PROSPECTUS
JANUARY 1,
1994 , AS REVISED
JUNE 15, 1994
PUTNAM ARIZONA TAX EXEMPT INCOME FUND
CLASS A AND B SHARES
INVESTMENT STRATEGY: TAX-ADVANTAGED
This Prospectus explains concisely what you should know before
investing in the Fund. Please read it carefully and keep it for
future reference. You can find more detailed information about
the Fund in the January 1, 1994 Statement of Additional
Information, as amended from time to time. For a free copy of
the Statement, call Putnam Investor Services at 1-800-225-1581.
The Statement has been filed with the Securities and Exchange
Commission and is incorporated into this Prospectus by reference.
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 FUND 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 .
BOSTON * LONDON * TOKYO
<PAGE>
PUTNAM ARIZONA TAX EXEMPT INCOME FUND (THE "FUND") SEEKS AS HIGH
A LEVEL OF CURRENT INCOME EXEMPT FROM FEDERAL INCOME TAX AND
ARIZONA STATE INCOME TAX AS PUTNAM INVESTMENT MANAGEMENT, INC.,
THE FUND'S INVESTMENT MANAGER ("PUTNAM MANAGEMENT"), BELIEVES IS
CONSISTENT WITH PRESERVATION OF CAPITAL. THE FUND INVESTS
PRIMARILY IN A PORTFOLIO OF ARIZONA TAX EXEMPT SECURITIES, WHICH
MAY INCLUDE SECURITIES OF ISSUERS OTHER THAN THE STATE OF ARIZONA
AND ITS POLITICAL SUBDIVISIONS.
THE FUND OFFERS TWO CLASSES OF SHARES: CLASS A AND CLASS B.
EACH CLASS IS SOLD PURSUANT TO DIFFERENT SALES ARRANGEMENTS AND
BEARS DIFFERENT EXPENSES. FOR MORE INFORMATION ABOUT THE
DIFFERENT SALES ARRANGEMENTS, SEE "ALTERNATIVE SALES
ARRANGEMENTS." FOR INFORMATION ABOUT VARIOUS EXPENSES BORNE BY
EACH CLASS, SEE "EXPENSES SUMMARY."
ABOUT THE FUND
Expenses summary..................................... 3
Financial highlights................................. 4
Objective............................................ 6
How objective is pursued............................. 6
How performance is shown............................. 15
How the Fund is managed.............................. 16
Organization and history............................. 16
ABOUT YOUR INVESTMENT
Alternative sales arrangements....................... 18
How to buy shares.................................... 19
Distribution Plans...................................
23
How to sell shares................................... 24
How to exchange shares...............................
26
How the Fund values its shares.......................
27
How distributions are made; tax information..........
27
ABOUT PUTNAM INVESTMENTS, INC. 29
APPENDIX 30
Tax-exempt security ratings 30
<PAGE>
ABOUT THE FUND
EXPENSES SUMMARY
Expenses are one of several factors to consider when investing in
the Fund. The following table summarizes your maximum
transaction costs from investing in the Fund and expenses
incurred by the Fund based on its most recent fiscal year. The
Examples show the cumulative expenses attributable to a
hypothetical $1,000 investment in the Fund over specified
periods.
CLASS A CLASS B
SHARES SHARES
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases (as a percentage of
offering price) 4.75% NONE*
5.0% in the first
year, declining
Deferred Sales Charge (as a to 1.0% in the
percentage of the lower of sixth year, and
original purchase price or eliminated
redemption proceeds) NONE** thereafter
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management Fees 0.60% 0.60%
12b-1 Fees 0.20% 0.85%
Other Expenses 0.18% 0.18%
Total Fund Operating Expenses 0.98% 1.63%
EXAMPLES
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return and redemption at the end of each
period:
1 3 5 10
year years years years
CLASS A $57 $77 $99 $162
CLASS B $67 $81 $109 $176***
<PAGE>
Your investment of $1,000 would incur the following expenses,
assuming 5% annual return but no redemption:
1 3 5 10
year years years years
CLASS A $57 $77 $99 $162
CLASS B $17 $51 $89 $176***
The table is provided to help you understand the expenses of
investing in the Fund and your share of the operating expenses
which the Fund incurs. The annual management fees and total
operating expenses shown in the table for Class A shares reflect
the termination of an expense limitation previously in effect, as
well as the implementation of the Class A Distribution Plan.
Actual management fees, 12b-1 fees and total operating expenses
for Class A shares for the Fund's last fiscal year were 0.59%,
0.11% and 0.88%, respectively. The table and Examples are based
on the operating expenses for the Fund's last fiscal year, except
that 12b-1 fees for each class reflect the amount to which the
Trustees currently limit payments under its Distribution Plan.
For Class B shares, management fees and "Other expenses" are
based on the operating expenses for the Fund's Class A shares.
The Examples do not represent past or future expense levels, and
actual Fund expenses may be more or less than those shown.
Federal regulations require the Example to assume a 5% annual
return, but actual annual return has varied.
* Class B shares are sold without a front-end sales charge, but
their 12b-1 fees may cause long-term shareholders to pay more
than the economic equivalent of the maximum permitted front-end
sales charge.
** 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 -- Class A shares."
***Reflects conversion of Class B shares to Class A shares (which
pay lower ongoing expenses) approximately eight years after
purchase. See "How to buy shares -- Class B shares -- Conversion
of Class B shares."
FINANCIAL HIGHLIGHTS
The table on the following page presents per share financial
information for the life of the Fund. This information has been
audited and reported on by the Fund's independent accountants.
The Report of Independent Accountants and financial statements
included in the Fund's Annual Report to shareholders for the 1993
fiscal year are incorporated by reference into this Prospectus.
