.67 11.44
- -----------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary expense limitation in effect during the
period. As a result of such limitation, the expenses of the fund for the
periods ended November 30, 2004, May 31, 2004 and May 31, 2000 reflect a
reduction of 0.05%, 0.03% and 0.03%, respectively, of average net assets
for class A shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
Six months
ended
November 30
Per-share (Unaudited) Year ended May 31
operating performance 2004 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $9.09 $9.50 $9.06 $8.93 $8.53 $9.21
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income .15 (c) .31 (c) .31 .37 .40 .41 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .17 (.42) .45 .14 .40 (.68)
- -----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .32 (.11) .76 .51 .80 (.27)
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
From net
investment income (.16) (.30) (.32) (.38) (.40) (.41)
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (.16) (.30) (.32) (.38) (.40) (.41)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.25 $9.09 $9.50 $9.06 $8.93 $8.53
- -----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.57* (1.17) 8.59 5.79 9.47 (2.93)
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $16,259 $18,617 $26,703 $24,642 $21,714 $28,157
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .75* (c) 1.53 (c) 1.56 1.53 1.53 1.51 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.68* (c) 3.25 (c) 3.37 4.12 4.59 4.69 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.07* 5.91 37.41 20.63 23.67 11.44
- -----------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary expense limitation in effect during the
period. As a result of such limitation, the expenses of the fund for the
periods ended November 30, 2004, May 31, 2004 and May 31, 2000 reflect a
reduction of 0.05%, 0.03% and 0.03%, respectively, of average net assets
for class B shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- -----------------------------------------------------------------------------------------------------------------------------
Six months
ended
November 30
Per-share (Unaudited) Year ended May 31
operating performance 2004 2004 2003 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $9.11 $9.52 $9.08 $8.95 $8.55 $9.23
- -----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income .17 (c) .34 (c) .35 .41 .43 .44 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .18 (.41) .45 .13 .40 (.68)
- -----------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .35 (.07) .80 .54 .83 (.24)
- -----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -----------------------------------------------------------------------------------------------------------------------------
From net
investment income (.18) (.34) (.36) (.41) (.43) (.44)
- -----------------------------------------------------------------------------------------------------------------------------
Total distributions (.18) (.34) (.36) (.41) (.43) (.44)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.28 $9.11 $9.52 $9.08 $8.95 $8.55
- -----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.87* (.82) 8.96 6.16 9.84 (2.57)
- -----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,362 $1,268 $1,047 $1,088 $880 $849
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .57* (c) 1.18 (c) 1.21 1.18 1.18 1.16 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 1.86* (c) 3.61 (c) 3.72 4.47 4.92 5.08 (c)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 11.07* 5.91 37.41 20.63 23.67 11.44
- -----------------------------------------------------------------------------------------------------------------------------
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(b) Includes amounts paid through expense offset arrangements (Note 2).
(c) Reflects an involuntary expense limitation in effect during the
period. As a result of such limitation, the expenses of the fund for the
periods ended November 30, 2004, May 31, 2004 and May 31, 2000 reflect a
reduction of 0.05%, 0.03% and 0.03%, respectively, of average net assets
for class M shares (Note 2).
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
November 30, 2004 (Unaudited)
Note 1
Significant accounting policies
Putnam Arizona Tax Exempt Income Fund (the "fund"), a Massachusetts
business trust, 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 personal income tax as Putnam Investment
Management, LLC ("Putnam Management"), the fund's manager, an indirect
wholly-owned subsidiary of Putnam, LLC, believes is consistent with
preservation of capital, by investing primarily in a portfolio of
investment-grade Arizona tax-exempt securities with intermediate-to
long-term maturities. The fund may be affected by economic and political
developments in the state of Arizona.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.50%. 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 and class M shares, and are subject to a contingent
deferred sales charge, if those shares are redeemed within six years of
purchase. Class M shares are sold with a maximum front-end sales charge
of 3.25% and pay an ongoing distribution fee that is higher than class A
but lower than class B shares.
Effective April 19, 2004 (May 3, 2004 for defined contribution plans
administered by Putnam), a 2.00% redemption fee may apply to any shares
that are redeemed (either by selling or exchang ing into another fund)
within 5 days of purchase. The redemption fee is accounted for as an
addition to paid-in-capital.
Investment income, realized and unrealized gains and losses and expenses
of the fund are borne pro-rata based on the relative net assets of each
class to the total net assets of the fund, except that each class bears
expenses unique to that class (including the distribution fees
applicable to such classes). 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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in 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 valued at fair
value on the basis of valuations provided by an independent pricing
service, approved by the Trustees. Such services use information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Other investments are valued 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 recorded 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. All premiums/discounts
are amortized/accreted on a yield-to-maturity basis. The premium in
excess of the call price, if any, is amortized to the call date;
thereafter, any remaining premium is amortized to maturity.
