FEBRUARY 1, 1996 , as
revised JULY 30, 1996
Putnam California Tax Exempt Income Fund
Class A, B and M shares
Putnam California Tax Exempt Money Market Fund
INVESTMENT STRATEGY: TAX-FREE
This prospectus explains concisely what you should know before
investing in Putnam California Tax Exempt Income Fund (the
"Income Fund") or Putnam California Tax Exempt Money Market Fund
(the "Money Market Fund") (collectively, the "funds"). The
Income Fund is a portfolio of Putnam California Tax Exempt Income
Trust (the "Trust"). Please read it carefully and keep it for
future reference. You can find more detailed information in the
February 1, 1996 statement of additional information (the "SAI"),
as amended from time to time. For a free copy of the SAI or
other information, call Putnam Investor Services at 1-800-225-
1581. The SAI has been filed with the Securities and Exchange
Commission and is incorporated into this prospectus by reference.
An investment in the Money Market Fund is neither insured nor
guaranteed by the U.S. government. There can be no assurance
that the Money Market Fund will be able to maintain a stable net
asset value of $1.00 per share.
The Money Market Fund may invest a significant percentage of
its assets in the securities of a single issuer, and an
investment in the fund may therefore be riskier than an
investment in other types of money market funds.
The fund invests primarily in a portfolio of California tax-
exempt securities, which may include securities of issuers other
than California and its political subdivisions.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
BOSTON * LONDON * TOKYO<PAGE>
ABOUT THE FUNDS
Expenses summary
This section describes the sales charges, management fees, and
annual operating expenses that apply to a fund's various classes
of shares. Use it to help you estimate the impact of transaction
costs on your investment over time.
Financial highlights
Study this table to see, among other things, how a fund performed
each year for the past 10 years or since it began investment
operations if it has been in operation for less than 10 years.
Objectives
Read this section to make sure a fund's objectives are consistent
with your own.
How the funds pursue their objectives
This section explains in detail how a fund seeks its investment
objectives.
Risk factors
All investments entail some risk. Read this section to make sure
you understand certain risks that may be involved when investing
in a fund.
How performance is shown
This section describes and defines the measures used to assess a
fund's performance. All data are based on the fund's past
investment results and do not predict future performance.
How the funds are managed
Consult this section for information about a fund's management,
allocation of a fund's expenses, and how purchases and sales of
securities are made for the fund.
Organization and history
In this section, you will learn when a fund was introduced, how
it is organized, how it may offer shares, and who its Trustees
are.
<PAGE>
ABOUT YOUR INVESTMENT
Alternative sales arrangements (Income Fund only)
Read this section for descriptions of the classes of shares this
prospectus offers and for points you should consider when making
your choice.
How to buy shares
This section describes the ways you may purchase shares and tells
you the minimum amounts required to open various types of
accounts. It explains how sales charges are determined and how
you may become eligible for reduced sales charges on each class
of shares.
Distribution plans
This section tells you what distribution fees are charged against
each class of shares.
How to sell shares
In this section you can learn how to sell shares of a fund,
either directly to the fund or through an investment dealer.
How to exchange shares
Find out in this section how you may exchange shares of a fund
for shares of other Putnam funds. The section also explains how
exchanges can be made without sales charges and the conditions
under which sales charges may be required.
How a fund values its shares
This section explains how a fund determines the value of its
shares.
How a fund makes distributions to shareholders; tax
information
This section describes the various options you have in choosing
how to receive dividends from a fund. It also discusses the
federal tax status of the payments and counsels shareholders to
seek specific advice about their own situation.
ABOUT PUTNAM INVESTMENTS, INC.
Read this section to learn more about the companies that provide
the marketing, investment management, and shareholder account
services to Putnam funds and their shareholders.
APPENDIX
Securities ratings
<PAGE>
About the funds
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing.
The following tables summarize your maximum transaction costs
from investing in a fund and expenses incurred in the most recent
fiscal year. The examples show the cumulative expenses
attributable to a hypothetical $1,000 investment over specified
periods.
Income Fund
Class A Class B Class M
shares shares shares
Shareholder transaction
expenses
Maximum sales charge
imposed on purchases
(as a percentage of
offering price) 4.75% NONE* 3.25%*
Deferred sales charge 5.0% in the first
(as a percentage year, declining
of the lower of to 1.0% in the
original purchase sixth year, and
price or redemption eliminated
proceeds) NONE** thereafter NONE
Money Market Fund
Shareholder transaction expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) NONE
Deferred sales charge (as a
percentage of the lower
of original
purchase price or
redemption proceeds) NONE
<PAGE>
Annual fund operating expenses
(as a percentage of average net assets)
Total fund
Management 12b-1 Other operating
fees fees expenses expenses
- ---------- ----- -------------------
Income Fund
Class A 0.45% 0.20% 0.09% 0.74%
Class B 0.45% 0.85% 0.09% 1.39%
Class M 0.45% 0.50% 0.09% 1.04%
Money Market Fund 0.45% NONE 0.55% 1.00%
The table is provided to help you understand the expenses of
investing in a fund and your share of the operating expenses that
each fund incurs. The expenses shown in the table do not reflect
the application of credits related to brokerage service
and expense offset arrangements that reduce certain fund
expenses. The 12b-1 fees for class M shares of the Income Fund
reflect amounts currently payable under the class M distribution
plan. For Income Fund class M shares, management fees and "Other
expenses" are based on the corresponding expenses for class A
shares.
Examples
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and, except as indicated, redemption at
the end of each period:
1 3 5 10
year years years years
Income Fund
Class A $55 $70 $87 $135
Class B $64 $74 $96 $149***
Class B (no redemption) $14 $44 $76 $149***
Class M $43 $65 $88 $156
Money Market Fund $10 $32 $55 $123
The examples do not represent past or future expense levels.
Actual expenses may be greater or less than those shown. Federal
regulations require the examples to assume a 5% annual return,
but actual annual return varies.
* The higher 12b-1 fees borne by class B and class M shares
of the Income Fund may cause long-term shareholders to pay
more than the economic equivalent of the maximum permitted
front-end sales charge on class A shares.
<PAGE>
** 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. See "How to buy shares -- The
Income Fund -- Class A shares."
*** Reflects conversion of class B shares to class A shares
(which pay lower ongoing expenses) approximately eight
years after purchase. See "Alternative sales arrangements
-- The Income Fund."
FINANCIAL HIGHLIGHTS
The following tables present per share financial information for
class A, B and M shares of the Income Fund and shares of the
Money Market Fund. This information has been audited and
reported on by the funds' independent accountants. The "Report
of independent accountants" and financial statements included in
each fund's annual report to shareholders for the 1995 fiscal
year are incorporated by reference into this prospectus. Each
fund's annual report, which contains additional unaudited
performance information, is available without charge upon
request.
<PAGE>
<TABLE>
<CAPTION>
PUTNAM CALIFORNIA TAX EXEMPT INCOME FUND
FINANCIAL HIGHLIGHTS*
(For a share outstanding throughout the period)
For the period For the period
February 14, 1995 January 4, 1993
(commencement (commencement of
of operations) to Year ended operations)to
September 30 September 30 September 30 Year ended September 30
1995 1995 1994 1993 1995 1994 1993 1992
Class M Class B Class A
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $8.13 $8.08 $8.91 $8.37 $8.09 $8.92 $8.39 $8.11
Investment operations:
Net investment income .29 .42 .45 .32 .48 .50 .53 .54
Net realized and unrealized
gain (loss) on investments .24 .32 (.81) .55 .31 (.81) .57 .27
Total from investment
operations .53 .74 (.36) .87 .79 (.31) 1.10 .81
Distributions to shareholders:
From net investment income (.30)** (.42)** (.45) (.33) (.48)** (.50) (.53)(.53)
From net realized gain or loss
on investments -- -- (.02) -- -- -- -- --
In excess of net realized gain
or loss on investments -- (.03) -- -- (.03) (.02) (.04) --
Total distributions (.30) (.45) (.47) (.33) (.51) (.52) (.57) (.53)
Net asset value, end of period $8.36 $8.37 $8.08 $8.91 $8.37 $8.09 $8.92$8.39
Total investment return at
net asset value (%) (a) 6.56(b) 9.47 (4.15) 10.51(b) 10.07 (3.53) 13.63 10.34
Net assets, end of period
(in thousands) $4,108 $416,367 $349,609 $209,657$3,168,277 $3,260,769 $3,600,182 $2,854,165
Ratio of expenses to
average net assets (%)(c).69(b) 1.39 1.32 1.00(b) .74 .68 .69 .60
Ratio of net investment
income to average net assets (%) 3.52(b) 5.17 5.16 3.68(b) 5.86 5.86
6.16 6.53
Portfolio Turnover (%) 47.73 47.73 21.06 22.95 47.73 21.06 22.95 31.25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Putnam California Tax Exempt Income Fund (continued)
Financial highlights*
(For a share outstanding throughout the period)
Year ended September 30
1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $7.70 $7.83 $7.67 $7.14 $7.80 $6.97
Investment operations:
Net investment income .54 .54 .56 .57 .57 .61
Net realized and unrealized
gain (loss) on investments .41 (.10) .16 .52 (.66) .83
Total from investment operations .95 .44 .72 1.09 (.09) 1.44
Distributions to shareholders:
From net investment income (.54) (.54) (.56) (.56) (.57) (.61)
From net realized gain or loss
on investments -- (.03) -- -- -- --
In excess of net realized gain
or loss on investments -- -- -- -- -- --
Total distributions (.54) (.57) (.56) (.56) (.57) (.61)
Net asset value, end of period $8.11 $7.70 $7.83 $7.67 $7.14 $7.80
Total investment return at
net asset value (%) (a) 12.71 5.75 9.63 15.69 (1.52) 21.36
Net assets, end of period
(in thousands) $2,295,154 $1,807,931 $1,541,563 $1,228,401$1,088,122 $811,399
Ratio of expenses to
average net assets (%)(c) .56 .52 .52 .51 .52 .53
Ratio of net investment
income to average net assets (%) 6.79 6.90 7.09 7.51 7.22 7.91
Portfolio turnover (%) 35.76 33.42 60.77 95.05 93.46 65.88
<FN>
* Table has been restated to reflect a 2-for-1 share split declared by the fund to shareholders of record on October
27, 1989, effective October 28, 1989.
** Distributions in excess of net investment income amounted to less than $0.01 per share for each class.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the year ended September 30, 1995 includes amounts paid through
brokerage service and expense offset arrangements. Prior period ratios exclude these amounts.