The Fund's Annual Report, which contains additional unaudited
performance information, will be made available without charge
upon request.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL
HIGHLIGHTS*
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<S> <C> <C> <C> <C>
FOR THE PERIOD FOR THE PERIOD
JULY 15, 1993 JANUARY 30, 1991
(COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) TO OF OPERATIONS) TO
AUGUST 31 YEAR ENDED AUGUST 31 AUGUST 31
1993 1993 1992 1991
CLASS B CLASS A
NET ASSET VALUE, BEGINNING OF PERIOD $9.39 $9.07 $8.66 $8.50
INVESTMENT OPERATIONS
NET INVESTMENT INCOME .11 .54(A) .57(A) .33(A)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS .03 .47 .42 .16
TOTAL FROM INVESTMENT OPERATIONS .14 1.01 .99 .49
LESS DISTRIBUTIONS FROM:
NET INVESTMENT INCOME (.06) (.55) (.57) (.33)
NET REALIZED GAIN ON INVESTMENTS -- (.06) (.01) --
TOTAL DISTRIBUTIONS (.06) (.61) (.58) (.33)
NET ASSET VALUE, END OF PERIOD $9.47 $9.47 $9.07 $8.66
TOTAL INVESTMENT RETURN AT NET
ASSET VALUE (%)(B) 11.15(C) 11.54 11.85 9.90(C)
NET ASSETS, END OF PERIOD (IN THOUSANDS) $2,974 $145,304 $88,566 $46,902<PAGE>
RATIO OF EXPENSES TO AVERAGE NET ASSETS (%) 1.44(C) .89 .58(A).27(A)(C)
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS (%) 3.27(C) 5.82 6.34(A) 6.67(A)(C)
PORTFOLIO TURNOVER (%) 5.72 5.72 31.84 12.46(D)
*FINANCIAL HIGHLIGHTS FOR PERIODS ENDED THROUGH AUGUST 31, 1992 HAVE BEEN RESTATED TO CONFORM WITH REQUIREMENTS ISSUED
BY THE SEC IN APRIL 1993.
(A)REFLECTS AN ABSORPTION OF EXPENSES INCURRED BY THE FUND AND AN EXPENSE LIMITATION APPLICABLE DURING THE PERIOD. AS A
RESULT OF THESE LIMITATIONS, NET INVESTMENT INCOME OF THE FUND FOR THE YEARS ENDED AUGUST 31, 1993, AUGUST 31, 1992 AND
THE PERIOD ENDED AUGUST 31, 1991, REFLECT EXPENSE REDUCTIONS OF $0.00, $0.03 AND $0.05 PER SHARE, RESPECTIVELY.
(B)TOTAL INVESTMENT RETURN ASSUMES DIVIDEND REINVESTMENT AND DOES NOT REFLECT THE EFFECT OF SALES CHARGES.
(C)ANNUALIZED.
(D)NOT ANNUALIZED.
</TABLE>
<PAGE>
OBJECTIVE
THE FUND'S OBJECTIVE IS TO SEEK AS HIGH A LEVEL OF CURRENT INCOME
EXEMPT FROM FEDERAL INCOME TAX AND ARIZONA STATE INCOME TAX AS
PUTNAM MANAGEMENT BELIEVES IS CONSISTENT WITH PRESERVATION OF
CAPITAL. The Fund is not intended to be a complete investment
program, and there is no assurance it will achieve its objective.
HOW OBJECTIVE IS PURSUED
BASIC INVESTMENT STRATEGY
PUTNAM ARIZONA TAX EXEMPT INCOME FUND SEEKS ITS OBJECTIVE BY
FOLLOWING THE FUNDAMENTAL INVESTMENT POLICY OF INVESTING AT LEAST
80% OF ITS NET ASSETS IN ARIZONA TAX EXEMPT SECURITIES (WHICH ARE
DESCRIBED BELOW), EXCEPT WHEN INVESTING FOR DEFENSIVE PURPOSES
DURING TIMES OF ADVERSE MARKET CONDITIONS. Under current law, to
the extent distributions by the Fund are derived from interest on
Arizona Tax Exempt Securities, they shall be exempt from federal
and Arizona state income taxes (other than any applicable federal
alternative minimum tax and Arizona minimum corporate income
tax). The Fund may also invest in taxable obligations, as
described below, to the extent permitted by its investment
policies, or hold its assets in money market instruments or in
cash. The Fund's investments in Arizona Tax Exempt Securities
and taxable obligations will be limited to securities rated not
lower than the five highest grades assigned by Moody's Investors
Service, Inc. ("Moody's") (Aaa, Aa, A, Baa or Ba) and
Standard & Poor's Corporation ("Standard & Poor's") (AAA,
AA, A, BBB or BB), or unrated securities which Putnam Management
determines are of comparable quality. Putnam Management expects
the Fund will generally invest in Arizona Tax Exempt Securities
of longer maturities (10 years or more), but the Fund may invest
in Arizona Tax Exempt Securities having a broad range of
maturities.
INTEREST INCOME FROM CERTAIN TYPES OF ARIZONA TAX EXEMPT
SECURITIES MAY BE SUBJECT TO FEDERAL ALTERNATIVE MINIMUM TAX
APPLICABLE TO BOTH INDIVIDUALS AND CORPORATIONS. It is a
fundamental policy of the Fund to exclude these securities from
the term "Arizona Tax Exempt Securities" for purposes of
determining compliance with the 80% test described above. In
addition, corporations may be subject to alternative minimum tax
on a portion of the exempt-interest dividends they receive from
the Fund.
<PAGE>
THE MARKET VALUE OF THE FUND'S INVESTMENTS WILL CHANGE IN
RESPONSE TO CHANGES IN INTEREST RATES AND OTHER FACTORS. During
periods of falling interest rates, the values of long-term,
fixed-income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities
generally decline. Changes by recognized rating services in
their ratings of securities and in the ability of an issuer to
make payments of interest and principal will also affect the
value of these investments. Changes in the value of portfolio
securities will not affect interest income derived from those
securities but will affect the Fund's net asset value.
