-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Ken+hIeegEGaquLDgUKGvcW3yXMgBW/2cOCXlnyatcWeNjbAKA7G2DlRnAqSuZLi kfkegffQKNOM6Q93HLin+w== 0000869392-94-000004.txt : 19940620 0000869392-94-000004.hdr.sgml : 19940620 ACCESSION NUMBER: 0000869392-94-000004 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19940617 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM ARIZONA TAX EXEMPT INCOME FUND CENTRAL INDEX KEY: 0000869392 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 046665534 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-37992 FILM NUMBER: 94534642 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQUARE CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6172921000 497 1 DEFINITIVE INFORMATION 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 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 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*** 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.
FINANCIAL HIGHLIGHTS* (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) 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 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.
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. 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: 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. 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. 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. 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." 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:
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* ------------------------------------------------------------------------------------- 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 * 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. 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. 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. 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. 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. 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. 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. 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. 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 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. -----END PRIVACY-ENHANCED MESSAGE-----