/TABLE
<PAGE>
<TABLE>
<CAPTION>
Putnam California Tax Exempt Money Market Fund
Financial highlights
(For a share outstanding throughout the period)
For the period
October 26,1987
(commencement
of operations) to
Year ended
Year ended September 30 September 30
1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment
Income $0.0288 $.0192 $.0175 $.0262(a) $.0407(a) $.0513(a) $.0566(a) $.0416(a)
Net realized and unrealized
gain on investments -- -- -- .0001 -- -- .0001
.0001
Total from investment
operations $0.0288 $0.0192 $0.0175 $0.0263 $0.0407 $0.0513 $0.0567 $0.0417
Total
distributions ($0.0288) ($0.0192) ($0.0175) ($0.0263) ($0.0407) ($0.0513)
($0.0567) ($0.0417)
Total investment
return at net
asset value (%)(b) 2.92 1.94 1.77 2.67 4.15 5.26 5.82
4.25(c)
Net assets, end of
period
(in thousands) $35,140 $44,799 $45,364 $58,858 $69,184 $87,095 $73,136 $ 43,436
Ratio of expenses to
average net
assets (%) (d) 1.00 .67 .89 .85(a) .80(a) .69(a) .69(a)
.58(a)(c)
Ratio of net
investment
Income to average
net assets (%) 2.84 1.84 1.78 2.70(a) 4.03(a) 5.12(a) 5.65(a)
4.21(a)(c)
<FN>
(a)Reflects an expense limitation and, during the period ended September 30, 1988, a waiver of a portion of distribution
fees in effect during the period. As a result of such expense limitation and waiver, expenses of the
fund for the years ended September 30, 1992, 1991, 1990, 1989 and for the period ended September 30, 1988, reflect per
share reductions of $0.0026, $0.0033, $0.0033, $0.0043 and $0.0051, respectively.
(b)Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(c)Not annualized.
(d) The ratio of expenses to average net assets for the year ended September 30, 1995 includes amounts paid through
expense offset arrangements. Prior period ratios exclude these amounts.
/TABLE
<PAGE>
OBJECTIVES
Putnam California Tax Exempt Income Fund and Putnam California
Tax Exempt Money Market Fund seek as high a level of current
income exempt from federal income tax and California personal
income tax as Putnam Investment Management, Inc., the funds'
investment manager ("Putnam Management"), believes is consistent
with preservation of capital and, in the case of the Money Market
Fund, maintenance of liquidity and stability of principal. Under
current law, to the extent distributions by the funds are derived
from interest on California tax-exempt securities (which are
described below) and are designated as such, they are exempt from
federal income tax and California state personal income
tax. Neither fund is intended to be a complete investment
program, and there is no assurance that either fund will achieve
its objective.
HOW THE FUNDS PURSUE THEIR OBJECTIVES
Basic investment strategy
Putnam California Tax Exempt Income Fund and Putnam California
Tax Exempt Money Market Fund seek their objectives by investing
primarily in a portfolio of California tax-exempt securities (as
defined below). The funds have separate investment policies
involving different levels of yield and risk.
The Income Fund
Putnam California Tax Exempt Income Fund seeks its objective by
investing primarily in longer-term California tax-exempt
securities. It is a fundamental policy of the Income Fund that
at least 90% of the Income Fund's income distributions will be
exempt from both federal income tax and California personal
income tax, except during times of adverse market conditions when
more than 10% of the Income Fund's income distributions could be
subject to federal income tax and/or California personal income
tax. For temporary defensive purposes and for purposes of
maintaining liquidity, the Income Fund may also invest in taxable
obligations, provided that not more than 10% of the Income Fund's
income distributions are subject to federal income tax and/or
California personal income tax.
The Income Fund may also invest in taxable obligations to the
extent permitted by its investment policies, or hold its assets
in money market instruments or in cash. Putnam Management
expects that the fund will generally invest in California tax-
exempt securities of longer maturities (10 years or more), but
the fund may invest in California tax-exempt securities having a
broad range of maturities.
<PAGE>
The Income Fund's investments in California tax-exempt securities
and taxable obligations will be limited to securities rated at
the time of purchase not lower than the five highest grades
assigned by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa,
A, Baa or Ba) or Standard & Poor's ("S&P") (AAA, AA, A, BBB or
BB), or unrated securities that Putnam Management determines are
of comparable quality.
The Income Fund will not purchase a California tax-exempt
security rated at the time of purchase Ba by Moody's, BB by S&P
or, if unrated, determined to be of comparable quality, if, as a
result, more than 25% of its total assets would be of that
quality. The rating services' descriptions of the five highest
grades of debt securities and other rating information are
included in the appendix to this prospectus. California tax-
exempt securities rated Ba or BB (and comparable unrated
securities), commonly known as "junk bonds," are considered to
have speculative elements, with large uncertainties or major
exposures to adverse conditions.
The Money Market Fund
Putnam California Tax Exempt Money Market Fund follows the
fundamental policy that at least 90% of the fund's income
distributions normally will be exempt from both federal income
tax and California personal income tax. Subject to this
limitation, the Money Market Fund may also invest in high quality
taxable money market instruments of the type described under
"Alternative investment strategies" below.
The Money Market Fund will invest only in the following short-
term, high quality California tax-exempt securities: (i)
municipal notes; (ii) municipal bonds; (iii) municipal
securities backed by the U.S. government; (iv) short-term
discount notes (tax-exempt commercial paper); (v) participation
interests in any of the foregoing; and (vi) unrated securities or
new types of tax-exempt instruments which become available in the
future if Putnam Management determines they are of comparable
quality. In connection with the purchase of California tax-
exempt securities, the Money Market Fund may acquire stand-by
commitments, which give the Money Market Fund the right to resell
the security to the dealer at a specified price. Stand-by
commitments may provide additional liquidity for the Money Market
Fund but are subject to the risk that the dealer may fail to meet
its obligations. The Money Market Fund does not generally expect
to pay additional consideration for stand-by commitments nor to
assign any value to them. The Money Market Fund's investments
are concentrated in California tax-exempt securities, and an
investment in the fund may therefore be riskier than an
investment in money market funds that do not concentrate their
investments in tax-exempt securities of a single state.
The Money Market Fund will invest only in high-quality California
tax-exempt securities or other money market instruments that
Putnam Management believes present minimal credit risk. High-
quality securities are securities rated in one of the two highest
categories by at least two nationally recognized rating services
(or, if only one rating service has rated the security, by that
service) or if the security is unrated, judged to be of
equivalent quality by Putnam Management. The Money Market Fund
will maintain a dollar-weighted average maturity of 90 days or
less and will not invest in securities with remaining maturities
of more than 397 days. The Money Market Fund may invest in
variable or floating-rate California tax-exempt securities which
bear interest at rates subject to periodic adjustment or which
provide for periodic recovery of principal on demand. Under
certain conditions, these securities may be deemed to have
remaining maturities equal to the time remaining until the next
interest adjustment date or the date on which principal can be
recovered on demand.
Considerations of liquidity and preservation of capital mean that
the Money Market Fund may not necessarily invest in California
tax-exempt securities paying the highest available yield at a
particular time. Consistent with its investment objective, the
Money Market Fund will attempt to maximize yields by portfolio
trading and by buying and selling portfolio investments in
anticipation of or in response to changing economic and money
market conditions and trends. The Money Market Fund will also
invest to take advantage of what Putnam Management believes to be
temporary disparities in yields of different segments of the
market for California tax-exempt securities or among particular
instruments within the same segment of the market. These
policies, as well as the relatively short maturity of obligations
purchased by the fund, may result in frequent changes in the
fund's portfolio. Such portfolio turnover may give rise to
taxable gains.
The value of the securities in the Money Market Fund's Portfolio
can be expected to vary inversely with changes in prevailing
interest rates. Although the Money Market Fund's investment
policies are designed to minimize these changes and to maintain a
net asset value of $1.00 per share, there is no assurance that
these policies will be successful. Withdrawals by shareholders
could require the sale of portfolio investments at a time when
such a sale might not otherwise be desirable.
Alternative minimum tax
Interest income from certain types of California tax-exempt
securities may be subject to federal alternative minimum tax for
individuals and corporations.
<PAGE>
Neither of the funds treats interest which may be subject to
federal alternative minimum tax for individuals as income that is
exempt from federal income tax for purposes of determining
compliance with its 90% test. To the extent that a fund earns
such interest income, individual and corporate shareholders,
depending on their own tax status, may be subject to federal (but
not California) alternative minimum tax on that part of the
fund's distributions attributable to such income. More
generally, an investment in either fund may subject corporate
shareholders to federal alternative minimum tax, because a
portion of tax-exempt income is generally included in the federal
alternative minimum taxable income of corporations.
Alternative investment strategies
At times Putnam Management may judge that conditions in the
markets for California tax-exempt securities make pursuing a
fund's basic investment strategy inconsistent with the best
interests of its shareholders. At such times Putnam Management
may temporarily use alternative strategies primarily designed to
reduce fluctuations in the value of the fund's assets.
In implementing these defensive strategies, the Income Fund may
invest without limit in taxable obligations, including
obligations of the U.S. government, its agencies or
instrumentalities; obligations issued by governmental issuers in
other states, the interest on which would be exempt from federal
(but not California) income tax; other debt securities rated
within the four highest grades by either Moody's or S&P;
commercial paper rated in the highest grade by either rating
service (Prime-1 or A-1+, respectively); certificates of deposit
and bankers' acceptances; repurchase agreements; or any other
securities that Putnam Management considers consistent with such
defensive strategies.
Similarly, when implementing these defensive strategies, the
Money Market Fund may invest in high quality taxable money market
instruments, including: bank certificates of deposit, bankers'
acceptances, prime commercial paper, high-grade short-term
corporate obligations, short-term U.S. government securities or
repurchase agreements, or any other securities Putnam Management
considers consistent with such defensive strategies.
It is impossible to predict when, or for how long, a fund will
use these alternative strategies. Shareholders would be subject
to federal income tax and/or California state income tax, on
distributions of the interest income from these instruments.
<PAGE>
California tax-exempt securities
California tax-exempt securities include obligations of the State
of California, its political subdivisions, and their agencies,
instrumentalities or other governmental units, the interest on
which, in the opinion of bond counsel, is exempt from federal
income tax and California personal income tax.
These securities are issued to obtain funds for various public
purposes, such as the construction of public facilities, the
payment of general operating expenses or the refunding of
outstanding debts.