At times Putnam Management may judge that conditions in the
markets for Arizona Tax Exempt Securities make pursuing the
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 Fund may invest 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 income tax; other debt securities
rated within the four highest grades by either Moody's or
Standard & Poor's; 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. It is
impossible to predict when, or for how long, the Fund will use
such alternative strategies.
ARIZONA TAX EXEMPT SECURITIES
ARIZONA TAX EXEMPT SECURITIES INCLUDE OBLIGATIONS OF THE STATE OF
ARIZONA OR ITS POLITICAL SUBDIVISIONS OR THEIR AGENCIES OR
INSTRUMENTALITIES OR OTHER GOVERNMENTAL UNITS, THE INTEREST WITH
RESPECT TO WHICH, IN THE OPINION OF BOND COUNSEL, IS EXEMPT FROM
FEDERAL INCOME TAX AND ARIZONA STATE INCOME TAX (OTHER THAN ANY
APPLICABLE FEDERAL ALTERNATIVE MINIMUM TAX AND ARIZONA MINIMUM
CORPORATE 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, and 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, or to fund short-term cash
requirements. Short-term Arizona Tax Exempt Securities may be
issued as interim financing in anticipation of tax collections,
revenue receipts or bond sales to finance various public
purposes. Arizona Tax Exempt Securities may also include
obligations issued by certain other governmental entities,
including issuers other than the State of Arizona and its
political subdivisions, if such debt obligations generate
interest income which is exempt from federal income tax and
Arizona state income tax.
THE TWO PRINCIPAL CLASSIFICATIONS OF ARIZONA 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. 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, the credit quality of which is
directly related to the private user of the facilities.
The Fund may also invest in securities representing interests in
Arizona Tax Exempt Securities, known as "inverse floating
obligations" or "residual interest bonds," paying interest rates
that vary inversely to 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. Such securities have the effect of
providing a degree of investment leverage, since they will
generally increase or decrease in value in response to changes in
market interest rates at a rate which is a multiple (typically
two) of the rate at which fixed-rate long-term tax exempt
securities increase or decrease in response to such changes. 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 tax exempt securities.
INVESTMENTS IN PREMIUM SECURITIES
During a period of declining interest rates, many of the Fund's
portfolio investments will likely bear coupon rates which are
higher than current market rates, regardless of whether such
securities were originally purchased at a premium. Such
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 such
"premium" securities tend to approach the principal amount as
they 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 such 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 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."
RISK FACTORS
THE FUND MAY INVEST IN BOTH HIGHER-RATED AND LOWER-RATED ARIZONA
TAX EXEMPT SECURITIES. 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 Fund
will not purchase an Arizona Tax Exempt Security rated both Ba by
Moody's and BB by Standard & Poor's at the time of purchase, or,
if unrated, determined by Putnam Management to be of comparable
quality if, as a result, more than 25% of the Fund's total assets
would be of that quality. The rating services' descriptions of
the five highest grades of debt securities are included in the
Appendix to this Prospectus. Arizona Tax Exempt Securities rated
Ba or BB are considered to have speculative elements, with large
uncertainties or major risk exposures to adverse conditions. The
Fund will not necessarily dispose of a security when its rating
is reduced below its rating at the time of purchase, although
Putnam Management will monitor the investment to determine
whether continued investment in the security will assist in
meeting the Fund's investment objective.
The table below shows the percentages of the Fund's assets
invested during fiscal 1993 in securities assigned to the various
rating categories by Moody's and Standard & Poor's and in unrated
securities determined by Putnam Management to be of comparable
quality:
<PAGE>
UNRATED SECURITIES OF
RATED SECURITIES, AS COMPARABLE QUALITY,
PERCENTAGE OF AS PERCENTAGE OF
RATING FUND'S ASSETS FUND'S ASSETS
"AAA"/"Aaa" 36.04% -%
"AA"/"Aa" 14.13% -%
"A"/"A" 16.90% -%
"BBB"/"Baa" 17.87% 5.78%
"BB"/"Ba" 4.47% 4.13%
"B"/"B" -% 0.68%
------ ------
Total 89.41% 10.59%
====== ======
Putnam Management seeks to minimize the risks of investing in
lower-rated securities through diversification and careful
investment analysis. However, the amount of information about
the financial condition of an issuer of Arizona 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 Arizona Tax Exempt Securities in the
lower rating categories, the achievement of the Fund's goals is
more dependent on Putnam Management's investment analysis than
would be the case if the Fund were investing in Arizona 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 which may invest in securities in
certain of the lower rating categories. For additional
information concerning the risks associated with investment by
the Fund in securities in the lower rating categories, see the
Statement of Additional Information.
At times, a substantial portion of the 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 a major portion or all of
such securities. Under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such
securities when Putnam Management believes it advisable to do so
or may be able to sell such securities only at prices lower than
if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the
fair value of such securities for purposes of computing the
Fund's net asset value. In order to enforce its rights in the
event of a default under such securities, the Fund may be
required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the Fund's net
asset value. Any income derived from the Fund's ownership or
operation of such assets would not be tax exempt.
Certain securities held by the Fund may permit the issuer at its
option to "call," or redeem, its 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.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds are issued at a
significant discount from their principal amount and pay interest
only at maturity rather than at intervals during the life of the
security. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds either in cash or
in additional bonds. The value of zero-coupon bonds is subject
to greater fluctuation in response to changes in market interest
rates than bonds which pay interest currently. Both zero-coupon
bonds and payment-in-kind 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. Even though such bonds do not pay current
interest in cash, the Fund is nonetheless required to accrue
interest income on such investments and to distribute such
amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to
satisfy its distribution requirements.