C) Interest rate swap contracts The fund may enter into interest rate
swap contracts, which are arrangements between two parties to exchange
cash flows based on a notional principal amount, to manage the fund's
exposure to interest rates. Interest rate swap contracts are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss. Payments received or made
are recorded as realized gains or loss. The fund could be exposed to
credit or market risk due to unfavorable changes in the fluctuation of
interest rates or if the counterparty defaults on its obligation to
perform. Risk of loss may exceed amounts recognized on the statement of
assets and liabilities. Interest rate swap contracts outstanding at
period end, if any, are listed after the fund's portfolio.
D) 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 of 1986 (the "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 Code, 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, 2004, the fund had a capital loss carryover of $909,020
available to the extent allowed by the Code to offset future net capital
gain, if any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
- --------------------------------
$301,152 May 31, 2009
607,868 May 31, 2010
The aggregate identified cost on a tax basis is $94,442,918, resulting
in gross unrealized appreciation and depreciation of $6,197,927 and
$369,374, respectively, or net unrealized appreciation of $5,828,553.
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are paid monthly. Distributions from capital gains, if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. Reclassifications are
made to the fund's capital accounts to reflect income and gains
available for distribution (or available capital loss carryovers) under
income tax regulations.
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory
services 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) the following annual rates expressed as a
percentage of the fund's average net assets: 0.60% of the first $500
million, 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.
Effective January 28, 2004, Putnam Management has agreed to waive fees
and reimburse expenses of the fund through May 31, 2005 to the extent
necessary to ensure that the fund's expenses do not exceed the average
expenses of the front-end load funds viewed by Lipper Inc. as having the
same investment classification or objective as the fund. The expense
reimbursement is based on a comparison of the fund's expenses with the
average annualized operating expenses of the funds in its Lipper peer
group for each calendar quarter during the fund's last fiscal year,
excluding 12b-1 fees and without giving effect to any expense offset and
brokerage service arrangements that may reduce fund expenses. For the
period ended November 30, 2004, Putnam Management waived $57,663 of its
management fee from the fund.
For the period ended November 30, 2004, Putnam Management has assumed
$4,180 of legal, shareholder servicing and communication, audit and
Trustee fees incurred by the fund in connection with certain legal and
regulatory matters (including those described in Note 5).
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, LLC. Putnam
Investor Services, a division of PFTC, provides investor servicing agent
functions to the fund. During the six months ended November 30, 2004,
the fund paid PFTC $72,409 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. For the six months ended November 30,
2004, the fund's expenses were reduced by $14,827 under these
arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $625, as a quarterly retainer, 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 a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Trustee compensation and expenses in the
statement of operations. Accrued pension liability is included in
Payable for Trustee compensation and expenses in the statement of assets
and liabilities. The Trustees have terminated the Pension Plan with
respect to any Trustee first elected after 2003.
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, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, Inc., for services provided
and expenses incurred in distributing shares of the fund. The Plans
provide for payments by the fund to Putnam Retail Management at annual
rates of up to 0.35%, 1.00% and 1.00% of the average net assets
attributable to class A, class B and class M shares, respectively. The
Trustees have approved payment by the fund at the annual rates of 0.20%,
0.85% and 0.50% of the average net assets attributable to class A,
class B and class M shares, respectively.
For the six months ended November 30, 2004, Putnam Retail Management,
acting as underwriter, received net commissions of $534 and $188 from
the sale of class A and class M shares, respectively, and received
$30,854 in contingent deferred sales charges from redemptions of class B
shares.
A deferred sales charge of up to 1.00% is assessed on certain
redemptions of class A shares that were purchased without an initial
sales charge as part of an investment of $1 million or more. For the six
months ended November 30, 2004, Putnam Retail Management, acting as
underwriter, received no monies on class A redemptions.
Note 3
Purchases and sales of securities
During the six months ended November 30, 2004, cost of purchases and
proceeds from sales of investment securities other than short-term
investments aggregated $11,449,417 and $20,694,514, respectively. There
were no purchases or sales of U.S. government securities.