They may also be issued to finance various private activities,
including the lending of funds to public or private institutions
for the construction of housing, educational or medical
facilities, or to fund short-term cash requirements. They may
also include certain types of industrial development bonds,
private activity bonds or notes issued by public authorities to
finance privately owned or operated facilities.
Short-term California tax-exempt securities may be issued as
interim financing in anticipation of tax collections, revenue
receipts or bond sales to finance various public purposes.
California tax-exempt securities may also include obligations
issued by certain other governmental entities, such as U.S.
territories or possessions, if these debt obligations generate
interest income that is exempt from federal income tax and
California personal income tax.
The two principal classifications of California tax-exempt
securities are general obligation and special obligation (or
special revenue obligation) securities.
General obligation securities involve a pledge of the credit of
an issuer possessing taxing power and are payable from the
issuer's general unrestricted revenues. Their payment may depend
on an appropriation by the issuer's legislative body. The
characteristics and methods of enforcement of general obligation
securities vary according to the law applicable to the particular
issuer.
Special obligation (or special revenue obligation) securities are
payable only from the revenues derived from a particular facility
or class of facilities, or a specific revenue source, and
generally are not payable from the unrestricted revenues of the
issuer. Industrial development bonds and private activity bonds
are in most cases special obligation securities, whose credit
quality is tied to the private user of the facilities.
<PAGE>
The Income Fund may also invest in securities representing
interests in California tax-exempt securities, known as "inverse
floating obligations" or "residual interest bonds." These
obligations pay interest rates that vary inversely with changes
in the interest rates of specified short-term tax-exempt
securities or an index of short-term tax-exempt securities. The
interest rates on inverse floating obligations or residual
interest bonds will typically decline as short-term market
interest rates increase and increase as short-term market rates
decline.
These securities have the effect of providing a degree of
investment leverage. They will generally respond to changes in
market interest rates more rapidly than fixed-rate long-term
securities (typically twice as fast). As a result, the market
values of inverse floating obligations and residual interest
bonds will generally be more volatile than the market values of
fixed-rate California tax-exempt securities.
Risk factors
The Income Fund
The values of California tax-exempt securities in which the
Income Fund may invest will fluctuate in response to changes in
interest rates. A decrease in interest rates will generally
result in an increase in the value of the fund's assets.
Conversely, during periods of rising interest rates, the value of
the fund's assets will generally decline. The magnitude of these
fluctuations generally is greater for securities with longer
maturities. However, the yields on such securities are generally
higher. In addition, the values of fixed-income securities are
affected by changes in general economic conditions and business
conditions affecting the specific industries of their issuers.
Changes by recognized rating services in their ratings of a
fixed-income security and changes in the ability of an issuer to
make payments of interest and principal may also affect the value
of these investments. Changes in the value of portfolio
securities generally will not affect income derived from these
securities, but will affect the fund's net asset value.
The Income Fund may invest in both higher-rated and lower-rated
California tax-exempt securities. Lower-rated securities are
securities rated below Baa by Moody's or BBB by S&P, and are
commonly known as "junk bonds." The values of lower-rated
securities generally fluctuate more than those of higher-rated
securities. In addition, the lower rating reflects a greater
possibility that the financial condition of the issuer, or
adverse changes in general economic conditions, or both, may
impair the ability of the issuer to make payments of income and
principal.
The table below shows the percentages of the Income Fund's net
assets invested during fiscal 1995 in securities assigned to the
various rating categories by S&P, or, if unrated by S&P, assigned
to comparable rating categories by Moody's, and in unrated
securities determined by Putnam Management to be of comparable
quality:
Unrated securities
Rated securities,of comparable quality,
as percentage ofas percentage of
Rating net assets net assets
"AAA" 62.06% --
"AA" 12.09% --
"A" 9.69% --
"BBB" 7.52% 1.76%
"BB" 0.96% 5.39%
"B" 0.53% --
------ -----
92.85% 7.15%
====== =====
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through careful investment analysis.
However, the amount of information available about the financial
condition of an issuer of California tax-exempt securities may
not be as extensive as that which is made available by
corporations whose securities are publicly traded. When the fund
invests in California tax-exempt securities in the lower rating
categories, the achievement of the fund's goals is more dependent
on Putnam Management's ability than would be the case if the fund
were investing in California tax-exempt securities in the higher
rating categories. Investors should consider carefully their
ability to assume the risks of owning shares of a mutual fund
that may invest in securities in certain of the lower rating
categories.
The fund will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase.
However, Putnam Management will monitor the investment to
determine whether continued investment in the security will
assist in meeting the fund's investment objective.
The Income Fund may invest in so-called "zero-coupon" bonds whose
values are subject to greater fluctuation in response to changes
in market interest rates than bonds that pay interest currently.
Zero-coupon bonds are issued at a significant discount from face
value and pay interest only at maturity rather than at intervals
during the life of the security.
<PAGE>
Zero-coupon bonds allow an issuer to avoid the need to generate
cash to meet current interest payments. Accordingly, such bonds
may involve greater credit risks than bonds paying interest
currently. The fund is required to accrue and distribute income
from zero-coupon bonds on a current basis, even though it does
not receive that income currently in cash. Thus, the fund may
have to sell other investments to obtain cash needed to make
income distributions.
The secondary market for California tax-exempt securities is
generally less liquid than that for taxable fixed-income
securities, particularly in the lower rating categories. Thus it
may be more difficult from time to time to value or buy and sell
certain securities.
Certain investment grade securities in which the fund may invest
share some of the risk factors discussed above with respect to
lower-rated securities.
For additional information concerning the risks associated with
investing in securities in the lower rating categories, see the
SAI.
Both funds
At times, a substantial portion of a fund's assets may be
invested in securities as to which the fund, by itself or
together with other funds and accounts managed by Putnam
Management and its affiliates, holds all or a major portion.
Under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, a fund
could find it more difficult to sell these securities when Putnam
Management believes it advisable to do so or may be able to sell
such securities only at prices lower than if they were more
widely held. Under these circumstances, it may also be more
difficult to determine the fair value of such securities for
purposes of computing that fund's net asset value.
In order to enforce its rights in the event of a default of these
securities, a fund may be required to participate in various
legal proceedings or take possession of and manage assets
securing the issuer's obligations on the securities. This could
increase a fund's operating expenses and adversely affect the
fund's net asset value. Any income derived from a fund's
ownership or operation of such assets would not be tax-exempt.
The ability of a holder of a tax-exempt security to enforce the
terms of that security in a bankruptcy proceeding may be more
limited than would be the case with respect to a privately-issued
security.
<PAGE>
Certain securities held by a fund may permit the issuer at its
option to "call," or redeem, such securities. If an issuer were
to redeem securities held by the fund during a time of declining
interest rates, the fund may not be able to reinvest the proceeds
in securities providing the same investment return as the
securities redeemed.
Since each fund invests primarily in California tax-exempt
securities, the performance of each fund may be especially
affected by factors pertaining to the California economy and
other factors affecting the ability of issuers of California tax-
exempt securities to meet their obligations.
As a result, the value of the Income Fund's shares may fluctuate
more widely than the value of shares of a portfolio investing in
securities relating to a number of different states. The ability
of state, county or local governments to meet their obligations
will depend primarily on the availability of tax and other
revenues to those governments and on their fiscal conditions
generally. There is no assurance that any California issuer
will make full payments of principal or interest or remain
solvent. For example, in December 1994, Orange County filed for
bankruptcy.
The amounts of tax and other revenues available to governmental
issuers of California tax-exempt securities may be affected from
time to time by economic, political and demographic conditions
within or outside of California. The State of California has
experienced significant financial difficulties as a result of the
ongoing recession in California. In addition, constitutional or
statutory restrictions may limit a government's power to raise
revenues or increase taxes. The availability of federal, state,
and local aid to issuers of California tax-exempt securities may
also affect their ability to meet their obligations.
Payments of principal and interest on special obligation
securities will depend on the economic condition of the facility
or specific revenue source from whose revenues the payments will
be made. The facility's economic status, in turn, could be
affected by economic, political and demographic conditions
affecting California.
Any reduction in the actual or perceived ability of an issuer of
California tax-exempt securities to meet its obligations would
likely have an adverse effect on the market value and
marketability of its obligations. A reduction in the rating of
the issuer's outstanding securities would be included among these
factors. Doubts surrounding an issuer's ability to meet its
obligations could adversely affect the values of other California
tax-exempt securities as well.
<PAGE>
Diversification and concentration policies
Each fund is a "diversified" investment company. This means
that, under the Investment Company Act of 1940 and other
applicable law, each fund may, with respect to 25% of its total
assets, invest without limit in the securities of one or more
issuers of California tax-exempt securities. Each fund is
limited with respect to the remaining portion of its assets to
investing 5% or less of its total assets in the securities of any
one issuer (other than the U.S. government).
As a result of this policy and because of the relatively small
number of issuers of California tax-exempt securities, each fund
is more likely to invest a higher percentage of its assets in the
securities of a single issuer than an investment company that
invests in a broad range of tax-exempt securities. This practice
involves an increased risk of loss to a fund if the issuer were
unable to make interest or principal payments or if the market
value of these securities were to decline.
Each fund will not invest more than 25% of its total assets in
any one industry. Governmental issuers of California tax-exempt
securities are not considered part of any "industry." However,
for this purpose California tax-exempt securities backed only by
the assets and revenues of nongovernmental users may be deemed to
be issued by nongovernmental users. Thus, the 25% limitation
would apply to these obligations.
It is possible that a fund may invest more than 25% of its assets
in a broader segment of the market for California tax-exempt
securities, such as revenue obligations of hospitals and other
health care facilities, housing revenue obligations, or airport
revenue obligations. This would be the case only if Putnam
Management determined that the yields available from obligations
in a particular segment of the market justified the additional
risks associated with such concentration.
Although these obligations could be supported by the credit of
governmental issuers or by the credit of nongovernmental issuers
engaged in a number of industries, economic, business, political
and other developments generally affecting the revenues of these
issuers may have a general adverse effect on all California tax-
exempt securities in a particular market segment. (Examples
would include proposed legislation or pending court decisions
affecting the financing of such projects and market factors
affecting the demand for their services or products.)
Each fund reserves the right to invest more than 25% of its
assets in industrial development bonds and private activity
securities consistent with its concentration and diversification
policies.
Investments in premium securities
During a period of declining interest rates, many of the Income
Fund's portfolio investments will likely bear coupon rates that
are higher than current market rates, regardless of whether these
securities were originally purchased at a premium. These
securities would generally carry market values greater than the
principal amounts payable on maturity, which would be reflected
in the net asset value of the fund's shares.