SINCE THE FUND INVESTS PRIMARILY IN ARIZONA TAX EXEMPT
SECURITIES, THE VALUE OF ITS SHARES MAY BE ESPECIALLY AFFECTED BY
FACTORS PERTAINING TO THE ARIZONA ECONOMY AND OTHER FACTORS
SPECIFICALLY AFFECTING THE ABILITY OF ISSUERS OF ARIZONA TAX
EXEMPT SECURITIES TO MEET THEIR OBLIGATIONS. As a result, the
value of the 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. The
amounts of tax and other revenues available to governmental
issuers of Arizona Tax Exempt Securities may be affected from
time to time by economic, political and demographic conditions
within Arizona. In addition, constitutional or statutory
restrictions may limit a government's power to raise revenues or
increase taxes or expenditures . The availability of
federal, state and local aid to issuers of Arizona 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, which in turn could be affected by
economic, political and demographic conditions in the state. Any
reduction in the actual or perceived ability of an issuer of
Arizona Tax Exempt Securities to meet its obligations (including
a reduction in the rating of its outstanding securities) would
likely affect adversely the market value and marketability of its
obligations and could affect adversely the values of other
Arizona Tax Exempt Securities as well.
<PAGE>
Certain investment grade Arizona Tax Exempt Securities in which
the Fund may invest share some of the risk factors discussed
above with respect to lower-rated Arizona Tax Exempt Securities.
DIVERSIFICATION AND CONCENTRATION POLICIES
THE FUND IS A "NON-DIVERSIFIED" INVESTMENT COMPANY UNDER THE
INVESTMENT COMPANY ACT OF 1940. This means that it may invest
its assets in a limited number of issuers. Under the Internal
Revenue Code, the Fund generally may not invest more than 25% of
its assets in obligations of any one issuer other than U.S.
government obligations and, with respect to 50% of its total
assets, the Fund may not invest more than 5% of its total assets
in the securities of any one issuer (except U.S. government
securities). Thus the Fund may invest up to 25% of its total
assets in the securities of each of any two issuers. Because of
the relatively small number of issuers of Arizona Tax Exempt
Securities, the Fund is more likely to invest a higher percentage
of its assets in the securities of a single issuer than an
investment company which invests in a broad range of tax-exempt
securities. This practice involves an increased risk of loss to
the Fund if the issuer is unable to make interest or principal
payments or if the market value of such securities were to
decline.
THE FUND WILL NOT INVEST MORE THAN 25% OF ITS TOTAL ASSETS IN ANY
INDUSTRY. Governmental issuers of Arizona Tax Exempt Securities
are not considered part of any "industry." However, Arizona Tax
Exempt Securities backed only by the assets and revenues of
nongovernmental users may for this purpose (and for
diversification purposes discussed above) be deemed to be issued
by such nongovernmental users. Thus, the 25% limitation would
apply to such obligations.
It is nonetheless possible that the Fund may invest more than 25%
of its assets in a broader segment of the market for Arizona 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
such obligations could be supported by the credit of governmental
users or by the credit of nongovernmental users engaged in a
number of industries, economic, business, political and other
developments generally affecting the revenues of such issuers
(for example, proposed legislation or pending court decisions
affecting the financing of such projects and market factors
affecting the demand for their services or products) may have a
general adverse effect on all Arizona Tax Exempt Securities in
such a market segment.
The Fund reserves the right to invest more than 25% of its assets
in industrial development securities.
SHORT-TERM TRADING
PUTNAM MANAGEMENT BUYS AND SELLS SECURITIES FOR THE FUND WHENEVER
IT BELIEVES IT IS APPROPRIATE TO DO SO. The Fund's investment
policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates.
From time to time, consistent with its investment objective, the
Fund may also trade securities for the purpose of seeking short-
term profits. A change in the securities held by the Fund is
known as "portfolio turnover." To the extent short-term trading
strategies are used, the Fund's portfolio turnover rate may be
higher than that of other mutual funds. Portfolio turnover
generally involves some expense to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestment in other securities. Such
transactions may result in realization of taxable capital gains.
Portfolio turnover rates for the life of the Fund are shown in
the section "Financial highlights."
In general, the secondary market for Arizona Tax Exempt
Securities is less liquid than that for taxable fixed-income
securities, particularly in the lower rating categories. The
ability of the Fund to buy and sell securities may, at any
particular time and with respect to any particular securities, be
limited.
FINANCIAL FUTURES AND OPTIONS
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS FOR
HEDGING PURPOSES. Futures contracts on a 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 when 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 Arizona Tax Exempt Securities which the Fund
owns or expects to purchase. The Fund may also purchase and sell
put and call options on index futures or on the indices directly,
in addition to or as an alternative to purchasing and selling
index futures.
The Fund may also, for hedging purposes, purchase and sell
futures contracts and related options with respect to 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 in a way similar to the Fund's use of index
futures and options.
<PAGE>
THE USE OF FUTURES AND OPTIONS INVOLVES CERTAIN SPECIAL RISKS AND
MAY RESULT IN REALIZATION OF TAXABLE INCOME AND CAPITAL GAINS.
FUTURES AND OPTIONS TRANSACTIONS INVOLVE COSTS AND MAY RESULT IN
LOSSES. Certain risks arise because of 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
Arizona Tax Exempt Securities which are the subject of the hedge.
The successful use of futures and options further depends on
Putnam Management's ability to forecast interest rate and market
movements correctly. Other risks arise from the Fund's potential
inability to close out its futures or related options positions,
and there can be no assurance that a liquid secondary market will
exist for any futures contract or option at any particular time.
Certain provisions of the Internal Revenue Code and certain
regulatory requirements may limit the Fund's ability to engage in
futures and options transactions.
A MORE DETAILED EXPLANATION OF FINANCIAL FUTURES AND OPTIONS
TRANSACTIONS AND INCLUDING THE RISKS ASSOCIATED WITH THEM IS
INCLUDED IN THE STATEMENT OF ADDITIONAL INFORMATION.