Note 4
Capital shares
At November 30, 2004, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended November 30, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 346,184 $3,200,140
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 121,680 1,126,813
- ----------------------------------------------------------------
467,864 4,326,953
Shares repurchased (1,141,200) (10,570,050)
- ----------------------------------------------------------------
Net decrease (673,336) $(6,243,097)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 930,147 $8,681,656
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 252,392 2,352,310
- ----------------------------------------------------------------
1,182,539 11,033,966
Shares repurchased (3,313,063) (30,798,546)
- ----------------------------------------------------------------
Net decrease (2,130,524) $(19,764,580)
- ----------------------------------------------------------------
Six months ended November 30, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 20,123 $185,772
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 16,001 148,068
- ----------------------------------------------------------------
36,124 333,840
Shares repurchased (327,088) (3,030,714)
- ----------------------------------------------------------------
Net decrease (290,964) $(2,696,874)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 70,253 $656,533
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 36,112 336,184
- ----------------------------------------------------------------
106,365 992,717
Shares repurchased (869,585) (8,092,965)
- ----------------------------------------------------------------
Net decrease (763,220) $(7,100,248)
- ----------------------------------------------------------------
Six months ended November 30, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 7,915 $73,019
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 2,098 19,462
- ----------------------------------------------------------------
10,013 92,481
Shares repurchased (2,314) (21,505)
- ----------------------------------------------------------------
Net increase 7,699 $70,976
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 35,919 $343,030
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 3,610 33,676
- ----------------------------------------------------------------
39,529 376,706
Shares repurchased (10,431) (96,445)
- ----------------------------------------------------------------
Net increase 29,098 $280,261
- ----------------------------------------------------------------
Note 5
Regulatory matters and litigation
On April 8, 2004, Putnam Management entered into agreements with the
Securities and Exchange Commission ("SEC") and the Massachusetts
Securities Division representing a final settlement of all charges
brought against Putnam Management by those agencies on October 28, 2003
in connection with excessive short-term trading by Putnam employees and,
in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans. The
settlement with the SEC requires Putnam Management to pay $5 million in
disgorgement plus a civil monetary penalty of $50 million, and the
settlement with the Massachusetts Securities Division requires Putnam
Management to pay $5 million in restitution and an administrative fine
of $50 million. The settlements also leave intact the process
established under an earlier partial settlement with the SEC under which
Putnam Management agreed to pay the amount of restitution determined by
an independent consultant, which may exceed the disgorgement and
restitution amounts specified above, pursuant to a plan to be developed
by the independent consultant.
Putnam Management, and not the investors in any Putnam fund, will bear all
costs, including restitution, civil penalties and associated legal fees
stemming from both of these proceedings. The SEC's and Massachusetts
Securities Division's allegations and related matters also serve as the
general basis for numerous lawsuits, including purported class action
lawsuits filed against Putnam Management and certain related parties,
including certain Putnam funds. Putnam Management has agreed to bear any
costs incurred by Putnam funds in connection with these lawsuits. Based on
currently available information, Putnam Management believes that the
likelihood that the pending private lawsuits and purported class action
lawsuits will have a material adverse financial impact on the fund is
remote, and the pending actions are not likely to materially affect its
ability to provide investment management services to its clients, including
the Putnam funds.
The fund may experience increased redemptions as a result of these matters,
which could result in increased transaction costs and operating expenses.
Results of November 11, 2004
shareholder meeting
(Unaudited)
A special meeting of shareholders of the fund was held on November 11, 2004.
At the meeting, each of the nominees for Trustees was elected, as follows:
Votes Votes
for withheld
- -----------------------------------------------------------------
Jameson A. Baxter 7,010,728 176,032
Charles B. Curtis 7,002,535 184,225
Myra R. Drucker 6,972,933 213,827
Charles E. Haldeman, Jr. 6,993,082 193,678
John A. Hill 7,010,728 176,032
Ronald J. Jackson 7,007,930 178,830
Paul L. Joskow 7,009,978 176,782
Elizabeth T. Kennan 7,004,715 182,045
John H. Mullin, III 7,010,728 176,032
Robert E. Patterson 7,010,728 176,032
George Putnam, III 7,006,413 180,347
A.J.C. Smith 7,006,413 180,347
W. Thomas Stephens 7,010,728 176,032
Richard B. Worley 6,972,796 213,964
A proposal to amend the fund's fundamental investment restriction with
respect to borrowing to allow the fund the investment flexibility permitted
by the Investment Company Act was adjourned.*
A proposal to amend the fund's fundamental investment restriction with
respect to making loans to enhance the fund's ability to participate in an
interfund borrowing and lending program was adjourned.*
A proposal to amend the fund's fundamental investment restriction with
respect to diversification of investments to enhance the fund's ability to
invest in registered investment companies such as Putnam Prime Money Market
Fund was adjourned.*
A proposal to amend to the fund's Agreement and Declaration of Trust to
permit the fund to satisfy redemption requests other than in cash was
adjourned.*
* Since sufficient votes in favor of this proposal were not received as of
November 11, 2004, the shareholder meeting with respect to this proposal has
been adjourned until no later than January 10, 2005 to permit further
solicitation in the Trustees' discretion.