The values of these "premium" securities tend to approach the
principal amount as the securities approach maturity (or call
price in the case of securities approaching their first call
date). As a result, an investor who purchases shares of the fund
during these periods would initially receive higher monthly
distributions (derived from the higher coupon rates payable on
the fund's investments) than might be available from alternative
investments bearing current market interest rates. But the
investor may face an increased risk of capital loss as these
higher coupon securities approach maturity (or first call date).
In evaluating the potential performance of an investment in the
fund, investors may find it useful to compare the fund's current
dividend rate with the fund's "yield," which is computed on a
yield-to-maturity basis in accordance with SEC regulations and
which reflects amortization of market premiums. See "How
performance is shown."
Portfolio turnover
The length of time a fund has held a particular security is not
generally a consideration in investment decisions. A change in
the securities held by a fund is known as "portfolio turnover."
As a result of the funds' investment policies, under certain
market conditions the funds' portfolio turnover rates may be
higher than that of other mutual funds.
Portfolio turnover generally involves some expense to a fund,
including brokerage commissions or dealer markups and other
transaction costs on the sale of securities and reinvestment in
other securities. These transactions may result in realization
of taxable capital gains. Portfolio turnover rates for the 10
most recent fiscal years of the Income Fund are shown in the
section "Financial highlights."
<PAGE>
Financial futures and options
Income Fund only
The Income Fund may purchase and sell financial futures contracts
and related options for hedging purposes.
Futures contracts on the Municipal Bond Index are traded on the
Chicago Board of Trade. This index is intended to represent a
numerical measure of market performance for long-term tax-exempt
bonds. An "index future" is a contract to buy or sell units of a
particular securities index at an agreed price on a specified
future date. Depending on the change in value of the index
between the time the fund enters into and terminates an index
futures contract, the fund realizes a gain or loss. The fund may
purchase and sell futures contracts on the index (or any other
tax-exempt bond index approved for trading by the Commodity
Futures Trading Commission) to hedge against general changes in
market values of California tax-exempt securities that the fund
owns or expects to purchase. The fund may also purchase and sell
put and call options on index futures or on the indexes directly,
in addition to or as an alternative to purchasing and selling
index futures.
For hedging purposes, the fund may also purchase and sell futures
contracts and related options on U.S. Treasury securities,
including U.S. Treasury bills, notes and bonds ("U.S. government
securities") and options directly on U.S. government securities.
U.S. government securities futures and options would be used for
purposes similar to index futures and options.
In addition, the fund may purchase put and call options on, or
warrants to purchase, California tax-exempt securities, either
directly or through custodial arrangements in which the fund and
other investors own an interest in one or more options on
California tax-exempt securities.
The use of futures and options involves certain special risks and
may result in realization of taxable income or capital gains.
Futures and options transactions involve costs and may result in
losses.
Certain risks arise from the possibility of imperfect
correlations between movements in the prices of financial futures
and options and movements in the prices of the underlying bond
index or U.S. government securities or of the California tax-
exempt securities that are the subject of the hedge. The
successful use of futures and options further depends on Putnam
Management's ability to forecast interest rate movements
correctly.
Other risks arise from the fund's potential inability to close
out futures or options positions. There can be no assurance that
a liquid secondary market will exist for any futures contract or
option at a particular time. Certain provisions of the Internal
Revenue Code and certain regulatory requirements may limit the
use of futures and options transactions.
A more detailed explanation of financial futures and options
transactions and the risks associated with them is included in
the SAI.
Other investment practices
Each of the funds may engage in the following investment
practices, each of which may result in taxable income or capital
gains and involves certain special risks. The SAI contains more
detailed information about these practices, including limitations
designed to reduce these risks.
Repurchase agreements and forward commitments. Each fund may
enter into repurchase agreements on up to 25% of its assets.
These transactions must be fully collateralized at all times.
Each fund may also purchase securities for future delivery, which
may increase its overall investment exposure and involves a risk
of loss if the value of the securities declines prior to the
settlement date. These transactions involve some risk to a fund
if the other party should default on its obligation and that fund
is delayed or prevented from recovering the collateral or
completing the transaction.
Derivatives
Certain of the instruments in which the Income Fund will invest,
such as futures contracts, options, forward contracts and inverse
floating obligations, are considered to be "derivatives."
Derivatives are financial instruments whose value depends upon,
or is derived from, the value of an underlying asset, such as a
security or an index. Further information about these
instruments and the risks involved in their use is included
elsewhere in this prospectus and in the SAI.
Limiting investment risk
Specific investment restrictions help each fund limit investment
risks for their shareholders. These restrictions prohibit a fund
from acquiring more than 10% of the voting securities of any
one issuer.* These restrictions prohibit each fund from
investing more than:
<PAGE>
(a) 5% of its total assets in securities of any one issuer (other
than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities, or by the State of California
or its political subdivisions);*
(b) 5% of its net assets in securities of any issuers if the
party responsible for payment, together with any predecessor, has
been in operation less than three years (except U.S. government
and agency obligations and obligations backed by the full faith,
credit and taxing power of any person authorized to issue
California tax-exempt securities); or
(c) 15% of its net assets in any combination of securities
that are not readily marketable, in securities restricted as to
resale (excluding restricted securities that have been
determined by the Trustees (or the person designated by the
Trustees to make such determinations) to be readily marketable)
and in repurchase agreements maturing in more than seven days.
The Money Market Fund has not invested more than 10% of its net
assets in the types of securities listed in item (c) and
has no current intention of doing so.
At a meeting to be held on September 5, 1996, shareholders of
each fund will be asked to approve a number of changes to each
fund's fundamental investment restrictions. If the changes are
approved, then the second sentence of the first paragraph under
the heading "Limiting Investment Risk" above will be revised for
each fund to read as follows:
These restrictions prohibit each fund from acquiring (with
respect to 75% of its total assets) more than 10% of the voting
securities of any one issuer.*
In addition, restriction (a) above will be revised to read as
follows:
(With respect to 75% of its assets), 5% of its total assets in
securities of any issuer (other than securities issued or
guaranteed by the U.S. government or its agencies or
instrumentalities);*
If any or all of these proposals do not receive sufficient votes
for approval, this prospectus will be revised as appropriate.
Restrictions marked with an asterisk (*) above are summaries of
fundamental investment policies. See the SAI for the full text
of these policies and the funds' other fundamental investment
policies. Except for investment policies designated as
fundamental in this prospectus or the SAI, the investment
policies described in this prospectus and in the SAI are not
fundamental investment policies. The Trustees may change any
non-fundamental investment policies without shareholder approval.
As a matter of policy, the Trustees would not materially change a
fund's investment objective without shareholder approval.
HOW PERFORMANCE IS SHOWN
The Income Fund
The Income Fund's investment performance may from time to time be
included in advertisements about the fund. "Yield" for each
class of shares is calculated by dividing the annualized net
investment income per share during a recent 30-day period by the
maximum public offering price per share of the class on the last
day of that period.
For purposes of calculating yield, net investment income is
calculated in accordance with SEC regulations and may differ from
net investment income as determined for financial reporting
purposes. SEC regulations require that net investment income be
calculated on a "yield-to-maturity" basis, which has the effect
of amortizing any premiums or discounts in the current market
value of fixed-income securities. The current dividend rate is
based on net investment income as determined for tax purposes,
which may not reflect amortization in the same manner. See "How
objectives are pursued -- Investments in premium securities."
Yield is based on the price of the shares, including the maximum
initial sales charge in the case of class A and class M shares,
but does not reflect the deduction of any contingent deferred
sales charge in the case of class B shares. "Tax-equivalent
yield" for each class of shares shows the effect on performance
of the tax-exempt status of distributions received from the fund.
It reflects the approximate yield that a taxable investment must
earn for shareholders at stated income levels to produce an
after-tax yield equivalent to that class' tax-exempt yield.
"Total return" for the one-, five- and ten-year periods (or for
the life of a class, if shorter) through the most recent calendar
quarter represents the average annual compounded rate of return
on an investment of $1,000 in the Income Fund invested at the
maximum public offering price (in the case of class A and class M
shares) or reflecting the deduction of any applicable contingent
deferred sales charge (in the case of class B shares). Total
return may also be presented for other periods or based on
investment at reduced sales charge levels. Any quotation of
investment performance not reflecting the maximum initial sales
charge or contingent deferred sales charge would be reduced if
the sales charges were used.
<PAGE>
The Money Market Fund
The Money Market Fund's investment performance may from time to
time be included in advertisements about the fund. "Yield"
represents an annualization of the change in value of a
shareholder account (excluding any capital changes) for a
specific seven-day period. "Effective yield" compounds the Money
Market Fund's yield for a year and is, for that reason, greater
than the Money Market Fund's yield. "Tax-equivalent yield" shows
the effect on performance of the tax-exempt status of
distributions received from the Money Market Fund. It reflects
the approximate yield that a taxable investment must earn for
shareholders at stated income levels to produce an after-tax
yield equivalent to the Money Market Fund's tax-exempt yield or
tax-exempt effective yield.
Both funds
All data are based on past investment results and do not predict
future performance.
Investment performance, which will vary, is based on many
factors, including market conditions, the composition of each
fund's portfolio, each fund's operating expenses and which class
of shares the investor purchases. Investment performance also
often reflects the risks associated with each fund's investment
objective and policies. These factors should be considered when
comparing each fund's investment results with those of other
mutual funds and other investment vehicles.
Quotations of investment performance for any period when an
expense limitation was in effect will be greater than if the
limitation had not been in effect. Each fund's performance may
be compared to that of various indexes. See the SAI.
HOW THE FUNDS ARE MANAGED
The Trustees of the Trust and the Money Market Fund are
responsible for generally overseeing the conduct of each fund's
business. Subject to such policies as the Trustees may
determine, Putnam Management furnishes a continuing investment
program for each fund and makes investment decisions on its
behalf. Subject to the control of the Trustees, Putnam
Management also manages the funds' other affairs and business.
Each fund pays Putnam Management a quarterly fee for these
services based on its average net assets. See "Expenses summary"
and the SAI.
The following officer of Putnam Management has had primary
responsibility for the day-to-day management of the Income Fund's
portfolio since the year stated below:
Business experience
Year (at least 5 years)
---- -------------------------
William H. Reeves 1986 Employed as an investment
Senior Vice President professional by Putnam
Management since 1986.