OTHER INVESTMENT PRACTICES
THE FUND MAY ALSO ENGAGE TO A LIMITED EXTENT IN THE FOLLOWING
INVESTMENT PRACTICES, EACH OF WHICH MAY RESULT IN TAXABLE INCOME
OR CAPITAL GAINS AND INVOLVES CERTAIN SPECIAL RISKS. THE
STATEMENT OF ADDITIONAL INFORMATION CONTAINS MORE DETAILED
INFORMATION ABOUT THESE PRACTICES, INCLUDING LIMITATIONS DESIGNED
TO REDUCE THESE RISKS.
REPURCHASE AGREEMENTS AND FORWARD COMMITMENTS. The Fund may
enter into repurchase agreements on up to 25% of its assets.
These transactions must be fully collateralized at all times.
The 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 the
Fund if the other party should default on its obligation and the
Fund is delayed or prevented from recovering the collateral or
completing the transaction.
LIMITING INVESTMENT RISK
SPECIFIC INVESTMENT RESTRICTIONS HELP THE FUND LIMIT INVESTMENT
RISKS FOR ITS SHAREHOLDERS. THESE RESTRICTIONS PROHIBIT THE FUND
FROM INVESTING MORE THAN: (a) (with respect to 50% of its total
assets) 5% of its total assets in the securities of any one
issuer, other than U.S. government securities;* (b) 5% of its net
assets in securities of any issuer if the party responsible for
payment, together with any predecessor, has been in operation for
less than three years (except obligations of the U.S. government
or its agencies or instrumentalities and general obligations
backed by the faith, credit and taxing power of any person
authorized to issue Arizona Tax Exempt Securities); (c) 5% of its
net assets in securities restricted as to resale;* and (d) 15% of
its net assets in any combination of securities that are not
readily marketable, securities restricted as to resale (excluding
securities determined by the Fund's Trustees (or the person
designated by the Fund's Trustees to make such determinations) to
be readily marketable), and repurchase agreements maturing in
more than seven days.
Restrictions marked with an asterisk (*) above are summaries of
fundamental policies. See the Statement of Additional
Information for the full text of these policies and the Fund's
other fundamental policies. Except for investment policies
designated as fundamental in this Prospectus or the Statement,
the investment policies described in this Prospectus and in the
Statement are not fundamental policies. The Trustees may change
any non-fundamental investment policies without shareholder
approval. As a matter of policy, the Trustees would not
materially change the Fund's investment objective without
shareholder approval.
HOW PERFORMANCE IS SHOWN
YIELD, TAX-EQUIVALENT YIELD AND TOTAL RETURN DATA 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 such class on the
last day of that period. For this purpose, net investment income
is calculated in accordance with SEC regulations and may differ
from the Fund's 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 Fund's current
dividend rate is based on the Fund's net investment income as
determined for financial reporting purposes, which may not
reflect amortization in the same manner. See "How objective is
pursued -- Investments in premium securities." The Fund's yield
reflects the deduction of the maximum initial sales charge in the
case of Class A 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 the Fund's tax-exempt
yield for such class. "Total return" for the one-year period and
for the life of the Fund (or since the commencement of the public
offering of the shares 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 Fund invested at
the maximum public offering price (in the case of Class A 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 or net asset value. Any quotation of
total return, yield or tax-equivalent yield not reflecting the
maximum initial sales charge or contingent deferred sales charge
would be reduced if such sales charges were used. Quotations of
yield, tax-equivalent yield or total return for any period when
an expense limitation was in effect will be greater than if the
limitation had not been in effect. The Fund's performance may be
compared to various indices. See the Statement of Additional
Information.
ALL DATA IS BASED ON THE FUND'S PAST INVESTMENT RESULTS AND DOES
NOT PREDICT FUTURE PERFORMANCE. Investment performance, which
will vary, is based on many factors, including market conditions,
the composition of the Fund's portfolio, the Fund's operating
expenses and which class of shares you purchase. Investment
performance also often reflects the risks associated with the
Fund's investment objective and policies. These factors should
be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
HOW THE FUND IS MANAGED
THE TRUSTEES OF THE FUND ARE RESPONSIBLE FOR GENERALLY OVERSEEING
THE CONDUCT OF THE FUND'S BUSINESS. Subject to such policies as
the Trustees may determine, Putnam Management furnishes a
continuing investment program for the Fund and makes investment
decisions on its behalf. Subject to the control of the Trustees,
Putnam Management also manages the Fund's other affairs and
business. Howard K. Manning, Senior Vice President of Putnam
Management and Vice President of the Fund, has had primary
responsibility for the day-to-day management of the Fund's
portfolio since June , 1993. Mr. Manning has been employed
by Putnam Management for the past five years.
The 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 (which are in turn allocated to the
relevant class of shares). The Fund also reimburses Putnam
Management for the compensation and related expenses of certain
officers of the Fund and their staff who provide administrative
services to the Fund. The total reimbursement is determined
annually by the Trustees.
Putnam Management places all orders for purchases and sales of
the Fund's 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 the Fund (and, if permitted by law, of the
other Putnam funds) as a factor in the selection of broker-
dealers.
<PAGE>
ORGANIZATION AND HISTORY
Putnam Arizona Tax Exempt Income Fund is a Massachusetts business
trust organized on November 9, 1990. A copy of the Agreement and
Declaration of Trust, which is governed by Massachusetts law, is
on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Fund is an open-end, non-diversified management investment
company with an unlimited number of authorized shares of
beneficial interest. Shares of the Fund may, without shareholder
approval, be divided into two or more series of shares
representing separate investment portfolios. Any such series of
shares may be further 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 currently divided into two classes. Each share
has one vote, with fractional shares voting proportionally.
Shares of each class will vote together as a single class except
when required by law or as determined by the Trustees. Shares
are freely transferable, are entitled to dividends as declared by
the Trustees, and, if the Fund were liquidated, would receive the
net assets of the Fund. The Fund may suspend the sale of shares
at any time and may refuse any order to purchase shares.