All tabulations are rounded to the nearest whole number.
The Putnam family of funds
The following is a complete list of Putnam's open-end mutual funds.
Investors should carefully consider the investment objective, risks,
charges, and expenses of a fund before investing. For a prospectus
containing this and other information for any Putnam fund or product, call
your financial advisor at 1-800-225-1581 and ask for a prospectus. Please
read the prospectus carefully before investing.
Growth Funds
Discovery Growth Fund
Growth Opportunities Fund
Health Sciences Trust
International New Opportunities Fund*
New Opportunities Fund
OTC & Emerging Growth Fund
Small Cap Growth Fund
Vista Fund
Voyager Fund
Blend Funds
Capital Appreciation Fund
Capital Opportunities Fund
Europe Equity Fund*
Global Equity Fund*
Global Natural Resources Fund*
International Capital
Opportunities Fund*
International Equity Fund*
Investors Fund
Research Fund
Tax Smart Equity Fund
Utilities Growth and Income Fund
Value Funds
Classic Equity Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
The Putnam Fund for Growth
and Income
International Growth and Income Fund*
Mid Cap Value Fund
New Value Fund
Small Cap Value Fund+
Income Funds
American Government Income Fund
Diversified Income Trust
Floating Rate Income Fund
Global Income Trust*
High Yield Advantage Fund*+
High Yield Trust*
Income Fund
Limited Duration Government
Income Fund++
Money Market Fund[SECTION MARK]
U.S. Government Income Trust
* A 1% redemption fee on total assets redeemed or exchanged between 6
and 90 days of purchase may be imposed for all share classes of these funds.
+ Closed to new investors.
++ Formerly Putnam Intermediate U.S. Government Income Fund.
[SECTION MARK] 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 fund seeks to
preserve your investment at $1.00 per share, it is possible
to lose money by investing in the fund.
The Putnam family of funds
Tax-free Income Funds
AMT-Free Insured Municipal Fund**
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund[SECTION MARK]
Tax-Free High Yield Fund
State tax-free income funds:
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio, and Pennsylvania
Asset Allocation Portfolios
Putnam Asset Allocation Portfolios--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
Putnam RetirementReady[REGISTRATION MARK] Funds
Putnam RetirementReady Funds -- nine investment portfolios that offer
diversification among stocks, bonds, and money market instruments and
adjust to become more conservative over time based on a target date for
withdrawing assets.
The nine portfolios:
Putnam RetirementReady 2045 Fund
Putnam RetirementReady 2040 Fund
Putnam RetirementReady 2035 Fund
Putnam RetirementReady 2030 Fund
Putnam RetirementReady 2025 Fund
Putnam RetirementReady 2020 Fund
Putnam RetirementReady 2015 Fund
Putnam RetirementReady 2010 Fund
Putnam RetirementReady Maturity Fund
** Formerly Putnam Tax-Free Insured Fund.
With the exception of money market funds, a 2% redemption fee will be
applied to shares exchanged or sold within 5 days of purchase.
Check your account balances and the most recent month-end performance at
www.putnaminvestments.com.
Fund information
About Putnam Investments
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and
Principal Executive Officer
Jonathan S. Horwitz
Senior Vice President and Treasurer
Steven D. Krichmar
Vice President and Principal
Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Daniel T. Gallagher
Vice President and Legal and
Compliance Liaison Officer
Beth S. Mazor
Vice President
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
Francis J. McNamara, III
Vice President and Chief Legal Officer
Charles A. Ruys de Perez
Vice President and Chief Compliance Officer
Judith Cohen
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, the most recent copy
of Putnam's Quarterly Performance Summary, and Putnam's Quarterly
Ranking Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should carefully consider the
investment objective, risks, charges, and expenses of a fund, which are
described in its prospectus. For this and other information or to
request a prospectus, call 1-800-225-1581 toll free. Please read the
prospectus carefully before investing. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site
www.putnaminvestments.com.
SA044-216562 1/05
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
Not applicable
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
Not applicable
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
Not applicable
Item 5. Audit Committee: Not applicable
- -------------------------
Item 6. Schedule of Investments: Not applicable
- --------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- ---------------------------------
(a) The registrant's principal executive officer and principal
financial officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report on Form N-CSR, that the design and
operation of such procedures are generally effective to provide
reasonable assurance that information required to be disclosed by
the investment company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) Not applicable
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: January 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
an the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: January 28, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: January 28, 2005