Each fund pays all expenses not assumed by Putnam Management,
including Trustees' fees, auditing, legal, custodial, investor
servicing and shareholder reporting expenses, and payments under
its distribution plans (in the case of the Income Fund, payments
are in turn allocated to the relevant class of shares). Expenses
of the Trust directly charged or attributable to the Income Fund
will be paid from the assets of the fund. General expenses of
the Trust will be allocated among the Trust's series and charged
to the assets of the Income Fund on a basis that the Trustees
deem fair and equitable, which may be based on the relative
assets of the fund or the nature of the services performed and
relative applicability to the fund. Each of the funds reimburses
Putnam Management for the compensation and related expenses of
certain officers and their staff who provide administrative
services to the Funds. The total reimbursement is determined
annually by the Trustees.
Putnam Management places all orders for purchases and sales of
each fund's portfolio securities. In selecting broker-dealers,
Putnam Management may consider research and brokerage services
furnished to it and its affiliates. Subject to seeking the most
favorable price and execution available, Putnam Management may
consider sales of shares of each fund (and, if permitted by law,
of the other Putnam funds) as a factor in the selection of
broker-dealers.
ORGANIZATION AND HISTORY
Each of the Trust and the Money Market Fund is a Massachusetts
business trust organized on December 17, 1982 and September 2,
1987, respectively. Copies of their Agreements and Declarations
of Trust, which are governed by Massachusetts law, are on file
with the Secretary of State of The Commonwealth of Massachusetts.
Prior to June 1, 1994, the Trust was known as Putnam California
Tax Exempt Income Fund.
The Trust is an open-end, diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Trust may be divided without
shareholder approval into two or more series of shares
representing separate investment portfolios. Any such
series of shares may be divided without shareholder approval into
two or more classes of shares having such preferences and special
or relative rights and privileges as the Trustees determine. The
Income Fund's shares are currently divided into three classes.
The Income Fund may also offer other classes of shares with
different sales charges and expenses. Because of these different
sales charges and expenses, the investment performance of the
classes will vary. For more information, contact your investment
dealer or Putnam Mutual Funds (at 1-800-225-1581).
The Money Market Fund is an open-end, diversified management
investment company with an unlimited number of authorized shares
of beneficial interest. Shares of the fund may be divided
without shareholder approval into two or more series of shares
representing separate investment portfolios. Any such series of
shares may be divided without shareholder approval into two or
more classes of shares having such preferences and special or
relative rights and privileges as the Trustees determine. The
fund's shares are not currently divided into series or classes.
For both funds, each share has one vote, with fractional shares
voting proportionally. Shares of the Trust vote by individual
series on all matters except when required by the Investment
Company Act of 1940, or when the Trustees have determined that
the matter affects only the interests of one series. Shares of
each class will vote together as a single class except when
otherwise required by law or as determined by the Trustees.
Shares are freely transferable, are entitled to dividends as
declared by the Trustees, and, if a fund were liquidated, would
receive the net assets of that fund. A fund may suspend the sale
of shares at any time and may refuse any order to purchase
shares. Although the Trust and the Money Market Fund are not
required to hold annual meetings of their shareholders,
shareholders holding at least 10% of the Trust's or the Money
Market Fund's outstanding shares entitled to vote have the right
to call a meeting to elect or remove Trustees, or to take other
actions as provided in the relevant Agreement and Declaration of
Trust.
Although each fund is offering only its own shares in this
prospectus, it is possible that a fund might become liable for
any misstatement in the prospectus about another fund. The
Trustees of each fund have considered this factor in approving
the use of a single prospectus.
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares for the Income Fund and 500 shares for the
Money Market Fund), the funds may choose to redeem your shares.
You will receive at least 30 days' written notice before a fund
redeems your shares, and you may purchase additional shares at
any time to avoid a redemption. Each fund may also redeem shares
if you own shares above a maximum amount set by the Trustees.
There is presently no maximum, but the Trustees may establish one
at any time, which could apply to both present and future
shareholders.
The Trustees of the Trust and the Money Market Fund: George
Putnam,* Chairman. President of the Putnam funds. Chairman and
Director of Putnam Management and Putnam Mutual Funds Corp.
("Putnam Mutual Funds"). Director, Marsh & McLennan Companies,
Inc.; William F. Pounds, Vice Chairman. Professor of Management,
Alfred P. Sloan School of Management, Massachusetts Institute of
Technology; Jameson Adkins Baxter, President, Baxter Associates,
Inc.; Hans H. Estin, Vice Chairman, North American Management
Corp.; John A. Hill, Chairman and Managing Director, First
Reserve Corporation; Ronald J. Jackson, Former Chairman,
President and Chief Executive Officer of Fisher-Price, Inc.
Trustee of Salem Hospital and Overseer of the Peabody Essex
Museum; Elizabeth T. Kennan, President Emeritus and
Professor, Mount Holyoke College; Lawrence J. Lasser,* Vice
President of the Putnam funds. President, Chief Executive
Officer and Director of Putnam Investments, Inc. and Putnam
Management. Director, Marsh & McLennan Companies, Inc.; Robert
E. Patterson, Executive Vice President, Cabot Partners Limited
Partnership; Donald S. Perkins,* Director of various
corporations, Cummins Engine Company, Inc., Lucent
Technologies Inc., Springs Industries, Inc., including AT&T,
Kmart Corporation and Time Warner Inc.; George Putnam, III,*
President, New Generation Research, Inc.; Eli Shapiro, Alfred P.
Sloan Professor of Management, Emeritus, Alfred P. Sloan School
of Management, Massachusetts Institute of Technology; A.J.C.
Smith,* Chairman, Chief Executive Officer and Director, Marsh &
McLennan Companies, Inc.; and W. Nicholas Thorndike, Director of
various corporations and charitable organizations, including Data
General Corporation, Bradley Real Estate, Inc. and Providence
Journal Co. Also, Trustee of Massachusetts General Hospital and
Eastern Utilities Associates. The Trust's and the Money Market
Fund's Trustees are also Trustees of the other Putnam funds.
Those marked with an asterisk (*) are or may be deemed to be
"interested persons" of the Trust or the Money Market Fund,
Putnam Management or Putnam Mutual Funds.
About Your Investment
ALTERNATIVE SALES ARRANGEMENTS
(Income Fund only)
The Income Fund offers investors three classes of shares that
bear sales charges in different forms and amounts and that bear
different levels of expenses:
Class A shares. An investor who purchases class A shares pays a
sales charge at the time of purchase. As a result, class A
shares are not subject to any charges when they are redeemed,
except for certain sales at net asset value in excess of $1
million that are subject to a contingent deferred sales charge
("CDSC"). Certain purchases of class A shares qualify for
reduced sales charges. Class A shares bear a lower 12b-1 fee
than class B and class M shares. See "How to buy shares -- Class
A shares" and "Distribution plans."
Class B shares. Class B shares are sold without an initial sales
charge, but are subject to a CDSC if redeemed within a specified
period after purchase. Class B shares also bear a higher 12b-1
fee than class A and class M shares. Class B shares
automatically convert into class A shares, based on relative net
asset value, approximately eight years after purchase. For more
information about the conversion of class B shares, see the SAI.
This discussion will include information about how shares
acquired through reinvestment of distributions are treated for
conversion purposes. The discussion will also note certain
circumstances under which a conversion may not occur. Class B
shares provide an investor the benefit of putting all of the
investor's dollars to work from the time the investment is made.
Until conversion, class B shares will have a higher expense ratio
and pay lower dividends than class A and class M shares because
of the higher 12b-1 fee. See "How to buy shares -- Class B
shares" and "Distribution plans."
Class M shares. An investor who purchases class M shares pays a
sales charge at the time of purchase that is lower than the sales
charge applicable to class A shares. Certain purchases of class
M shares qualify for reduced sales charges. Class M shares bear
a 12b-1 fee that is lower than class B shares but higher than
class A shares. Class M shares are not subject to any CDSC and
do not convert into any other class of shares. See "How to buy
shares -- Class M shares" and "Distribution plans."
Which arrangement is best for you? The decision as to which
class of shares provides a more suitable investment for an
investor depends on a number of factors, including the amount and
intended length of the investment. Investors making investments
that qualify for reduced sales charges might consider class A or
class M shares. Investors who prefer not to pay an initial sales
charge might consider class B shares. Orders for class B shares
for $250,000 or more and orders for class M shares for $1 million
or more will be treated as orders for class A shares or declined.
For more information about these sales arrangements, consult your
investment dealer or Putnam Investor Services. Shares may only
be exchanged for shares of the same class of another Putnam fund.
See "How to exchange shares."
<PAGE>
HOW TO BUY SHARES
The Income Fund
You can open a fund account with as little as $500 and make
additional investments at any time with as little as $50. You
can buy fund shares three ways - through most investment
dealers, through Putnam Mutual Funds (at 1-800-225-1581), or
through a systematic investment plan. If you do not have a
dealer, Putnam Mutual Funds can refer you to one.
Buying shares through Putnam Mutual Funds. Complete an order
form and write a check for the amount you wish to invest, payable
to the fund. Return the completed form and check to Putnam
Mutual Funds, which will act as your agent in purchasing shares
through your designated investment dealer.
Buying shares through systematic investing. You can make regular
investments of $25 or more per month through automatic deductions
from your bank checking or savings account. Application forms
are available from your investment dealer or through Putnam
Investor Services.
Shares are sold at the public offering price based on the net
asset value next determined after Putnam Investor Services
receives your order. In most cases, in order to receive that
day's public offering price, Putnam Investor Services must
receive your order before the close of regular trading on the New
York Stock Exchange. If you buy shares through your investment
dealer, the dealer must receive your order before the close of
regular trading on the New York Stock Exchange to receive that
day's public offering price.
Class A shares
The public offering price of class A shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, in its discretion, allocates the entire amount to
your investment dealer.
<PAGE>
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 25,000 4.99% 4.75% 4.50%
25,000 but under 100,000 4.71 4.50 4.25
100,000 but under 250,000 3.90 3.75 3.50
250,000 but under 500,000 3.09 3.00 2.75
500,000 but under 1,000,000 2.04 2.00 1.85
- -----------------------------------------------------------------
There is no initial sales charge on purchases of class A shares
of $1 million or more. However, a CDSC of 1.00% or 0.50%,
respectively, will be imposed if you redeem these shares within
the first or second year after purchase, based on the lower of
the shares' cost and current net asset value. Any shares
acquired by reinvestment of distributions will be redeemed
without a CDSC.