Although the Fund is not required to hold annual meetings of its
shareholders, shareholders holding at least 10% of the
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 Declaration of Trust.
If you own fewer shares than a minimum amount set by the Trustees
(presently 20 shares), the Fund may choose to redeem your shares
and pay you for them. You will receive at least 30 days' written
notice before the Fund redeems your shares, and you may purchase
additional shares at any time to avoid a redemption. The 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 FUND'S TRUSTEES: 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, M.I.T. ; JAMESON ADKINS BAXTER, President, Baxter
Associates, Inc. ; HANS H. ESTIN, Vice Chairman, North
American Management; JOHN A. HILL, Principal and Managing
Director, First Reserve Corporation; ELIZABETH T. KENNAN,
President, 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,
including AT&T, K mart Corporation and Time Warner Inc.; GEORGE
PUTNAM, III,* President, New Generation Research, Inc.; 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
Providence Journal Co. Also, Trustee and President,
Massachusetts General Hospital and Trustee of Eastern Utilities
Associates. The Fund's Trustees are also Trustees of the other
Putnam funds. Those marked with an asterisk (*) are "interested
persons" of the Fund, Putnam Management or Putnam Mutual Funds.
ABOUT YOUR INVESTMENT
ALTERNATIVE SALES ARRANGEMENTS
The Fund offers investors two classes of shares which bear sales
charges in different forms and amounts and which 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 sales at net asset value in excess of $1 million
which are subject to a contingent deferred sales charge).
Certain purchases of Class A shares qualify for reduced sales
charges. Class A shares currently bear a 12b-1 fee at the annual
rate of 0.20% of the Fund's average net assets attributable to
Class A shares. See "How to buy shares -- Class A shares."
CLASS B SHARES. Class B shares are sold without an initial sales
charge, but are subject to a contingent deferred sales charge of
up to 5% if redeemed within six years. Class B shares also bear
a higher 12b-1 fee than Class A shares, currently at the annual
rate of 0.85% of the Fund's average net assets attributable to
Class B shares. Class B shares will automatically convert into
Class A shares, based on relative net asset value, approximately
eight years after purchase. 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, but (until conversion) will have
a higher expense ratio and pay lower dividends than Class A
shares due to the higher 12b-1 fee. See "How to buy shares --
Class B shares."
WHICH ARRANGEMENT IS BETTER 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
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 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.
Sales personnel may receive different compensation depending on
which class of shares they sell. 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
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 return it with a check payable to the Fund 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 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. The Fund
receives the net asset value. The sales charge varies depending
on the size of your purchase and is allocated between your
investment dealer and Putnam Mutual Funds. The current sales
charges are:
<PAGE>
<TABLE>
<CAPTION>
SALES CHARGE AMOUNT OF
AS A PERCENTAGE OF: SALES CHARGE
------------------- REALLOWED
NET TO DEALERS
AMOUNT OF TRANSACTION AMOUNT OFFERING AS A PERCENTAGE
AT OFFERING PRICE INVESTED PRICE OF OFFERING PRICE*
-------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
Less than $25,000 4.99% 4.75% 4.50%
$25,000 but less than $100,000 4.71 4.50 4.25
100,000 but less than 250,000 3.90 3.75 3.50
250,000 but less than 500,000 3.09 3.00 2.75
500,000 but less than 1,000,000 2.04 2.00 1.85
-------------------------------------------------------------------------------------
/TABLE
<PAGE>
* At the discretion of Putnam Mutual Funds, however, the entire
sales charge may at times be reallowed to dealers. The Staff
of the Securities and Exchange Commission has indicated that
dealers who receive more than 90% of the sales charge may be
considered underwriters.
There is no initial sales charge on purchases of Class A shares
of $1 million or more. However, a contingent
deferred sales charge ("CDSC") of 1.00% or 0.50%,
respectively, is imposed on redemptions of such 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.
In addition, shares purchased by certain investors investing
$1 million or more that have made arrangements with Putnam Mutual
Funds and whose dealer of record waived the commission described
in the next paragraph 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
Statement of Additional Information for more information about
the CDSC.
Except as stated below, 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 and each subsequent one-year period
beginning with the first purchase at net asset value 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. On sales at net asset value to
a participant-directed qualified retirement plan initially
investing less than $20 million in Putnam funds and other
investments managed by Putnam Management or its affiliates
(including a plan sponsored by an employer with more than 750
employees), Putnam Mutual Funds pays commissions on cumulative
purchases during the life of the account at the rate of 1.00% of
the amount under $3 million and 0.50% thereafter. On sales at
net asset value to all other participant-directed qualified
retirement plans, Putnam Mutual Funds pays commissions on the
initial investment and on subsequent net quarterly sales at the
rate of 0.15%.
YOU MAY BE ELIGIBLE TO BUY CLASS A 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 Statement of
Additional Information. Shares may be sold at net asset value to
certain categories of investors , and the CDSC may be waived
under certain circumstances . See "How to buy shares --
General" below. <PAGE>
CLASS B SHARES. Class B shares are sold without an
initial sales charge, although a CDSC will be imposed if you
redeem shares within six years of purchase. 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 below.
Subject to the foregoing exclusions, 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. Therefore
when a share is redeemed, any increase in its value above the
initial purchase price is not subject to any CDSC. The
amount of the CDSC will depend on the number of years since you
invested and the dollar amount being redeemed, according to the
following table:
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
YEARS SINCE PURCHASE DOLLAR AMOUNT
PAYMENT MADE SUBJECT TO CHARGE
- ------------------- -------------------
0-1.................................. 5.0%
1-2.................................. 4.0%
2-3.................................. 3.0%
3-4.................................. 3.0%
4-5.................................. 2.0%
5-6.................................. 1.0%
6 and thereafter..................... NONE
In determining whether a CDSC is payable on any redemption, the
Fund will first redeem shares not subject to any charge, and then
shares held longest during the six-year period. 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.
CONVERSION OF CLASS B SHARES. Class B shares will automatically
convert into Class A shares at the end of the month eight years
after the purchase date, except as noted below. Class B shares
acquired by exchange from Class B shares of another Putnam fund
will convert into Class A shares based on the time of the initial
purchase. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date
of the initial purchase to which such shares relate. For this
purpose, Class B shares acquired through reinvestment of
distributions will be attributed to particular purchases of Class
B shares in accordance with such procedures as the Trustees may
determine from time to time. The conversion of Class B shares to
Class A shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel
that such conversions will not constitute taxable events for
Federal tax purposes. There can be no assurance that such ruling
or opinion will be available, and the conversion of Class B
shares to Class A shares will not occur if such ruling or opinion
is not available. In such event, Class B shares would continue
to be subject to higher expenses than Class A shares for an
indefinite period.
<PAGE>
GENERAL
The Fund may sell Class A and Class B shares at net asset value
without an initial sales charge or a CDSC to the Fund'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, employee benefit plans of
companies with more than 750 employees, 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, and the CDSC
will be waived on redemptions of shares arising out of
death or disability or in connection with certain withdrawals
from IRA or other retirement plans. Up to 12% of the value
of Class B shares subject to a Systematic Withdrawal Plan may
also be redeemed each year without a CDSC. See the Statement
of Additional Information.
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 Fund
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 Fund will not issue
certificates for your shares unless you request them. Putnam
Mutual Funds may, at its expense, provide additional promotional
incentives or payments to dealers that sell shares of the Putnam
funds. 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.
<PAGE>
DISTRIBUTION PLANS
CLASS A DISTRIBUTION PLAN. The purpose of the Class A Plan is to
permit the Fund to compensate Putnam Mutual Funds for services
provided and expenses incurred by it in promoting the sale of
Class A shares of the Fund, reducing redemptions, or maintaining
or improving services provided to shareholders by Putnam Mutual
Funds or dealers. The Class A Plan provides for payments by the
Fund to Putnam Mutual Funds at the annual rate of up to 0.35% of
the Fund's average net assets attributable to Class A shares,
subject to the authority of the Fund's Trustees to reduce the
amount of payments or to suspend the Class A Plan for such
periods as they may determine. Subject to these limitations, the
amount of such payments and the specific purposes for which they
are made shall be determined by the Trustees of the Fund. At
present, the Trustees have approved payments under the Class A
Plan at the annual rate of 0.20% of the Fund's average net assets
attributable to Class A shares for the purpose of compensating
Putnam Mutual Funds for services provided and expenses incurred
by it as principal underwriter of the Fund's Class A shares,
including payments made by it to dealers under the Service
Agreements referred to below. Should the Trustees decide in the
future to approve payments in excess of this amount, shareholders
will be notified and this Prospectus revised.
In order to compensate investment dealers (including, for this
purpose, certain financial institutions) for services provided in
connection with sales of Class A shares and the maintenance of
shareholder accounts, Putnam Mutual Funds makes quarterly
payments to qualifying dealers based on the average net asset
value of Class A shares of the Fund which are 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 after March 31, 1994
by shareholders investing $1 million or more and by participant-
directed qualified retirement plans sponsored by employers with
more than 750 employees ("NAV Shares"), except for shares owned
by certain investors investing $1 million or more that have made
arrangements with Putnam Mutual Funds and whose dealer of record
waived the sales commission. Except as stated below, Putnam
Mutual Funds makes such payments at the annual rate of 0.15% of
such average net asset value for Class A shares outstanding as of
March 5, 1993 and 0.20% of such average net asset value of shares
acquired after that date (including shares acquired through
reinvestment of distributions). For participant-directed
qualified retirement plans initially investing less than $20
million in Putnam funds and other investments managed by Putnam
Management or its affiliates, Putnam Mutual Funds' payments to
qualifying dealers on NAV Shares are 100% of the rate stated
above if average plan assets in Putnam funds (excluding money
market funds) during the quarter are less than $20 million, 60%
of the stated rate if average plan assets are at least $20
million but less than $30 million, and 40% of the stated rate if
average plan assets are $30 million or more. For all other
participant-directed qualified retirement plans purchasing NAV
Shares, Putnam Mutual Funds makes quarterly payments to
qualifying dealers at the annual rate of 0.10% of the average net
asset value of such shares.
CLASS B DISTRIBUTION PLAN. The Class B Plan provides for
payments by the Fund to Putnam Mutual Funds at the annual rate of
up to 1.00% of the Fund's average net assets attributable to
Class B shares, subject to the authority of the Trustees to
reduce the amount of payments or to suspend the Class B Plan for
such periods as they may determine. The Trustees currently limit
payments under the Class B Plan to the annual rate of 0.85% of
such assets. Should the Trustees decide in the future to approve
payments in excess of this amount, shareholders will be notified
and this Prospectus will be revised. Putnam Mutual Funds also
receives the proceeds of any CDSC imposed on redemptions of
shares.
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 and
sales to investors exempt from the CDSC. In addition, in order
to further compensate dealers (including, for this purpose,
certain financial institutions) for services provided in
connection with sales of Class B shares and the maintenance of
shareholder accounts, Putnam Mutual Funds makes quarterly
payments to qualifying dealers based on the average net asset
value of Class B shares which are attributable to shareholders
for whom the dealers are designated as the dealer of record,
except for the first year's service fees, which are prepaid as
described above. Putnam Mutual Funds makes such payments at an
annual rate of 0.20% of such average net asset value of such
shares.
GENERAL. Putnam Mutual Funds may suspend or modify the payments
made to dealers described above, and such payments are subject to
the continuation of the relevant Plan described above, 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
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 repurchase 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 Statement of
Additional Information 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 repurchases, 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 which case 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 your shares which 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 for its services.