Shares purchased by certain investors investing $1 million or
more who have made arrangements with Putnam Mutual Funds and
whose dealer of record waived the commission as described below
are not subject to the CDSC. In determining whether a CDSC is
payable, the fund will first redeem shares not subject to any
charge. Putnam Mutual Funds receives the entire amount of any
CDSC you pay. See the SAI for more information about the CDSC.
Putnam Mutual Funds pays investment dealers of record commissions
on sales of class A shares of $1 million or more based on an
investor's cumulative purchases during the one-year period
beginning with the date of the initial purchase at net asset
value. Each subsequent one-year measuring period for these
purposes will begin with the first net asset value purchase
following the end of the prior period. Such commissions are paid
at the rate of 1.00% of the amount under $3 million, 0.50% of the
next $47 million and 0.25% thereafter.
Class B shares
Class B shares are sold without an initial sales charge, although
a CDSC will be imposed if you redeem shares within a specified
period after purchase, as shown in the table below. The
following types of shares may be redeemed without charge at any
time: (i) shares acquired by reinvestment of distributions and
(ii) shares otherwise exempt from the CDSC, as described in "How
to buy shares -- The Income Fund -- General" below. For other
shares, the amount of the charge is determined as a percentage of
the lesser of the current market value or the cost of the shares
being redeemed.
Year 1 2 3 4 5 6 7+
- -------------------------------------------------------------
Charge 5% 4% 3% 3% 2% 1% 0%
In determining whether a CDSC is payable on any redemption, a
fund will first redeem shares not subject to any charge, and then
shares held longest during the CDSC period. For this purpose,
the amount of any increase in a share's value above its initial
purchase price is not regarded as a share exempt from the CDSC.
Thus, when a share that has appreciated in value is redeemed
during the CDSC period, a CDSC is assessed only on its initial
purchase price. For information on how sales charges are
calculated if you exchange your shares, see "How to exchange
shares." Putnam Mutual Funds receives the entire amount of any
CDSC you pay.
Class M shares
The public offering price of class M shares is the net asset
value plus a sales charge that varies depending on the size of
your purchase. The fund receives the net asset value. The sales
charge is allocated between your investment dealer and Putnam
Mutual Funds as shown in the following table, except when Putnam
Mutual Funds, at its discretion, allocates the entire amount to
your investment dealer.
Sales charge Amount of
as a percentage of: sales charge
------------------- reallowed to
Net dealers as a
Amount of transaction amount Offering percentage of
at offering price ($) invested price offering price
- -----------------------------------------------------------------
Under 50,000 3.36% 3.25% 3.00%
50,000 but under 100,000 2.30 2.25 2.00
100,000 but under 250,000 1.52 1.50 1.25
250,000 but under 500,000 1.01 1.00 1.00
500,000 and above NONE NONE NONE
General
You may be eligible to buy class A shares and class M shares at
reduced sales charges.
Consult your investment dealer or Putnam Mutual Funds for details
about Putnam's combined purchase privilege, cumulative quantity
discount, statement of intention, group sales plan, employee
benefit plans, and other plans. Descriptions are also included
in the order form and in the SAI.
<PAGE>
Sales charges will not apply to class M shares purchased with
redemption proceeds received within the prior 90 days from non-
Putnam mutual funds on which the investor paid a front-end or a
contingent deferred sales charge.
The fund may sell class A, class B and class M shares at net
asset value without an initial sales charge or a CDSC to the
Trust's current and retired Trustees (and their families),
current and retired employees (and their families) of Putnam
Management and affiliates, registered representatives and other
employees (and their families) of broker-dealers having sales
agreements with Putnam Mutual Funds, employees (and their
families) of financial institutions having sales agreements with
Putnam Mutual Funds (or otherwise having an arrangement with a
broker-dealer or financial institution with respect to sales of
fund shares), financial institution trust departments investing
an aggregate of $1 million or more in Putnam funds, clients of
certain administrators of tax-qualified plans, tax-qualified
plans when proceeds from repayments of loans to participants are
invested (or reinvested) in Putnam funds, "wrap accounts" for the
benefit of clients of broker-dealers, financial institutions or
financial planners adhering to certain standards established by
Putnam Mutual Funds, and investors meeting certain requirements
who sold shares of certain Putnam closed-end funds pursuant to a
tender offer by the closed-end fund.
In addition, the fund may sell shares at net asset value without
an initial sales charge or a CDSC in connection with the
acquisition by the fund of assets of an investment company or
personal holding company. The CDSC will be waived on redemptions
of shares arising out of the death or post-purchase disability of
a shareholder or settlor of a living trust account, and on
redemptions in connection with certain withdrawals from IRA or
other retirement plans. Up to 12% of the value of shares subject
to a systematic withdrawal plan may also be redeemed each year
without a CDSC. The SAI contains additional information about
purchasing the Income Fund's shares at reduced sales charges.
Shareholders of other Putnam funds may be entitled to exchange
their shares for, or reinvest distributions from their funds in,
shares of the fund at net asset value.
If you are considering redeeming or exchanging shares or
transferring shares to another person shortly after purchase, you
should pay for those shares with a certified check to avoid any
delay in redemption, exchange or transfer. Otherwise the Trust
may delay payment until the purchase price of those shares has
been collected or, if you redeem by telephone, until 15 calendar
days after the purchase date. To eliminate the need for
safekeeping, the Trust will not issue certificates for your
shares unless you request them.
The Money Market Fund
The Money Market Fund continuously offers its shares at a price
of $1.00 per share. You can open an account for $1,000 or more
and make additional investments at any time for as little as
$100. You can buy fund shares three ways -- by mail, by wire, or
through most investment dealers. There are no sales charges on
the sales of shares although the fund pays certain distribution
expenses described below.
Because the fund seeks to be fully invested at all times,
investments must be in Same Day Funds to be accepted. Same Day
Funds are monies credited to the account of the fund's designated
bank by the Federal Reserve Bank of Boston. When payment in Same
Day Funds is available to the fund prior to the close of regular
trading on the New York Stock Exchange, the fund will accept the
order to purchase shares that day.
If you are considering redeeming shares or transferring shares to
another person shortly after purchase, you should pay for those
shares with wired Same Day Funds or a certified check to avoid
any delay in redemption or transfer. Otherwise, the fund may
delay payment for shares until the purchase price of those shares
has been collected or, if you redeem by check, telephone or
Telex, until 15 calendar days after the purchase date.
After you make your initial investment in the fund, Putnam
Investor Services will establish an Investing Account for you on
the fund's records. This account is a complete record of all
transactions between you and the fund, which at all times shows
the balance of shares you own. The fund will not issue share
certificates.
Buying shares by mail. Complete the order form and send it to
Putnam Investor Services with your check, Federal Reserve Draft
or other negotiable bank draft drawn on a U.S. bank and payable
in U.S. dollars to the order of Putnam California Tax Exempt
Money Market Fund. If you pay by check or draft, the fund's
designated bank will make Same Day Funds available to the fund,
and the fund will accept the order on the first business day
after receipt of your check or draft. If you pay by Federal
Reserve Draft, the fund will accept the order the day it is
received provided it is received before the close of regular
trading on the New York Stock Exchange.
Buying shares by wire. You may invest in the fund by bank wire
transfer of Same Day Funds to the fund's designated bank. For
wiring instructions, see the order form.
Any commercial bank can transfer Same Day Funds by wire. Wired
funds received by the fund's designated bank by 3:00 p.m. Boston
time are normally accepted for investment on the day received.
To be sure that a bank wire order is accepted on the same day it
is sent, your bank should wire funds as early in the day as
possible. Your bank may charge for sending Same Day Funds on
your behalf. The fund's designated bank presently does not
charge you for receipt of wired Same Day Funds, but reserves the
right to charge for this service.
Buying shares through investment dealers. You may, if you wish,
purchase shares of the fund through investment dealers, which may
charge a fee for their services. Most investment dealers have a
sales agreement with Putnam Mutual Funds and will be glad to
accept your order. If you do not have a dealer, Putnam Mutual
Funds can refer you to one. Investment dealers must follow the
instructions in the order form.
Both funds
Putnam Mutual Funds will from time to time, at its expense,
provide additional promotional incentives or payments to dealers
that sell shares of the Putnam funds. These incentives or
payments may include payments for travel expenses, including
lodging, incurred in connection with trips taken by invited
registered representatives and their guests to locations within
and outside the United States for meetings or seminars of a
business nature. In some instances, these incentives or payments
may be offered only to certain dealers who have sold or may sell
significant amounts of shares. Certain dealers may not sell all
classes of shares.
DISTRIBUTION PLANS
The Income Fund
Class A distribution plan. The class A plan provides for
payments by the fund to Putnam Mutual Funds at the annual rate of
up to 0.35% of average net assets attributable to class A shares.
The Trustees currently limit payments under the class A plan to
the annual rate of 0.20% of such assets.
Putnam Mutual Funds makes quarterly payments to qualifying
dealers (including, for this purpose, certain financial
institutions) to compensate them for services provided in
connection with sales of class A shares and the maintenance of
shareholder accounts. The payments are based on the average net
asset value of class A shares attributable to shareholders for
whom the dealers are designated as the dealer of record.
This calculation excludes until one year after purchase shares
purchased at net asset value, known as "NAV shares," by
shareholders investing $1 million or more. NAV shares are not
subject to the one-year exclusion provisions in cases where
certain shareholders who invested $1 million or more have made
arrangements with Putnam Mutual Funds and the dealer of record
waived the sales commission.
Putnam Mutual Funds makes the quarterly payments at the annual
rate of 0.15% of such average net asset value for class A shares
outstanding as of December 31, 1992 and 0.20% of such average net
asset value of shares acquired after that date (including shares
acquired through reinvestment of distributions).
Class B and class M distribution plans. The class B and class M
plans provide for payments by the fund to Putnam Mutual Funds at
the annual rate of up to 1.00% of average net assets attributable
to class B shares and class M shares, as the case may be. The
Trustees currently limit payments under the class B and class M
plans to the annual rate of 0.85% and 0.50% of such assets,
respectively.
Although class B shares are sold without an initial sales charge,
Putnam Mutual Funds pays a sales commission equal to 4.00% of the
amount invested (including a prepaid service fee of 0.20% of the
amount invested) to dealers who sell class B shares. These
commissions are not paid on exchanges from other Putnam funds or
on sales to investors exempt from the CDSC.
The amount paid to dealers at the time of the sale of class M
shares is set forth above under "How to buy shares -- Class M
shares." In addition, to further compensate dealers (including
qualifying financial institutions) for services provided in
connection with sales of class B shares and class M shares and
the maintenance of shareholder accounts, Putnam Mutual Funds
makes quarterly payments to qualifying dealers.
The payments are based on the average net asset value of class B
shares and class M shares attributable to shareholders for whom
the dealers are designated as the dealer of record, except for
the first year's service fees in respect of class B shares, which
are prepaid as described above. Putnam Mutual Funds makes the
payments at an annual rate of 0.20% of such average net asset
value of class B shares and class M shares, as the case may be.
Putnam Mutual Funds also pays to dealers, as additional
compensation with respect to the sale of class M shares, 0.20% of
such average net asset value of class M shares. For class M
shares, the total annual payment to dealers equals 0.40% of such
average net asset value.
The Money Market Fund
The purpose of this plan is to permit the Money Market Fund to
compensate Putnam Mutual Funds for services provided and expenses
incurred by it in promoting the sales of shares of the Money
Market Fund, reducing redemptions, or maintaining or improving
services provided to shareholders by Putnam Mutual Funds or
dealers. The plan provides for payments by the Money Market Fund
to Putnam Mutual Funds at the annual rate of up to 0.35% of the
Money Market Fund's average net assets. No payments under the
plan are currently authorized. Should the Money Market Fund's
Trustees decide in the future to approve payments, shareholders
will be notified and this prospectus will be revised.
General (both funds). Payments under the plans are intended to
compensate Putnam Mutual Funds for services provided and expenses
incurred by it as principal underwriter of each fund's shares,
including the payments to dealers mentioned above. Putnam Mutual
Funds may suspend or modify such payments to dealers.
The payments are also subject to the continuation of the relevant
distribution plan, the terms of service agreements between
dealers and Putnam Mutual Funds, and any applicable limits
imposed by the National Association of Securities Dealers, Inc.
HOW TO SELL SHARES
The Income Fund
You can sell your shares to the fund any day the New York Stock
Exchange is open, either directly to the fund or through your
investment dealer. The fund will only redeem shares for which it
has received payment.
Selling shares directly to the fund. Send a signed letter of
instruction or stock power form to Putnam Investor Services,
along with any certificates that represent shares you want to
sell. The price you will receive is the next net asset value
calculated after the fund receives your request in proper form
less any applicable CDSC. In order to receive that day's net
asset value, Putnam Investor Services must receive your request
before the close of regular trading on the New York Stock
Exchange.
If you sell shares having a net asset value of $100,000 or more,
the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer or
certain other financial institutions. See the SAI for more
information about where to obtain a signature guarantee. Stock
power forms are available from your investment dealer, Putnam
Investor Services and many commercial banks.
If you want your redemption proceeds sent to an address other
than your address as it appears on Putnam's records, a signature
guarantee is required. Putnam Investor Services usually requires
additional documentation for the sale of shares by a corporation,
partnership, agent or fiduciary, or a surviving joint owner.
Contact Putnam Investor Services for details.
The fund generally sends you payment for your shares the
business day after your request is received. Under unusual
circumstances, the fund may suspend redemptions, or postpone
payment for more than seven days, as permitted by federal
securities law.
You may use Putnam's Telephone Redemption Privilege to redeem
shares valued up to $100,000 from your account unless you have
notified Putnam Investor Services of an address change within the
preceding 15 days. Unless an investor indicates otherwise on the
account application, Putnam Investor Services will be authorized
to act upon redemption and transfer instructions received by
telephone from a shareholder, or any person claiming to act as
his or her representative, who can provide Putnam Investor
Services with his or her account registration and address as it
appears on Putnam Investor Services' records.
Putnam Investor Services will employ these and other reasonable
procedures to confirm that instructions communicated by telephone
are genuine; if it fails to employ reasonable procedures, Putnam
Investor Services may be liable for any losses due to
unauthorized or fraudulent instructions. For information,
consult Putnam Investor Services.
During periods of unusual market changes and shareholder
activity, you may experience delays in contacting Putnam Investor
Services by telephone. In this event, you may wish to submit a
written redemption request, as described above, or contact your
investment dealer, as described below. The Telephone Redemption
Privilege is not available if you were issued certificates for
shares that remain outstanding. The Telephone Redemption
Privilege may be modified or terminated without notice.
Selling shares through your investment dealer. Your dealer must
receive your request before the close of regular trading on the
New York Stock Exchange to receive that day's net asset value.
Your dealer will be responsible for furnishing all necessary
documentation to Putnam Investor Services, and may charge you for
its services.
The Money Market Fund
You can sell your shares to the fund any day the New York Stock
Exchange is open, by check, by telephone or Telex, by mail or
through your investment dealer. The fund must receive your
properly completed application before you may sell shares;
certain methods require additional documentation (see below). To
enable shareholders to earn daily dividends as long as possible,
the fund has arranged the following methods of selling shares:
<PAGE>
Selling shares by check. If you would like to use the fund's
check-writing service, mark the proper box on the order form and
complete the signature card and, if applicable, the resolution.
Upon receiving the properly completed order form, signature card,
and resolution, the fund will send you checks which may be made
payable to the order of any person in the amount of $500 or more.
You will continue to earn dividends until the check clears. When
a check is presented to the fund's designated bank for payment, a
sufficient number of full and fractional shares in your account
will be redeemed to cover the amount of the check.
Shareholders utilizing fund checks are subject to the bank's
rules governing checking accounts. There is currently no charge
to the shareholder for the use of checks. You should make sure
that there are sufficient shares in your account to cover the
amount of the check drawn. If there is an insufficient number of
shares in the account, the check will be returned and no shares
will be redeemed. Because dividends declared on shares held in
your account or prior withdrawals may cause the value of your
account to change, it is impossible to determine in advance your
account's total value. Accordingly, you should not write a check
for the entire value of your account or close your account by
writing a check. Redemptions by check will be confirmed at least
monthly.
Selling shares by telephone. If you would like to sell fund
shares by telephone with proceeds directed to your bank account,
please mark the proper box on the order form. You may call toll-
free 1-800-225-1581. On the following business day, the amounts
withdrawn from your account will either be mailed by check or
wired in Same Day Funds to the bank account designated on your
application. (To wire proceeds, the amount must be $1,000 or
more and the designated bank must be a commercial bank within the
United States.) You may change a designated bank account by
sending a written request to Putnam Investor Services with your
signature guaranteed by a bank, broker-dealer or certain other
financial institutions. See the SAI for more information about
how to obtain a signature guarantee.
You may also use Putnam's Telephone Redemption Privilege to
redeem shares valued up to $100,000 from your account unless you
have notified Putnam Investor Services of an address change
within the preceding 15 days. Unless an investor indicates
otherwise on the account application, Putnam Investor Services
will be authorized to act upon redemption and transfer
instructions received by telephone from a shareholder, or any
person claiming to act as his or her representative, who can
provide Putnam Investor Services with his or her account
registration and address as it appears on Putnam Investor
Services' records. Putnam Investor Services will employ these
and other reasonable procedures to confirm that instructions
communicated by telephone are genuine; if it fails to employ
reasonable procedures, Putnam Investor Services may be liable for
any losses due to unauthorized or fraudulent instructions. For
information, consult Putnam Investor Services. During periods of
unusual market changes and shareholder activity, you may
experience delays in contacting Putnam Investor Services by
telephone in which case you may wish to submit a written
redemption request, as described below, or contact your
investment dealer. The Telephone Redemption Privilege may be
modified or terminated without notice.
Selling shares by mail. You may also sell shares of the fund by
sending a written withdrawal request to: Putnam Investor
Services, Mailing address: P.O. Box 41203, Providence, RI 02940-
1203. If you sell shares having a net asset value of $100,000 or
more, the signatures of registered owners or their legal
representatives must be guaranteed by a bank, broker-dealer or
certain other financial institutions. See the SAI for more
information about where to obtain a signature guarantee.
Putnam Investor Services may require additional documentation
from shareholders which are corporations, partnerships, agents,
fiduciaries or surviving joint owners. Corporations,
partnerships, agents, trusts and fiduciary accounts must submit a
completed resolution in proper form before selling shares by
telephone or check. Resolution forms are available from Putnam
Investor Services. If you are currently a shareholder and did
not request the check writing service or telephone/Telex
redemption privilege on your initial order form, you must first
complete and return an authorization form, available from Putnam
Investor Services. A shareholder may revoke authorization for
the check writing service or telephone/Telex redemption by
written notice at any time, effective when Putnam Investor
Services receives such notice.
The fund reserves the right to terminate or modify the terms of
the check writing service or telephone/Telex redemption
privilege, or to charge shareholders for the use of these
services at any time.
The fund generally sends you payment for your shares the business
day after your request is received. Under unusual circumstances,
the fund may suspend repurchases, or postpone payment for more
than seven days, as permitted by federal securities law.
HOW TO EXCHANGE SHARES
Shareholders of the Money Market Fund who received their shares
in exchange for shares of another Putnam fund with a sales
charge, and shareholders of the Income Fund, can exchange their
shares for shares of other Putnam funds at net asset value
beginning 15 days after purchase. Other shareholders of the
Money Market Fund may need to pay a sales charge, which varies
depending on the fund in which they exchange and the amount
exchanged. Shareholders of the Money Market Fund exchanging into
funds with more than one class of shares may exchange their
shares only for class A shares of the other fund. Shareholders
of the Income Fund may exchange their shares only for shares of
the same class. Not all Putnam funds offer all classes of
shares. If you exchange shares subject to a CDSC, the
transaction will not be subject to the CDSC. However, when you
redeem the shares acquired through the exchange, the redemption
may be subject to the CDSC, depending upon when you originally
purchased the shares. The CDSC will be computed using the
schedule of any fund into or from which you have exchanged your
shares that would result in your paying the highest CDSC
applicable to your class of shares. For purposes of computing
the CDSC, the length of time you have owned your shares will be
measured from the date of original purchase and will not be
affected by any exchange.
To exchange your shares, simply complete an Exchange
Authorization Form and send it to Putnam Investor Services. The
form is available from Putnam Investor Services. For federal
income tax purposes, an exchange is treated as a sale of shares
and generally results in a capital gain or loss. A Telephone
Exchange Privilege is currently available for amounts up to
$500,000. Putnam Investor Services' procedures for telephonic
transactions are described above under "How to sell shares." The
Telephone Exchange Privilege is not available if you were issued
certificates for shares that remain outstanding. Ask your
investment dealer or Putnam Investor Services for prospectuses of
other Putnam funds. Shares of certain Putnam funds are not
available to residents of all states.