<PAGE>
HOW TO EXCHANGE SHARES
You can exchange your shares for shares of the same class of
certain other Putnam funds at net asset value beginning 15 days
after purchase. Not all Putnam funds offer more than one class
of shares. If the other Putnam fund offers only one class of
shares, only Class A shares may be exchanged for such class. 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
and 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.
Exchange Authorization Forms are available by calling or writing
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 which 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 the Trustees or Putnam Management
believes doing so would be in the best interests of the Fund, the
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 Statement of Additional
Information to find out more about the exchange privilege.
HOW THE FUND VALUES ITS SHARES
THE 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 ITS SHARES OUTSTANDING. SHARES ARE VALUED AS OF
THE CLOSE OF REGULAR TRADING ON THE NEW YORK STOCK EXCHANGE EACH
DAY THE EXCHANGE IS OPEN. Tax-exempt securities (including
Arizona 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 such 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 stated at market
value. Short-term investments that will mature in 60 days or
less are stated at amortized cost, which approximates market
value. All other securities and assets are valued at their fair
value following procedures approved by the Trustees.
HOW DISTRIBUTIONS ARE MADE; TAX INFORMATION
The Fund declares all of its net interest income as a
distribution on each day it is open for business. 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
shares because expenses attributable to Class B shares will
generally be higher.
YOU CAN CHOOSE FROM THREE DISTRIBUTION OPTIONS: (1) reinvest all
distributions in additional Fund shares without a sales charge;
(2) receive distributions from net investment income in cash
while reinvesting capital gains distributions in additional
shares without a sales charge; or (3) 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 distribution is
paid. You will receive a statement confirming reinvestment of
distributions in additional Fund 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 the Fund or Putnam Investor Services is
returned as "undeliverable," Fund distributions will
automatically be reinvested in the Fund or in another Putnam
fund.
<PAGE>
FEDERAL TAXES
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other
requirements that are necessary for the Fund to be relieved of
federal taxes on income and gains it distributes to shareholders.
The Fund will distribute substantially all of its ordinary income
and capital gain net income on a current basis.
Distributions designated by the Fund as "exempt-interest
dividends" are not generally subject to federal 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 the Fund may have on the
taxation of your benefits. In addition, an investment in the
Fund may result in liability for federal alternative minimum tax
and for state and local taxes, both for individual and corporate
shareholders.
All Fund distributions 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 reinvestment of distributions.
Early in each year the Fund will notify you of the amount and tax
status of distributions paid to you by the Fund for the preceding
year.
ARIZONA TAXES
To the extent distributions by the Fund are derived from interest
income with respect to U.S. Treasury securities or, as described
below, Arizona Tax Exempt Securities of Arizona issuers, such
distributions will be exempt from Arizona state income tax.
"Arizona Tax Exempt Securities of Arizona issuers" means
obligations of the State of Arizona, or its political
subdivisions or their agencies or instrumentalities or other
governmental units, the interest with respect to which, in the
opinion of bond counsel rendered on the date of original
issuance, is exempt from federal income tax and Arizona state
income tax (other than Arizona minimum corporate income tax). In
addition, it is the published position of the Arizona Department
of Revenue that distributions by a regulated investment company
derived from certain other governmental obligations as to which
federal law specifically precludes state taxation of interest
received by a direct investor in such obligations are exempt from
Arizona state income tax.
Some Arizona Tax Exempt Securities of Arizona issuers have a
direct income tax exemption under Arizona law, independent of
federal tax treatment. However, in most cases, interest with
respect to Arizona Tax Exempt Securities of Arizona issuers is
exempt from Arizona state income tax only so long as that
interest is excluded from gross income for federal income tax
purposes. Therefore, if interest with respect to Arizona Tax
Exempt Securities of Arizona issuers held by the Fund ceases to
be exempt from federal income tax (or is retroactively determined
to be taxable under federal law), then, unless that obligation
has an independent statutory tax exemption under Arizona law,
distributions by the Fund derived from interest on that
obligation will cease to be exempt from state income taxes (and,
if interest on the obligation is determined to be taxable under
federal law retroactive to any date, then those distributions may
be considered not to have been exempt from state income taxes
from that date).
For Arizona income tax purposes, dividends by the Fund, other
than dividends exempt from Arizona state income tax, will be
taxable as ordinary income, whether paid in cash or reinvested in
additional shares. Under current Arizona income tax law,
distributions of net capital gains earned by the Fund are not
exempt from taxation and are taxed at ordinary income tax rates.
GENERAL
The foregoing is a summary of certain federal and Arizona tax
consequences of investing in the Fund. 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 alternative minimum tax and for 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 the Fund and
of other Putnam funds. Putnam Fiduciary Trust Company is the
Fund's custodian. Putnam Investor Services, a division of Putnam
Fiduciary Trust Company, is the Fund's 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
TAX EXEMPT SECURITY RATINGS
The ratings services' descriptions of tax exempt securities in
which the Fund will invest are:
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-edge . " 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 risks appear somewhat larger
than in 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>
STANDARD & POOR'S CORPORATION
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 highest 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 is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the
obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
<PAGE>
PUTNAM ARIZONA TAX EXEMPT INCOME 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
Coopers & Lybrand
One Post Office Square
Boston, MA 02109
PUTNAMINVESTMENTS
One Post Office Square
Boston, Massachusetts 02109
Toll-Free 1-800-225-1581
<PAGE>
Differences between the typeset (printed) prospectus and the
EDGAR filing version.
1.
Each interior page of the prospectus includes the word
"prospectus" at the bottom of the page.
2.
Pagination is different in printed prospectus.
3.
Section headings and subheadings in the printed prospectus are
printed in boldface type with colored ink.
4.
The first page of the printed prospectus contains an illustration
of balanced scales, Putnam's logo.
5.
The last page of the printed prospectus contains a graphic
recyclable logo.
<PAGE>