The exchange privilege is not intended as a vehicle for short-
term trading. Excessive exchange activity may interfere with
portfolio management and have an adverse effect on all
shareholders. In order to limit excessive exchange activity and
in other circumstances where Putnam Management or the Trustees
believe doing so would be in the best interests of a fund, each
fund reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any
exchange. Shareholders would be notified of any such action to
the extent required by law. Consult Putnam Investor Services
before requesting an exchange. See the SAI to find out more
about the exchange privilege.
HOW A FUND VALUES ITS SHARES
General. The Money Market Fund calculates the net asset value of
a share, and the Income Fund calculates the net asset value of a
share of each class, by dividing the total value of its assets,
less liabilities, by the number of shares outstanding. Shares
are valued as of the close of regular trading on the New York
Stock Exchange each day the Exchange is open.
The Income Fund. California tax-exempt securities are valued on
the basis of valuations provided by a pricing service approved by
the Trustees, which uses information with respect to transactions
in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between
securities in determining value.
The fund believes that reliable market quotations are generally
not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the
valuations provided by a pricing service will be based upon fair
value determined on the basis of the factors listed above.
Non-tax-exempt securities for which market quotations are readily
available are valued at market value. Short-term investments
that will mature in 60 days or less are valued at amortized cost,
which approximates market value. All other securities and assets
are valued at their fair value following procedures approved by
the Trustees.
The Money Market Fund. The Money Market Fund values its
portfolio investments at amortized cost according to Rule 2a-7
of the 1940 Act. The amortized cost of an instrument is
determined by valuing it at cost originally and thereafter
amortizing any discount or premium from its face value at a
constant rate until maturity.
HOW A FUND MAKES DISTRIBUTIONS TO SHAREHOLDERS; TAX INFORMATION
The Income Fund. The fund declares all of its net interest
income as a distribution on each day it is open for business.
Net interest income consists of interest accrued on portfolio
investments of the fund, less accrued expenses, computed in each
case since the most recent determination of net asset value.
Normally, the fund pays distributions of net interest income
monthly. The fund will distribute at least annually all net
realized capital gains, if any, after applying any available
capital loss carryovers. Distributions paid by the fund with
respect to class A shares will generally be greater than those
paid with respect to class B and class M shares because expenses
attributable to class B and class M shares will generally be
higher.
You begin earning distributions on the business day after Putnam
Mutual Funds receives payment for your shares. It is your
responsibility to see that your dealer forwards payment promptly.
<PAGE>
The Money Market Fund. The fund determines its net income once
each day the New York Stock Exchange is open, as of the close of
regular trading on the Exchange. Each determination of the
fund's net income includes (i) all accrued interest on portfolio
investments of the fund, (ii) plus or minus all realized and
unrealized gains and losses on the fund's investments, (iii) less
all accrued expenses of the fund. (The fund will not have
unrealized gains or losses so long as it values its investments
by the amortized cost method.) All of the net income of the fund
is declared each day that the fund is open for business as a
dividend to shareholders of record at the time of each
declaration. Shareholders begin earning dividends on the day
after the fund accepts their orders. Each month's dividends will
be paid and reinvested on the fifth business day of the next
month. Since the net income of the fund is declared as a
dividend each time it is determined, the net asset value per
share of the fund remains at $1.00 immediately after each
determination and dividend declaration.
You can choose from these distribution options:
- - (Both funds) Reinvest all distributions in additional shares
of your fund without a sales charge;
- - (Income Fund only) Receive distributions from net investment
income in cash while reinvesting capital gains distributions
in additional shares without a sales charge; or
- - (Both funds) Receive all distributions in cash.
You can change your distribution option by notifying Putnam
Investor Services in writing. If you do not select an option
when you open your account, all distributions will be reinvested.
All distributions not paid in cash will be reinvested in shares
of the class on which the distributions are paid. You will
receive a statement confirming reinvestment of distributions in
additional shares (or in shares of other Putnam funds for
Dividends Plus accounts) promptly following the quarter in which
the reinvestment occurs.
If a check representing a fund distribution is not cashed within
a specified period, Putnam Investor Services will notify you that
you have the option of requesting another check or reinvesting
the distribution in the fund or in another Putnam fund. If
Putnam Investor Services does not receive your election, the
distribution will be reinvested in the fund. Similarly, if
correspondence sent by a fund or Putnam Investor Services is
returned as "undeliverable," fund distributions will
automatically be reinvested in that fund or in another Putnam
fund.
Each fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on
income and gains it distributes to shareholders. Each fund will
distribute substantially all of its ordinary income and capital
gain net income on a current basis.
Fund distributions designated as "exempt-interest dividends" are
not generally subject to federal income tax. In addition, to the
extent that distributions are derived from interest on California
tax-exempt securities, such distributions will be exempt from
California personal income tax (but not from California franchise
and corporate income tax). However, if you receive social
security or railroad retirement benefits, you should consult your
tax adviser to determine what effect, if any, an investment in a
fund may have on the federal taxation of your benefits.
California does not tax any portion of social security or
railroad retirement benefits. In addition, an investment in a
fund may result in liability for federal alternative minimum tax,
both for individual and corporate shareholders.
The Income Fund may at times purchase California tax-exempt
securities at a discount from the price at which they were
originally issued, especially during periods of rising interest
rates. For federal income tax and California personal income tax
purposes, some or all of this market discount will be included in
the fund's ordinary income and will be taxable to shareholders as
such when it is distributed to them.
All distributions from other than exempt-interest
dividends will be taxable to you as ordinary income except that
any distributions of net long-term capital gains will be taxable
to you as such, regardless of how long you have held your shares.
Distributions will be taxable as described above whether received
in cash or in shares through the reinvestment of distributions.
Early in each year Putnam Investor Services will notify you of
the amount and tax status of distributions paid to you for the
preceding year.
For California tax purposes, distributions derived from
sources other than interest on (i) California tax-
exempt securities and (ii) obligations of the United States (or
other obligations) which pay interest exempt from California
personal income taxation under the Constitution or laws of the
United States will be taxable as ordinary income or as long
term capitol gain , whether paid in cash or reinvested in
additional shares.
The foregoing is a summary of certain federal and California
income tax consequences of investing in the funds. You should
consult your tax adviser to determine the precise effect of an
investment in the fund on your particular tax situation
(including possible liability for federal alternative minimum tax
and state and local taxes).
About Putnam Investments, Inc.
Putnam Management has been managing mutual funds since 1937.
Putnam Mutual Funds is the principal underwriter of each fund and
of other Putnam funds. Putnam Fiduciary Trust Company is the
funds' custodian. Putnam Investor Services, a division of Putnam
Fiduciary Trust Company, is the funds' investor servicing and
transfer agent.
Putnam Management, Putnam Mutual Funds and Putnam Fiduciary Trust
Company are subsidiaries of Putnam Investments, Inc., which is
wholly owned by Marsh & McLennan Companies, Inc., a publicly-
owned holding company whose principal businesses are
international insurance and reinsurance brokerage, employee
benefit consulting and investment management.
<PAGE>
Appendix
SECURITIES RATINGS
The following rating services describe rated securities as
follows:
Moody's Investors Service, Inc.
Bonds
Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edged". Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than
the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
<PAGE>
Notes
MIG 1/VMIG 1 -- This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the
market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins
of protection are ample although not so large as in the preceding
group.
Commercial paper
Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by the following characteristics:
- -- Leading market positions in well established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- -- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- -- Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
This will normally be evidenced by many of the characteristics
cited above to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity
is maintained.
Standard & Poor's
Bonds
AAA -- Debt rated 'AAA' has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only
in small degree.
A -- Debt rated 'A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB -- Debt rated 'BBB' is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB -- Debt rated `BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The `BB' rating
category is also used for debt subordinated to senior debt that
is assigned an actual or implied `BBB-' rating.
Notes
SP-1 -- Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are given a
plus sign (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes over
the term of the notes.
Commercial paper
A-1 -- This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with
a plus sign (+) designation.
A-2 -- Capacity for timely payment on issues with this
designation is satisfactory. However, the relative degree of
safety is not as high as for issues designated`A-1'.
<PAGE>
Make the most of your Putnam privileges
As a Putnam mutual fund shareholder , you have access to
a number of services that can help you build a more effective and
flexible financial program. Here are some of the ways you can use
these privileges to make the most of your Putnam mutual fund
investment.
SYSTEMATIC INVESTMENT PLAN
Invest as much as you wish ($25 or more) on any business
day of the month except for the 29th, 30th, or 31st. The amount
will be automatically transferred from your checking or savings
account.
SYSTEMATIC WITHDRAWAL
Make regular withdrawals of $50 or more monthly,
quarterly, or semiannually from an account valued at $10,000 or
more. Your automatic withdrawal may be made on any
business day of the month except for the 29th, 30th, or 31st.
SYSTEMATIC EXCHANGE
Transfer assets automatically from one Putnam account to
another on a regular, prearranged basis. There is no additional
charge for this service.
FREE EXCHANGE PRIVILEGE
Exchange money between Putnam funds in the same class of
shares without charge. The exchange privilege allows you to
adjust your investments as your objectives change. A signature
guarantee is required for exchanges of more than $500,000 and
shares of all Putnam funds may not be available to all investors.
DIVIDENDS PLUS
Diversify your portfolio by investing dividends and other
distributions from one Putnam fund automatically into another at
net asset value.
STATEMENT OF INTENTION
To reduce a front-end sales charge, you may agree to invest a
minimum dollar amount over 13 months. Depending on your fund,
the minimum is $25,000, $50,000, or $100,000. Whenever you make
an investment under this arrangement, you or your investment
advisor should notify Putnam that a Statement of Intention is in
effect .
<PAGE>
Investors may not maintain, within the same fund, simultaneous
plans for systematic investment or exchange and systematic
withdrawal or exchange. These privileges are subject to change
or termination.
For more information about any of these services and privileges,
call your investment advisor or a Putnam customer service
representative toll - free at 1 - 800 - 225 -
1581.<PAGE>
PUTNAM CALIFORNIA TAX EXEMPT INCOME FUND
PUTNAM CALIFORNIA TAX EXEMPT MONEY MARKET FUND
One Post Office Square
Boston, MA 02109
FUND INFORMATION:
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
INVESTOR SERVICING AGENT
Putnam Investor Services
Mailing address:
P.O. Box 41203
Providence, RI 02940-1203
CUSTODIAN
Putnam Fiduciary Trust Company
One Post Office Square
Boston, MA 02109
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
Toll-free 1-800-225-1581
