N-30D 1 putmteif.txt PUTNAM MASSACHUSETTS TAX EXEMPT INCOME FUND Putnam Massachusetts Tax Exempt Income Fund ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 5-31-01 [SCALE LOGO OMITTED] FROM THE TRUSTEES [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III] Dear Shareholder: Putnam Massachusetts Tax Exempt Income Fund was among the beneficiaries as the Federal Reserve Board dramatically reduced interest rates and equity investors continued to turn to bonds to ride out the stock market's extended period of turbulence. But the fund's successful run during the fiscal year ended May 31, 2001, was attributable to more than the favorable market environment for bonds. During the period, Fund Manager Richard Wyke was able to maintain a portfolio that provided both a healthy stream of tax-free current income and potential for capital growth over the long term. These opportunities do not present themselves automatically; they must be actively pursued, and Putnam's extensive credit research resources made a major contribution to Rick's efforts. In the following report, Rick discusses the fund's performance and strategy during fiscal 2001 in the context of the current market environment and then offers his insights into prospects for the months ahead. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds July 18, 2001 REPORT FROM FUND MANAGEMENT Richard P. Wyke While our municipal bond strategy faced a challenging environment in the latter part of 2000, it has proved its effectiveness during the first five months of 2001. Equity markets remained tumultuous, and investors continued to seek the relative calm of fixed-income securities and the diversification they afford. Meanwhile, investors in high-tax states increased demand for municipal securities. Massachusetts Tax Exempt Income Fund capitalized on this positive environment. One of the strategic moves that was particularly helpful to recent performance was the addition of higher-yielding lower credit-rating bonds to the fund's portfolio. The fund also benefited from falling short-term interest rates and rising municipal bond prices. Total return for 12 months ended 5/31/01 Class A Class B Class M NAV POP NAV CDSC NAV POP ----------------------------------------------------------------------- 10.95% 5.63% 10.24% 5.24% 10.61% 7.06% ----------------------------------------------------------------------- Past performance is no indication of future results. Performance information for longer periods and explanation of performance calculation methods begin on page 8. * FED EASING SPURS MARKET RALLY IN 2001 As stock prices remained volatile over the period, many investors became disillusioned with the stock market and began to recognize the solid risk/return relationship offered by municipal bonds. Municipal bond mutual funds enjoyed the fruits of this strengthening demand as cash flows into these funds began increasing for the first time in several years. We believe this rising demand will continue; furthermore, the municipal market is already beginning to anticipate the traditional demand surge that comes in June and July when many bonds pay out their coupon income and investors seek vehicles for reinvestment. Thus far, supply has nearly kept pace with this demand. It is up 30% to 40% over last year's levels. Supply usually increases when interest rates are falling, both from new issuance and advance refundings. This balanced supply/demand relationship has been very supportive of municipal bond prices and bodes well for future price appreciation. [GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Health care/ hospitals 49.2% Water and sewer 11.6% Transportation 11.3% Education 7.9% Housing 5.0% Footnote reads: *Based on net assets as of 5/31/01. Holdings will vary over time. Fund performance (and indeed municipal bond market performance) has also benefited significantly this year from the almost unprecedented sharpness of the Federal Reserve Board's monetary easing. In the first five months of this year, the Fed made five interest rate reductions totaling 2.5 percentage points, the most dramatic rate-cutting action since former Fed Chairman Paul Volcker's swift decreases in the early 1980s. Two of the cuts occurred outside of the Fed's normal meeting schedule, which is significant and showed the central bank's determination to stave off a recession. The Fed's actions spurred this year's bond market rally and also caused significant steepening in the yield curve, meaning that short-term rates became much lower than long-term rates. When this happens, it is most beneficial to be positioned in the middle of the curve; i.e., to own bonds with intermediate maturities. Fortunately, your fund has been overweighted in intermediate-term securities and performance has benefited accordingly. * LOWER-RATED CREDITS DRIVE PERFORMANCE The most important strategy we pursued during the recent period was the judicious addition of higher-yielding lower credit holdings to the portfolio. While more than half of the portfolio remains at the highest quality level, with approximately 53% of holdings rated Aaa/AAA, we have carefully increased the portfolio's concentration of lower-credit bonds over the past 12 to 15 months. High-yield municipal securities require greater research effort because of their added risk, but if prudently selected can provide potentially strong returns. [GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW] CREDIT QUALITY OVERVIEW* Aaa/AAA -- 53.3% Aa/AA -- 19.0% A -- 5.7% Baa/BBB -- 13.4% Ba/BB -- 7.5% Other -- 1.1% Footnote reads: *As a percentage of market value as of 5/31/01. A bond rated Baa/BBB or higher is considered investment grade. Percentages may include unrated bonds considered by Putnam Management to be of comparable quality. Ratings will vary over time. "Municipal investments have been attractive for some time, and recently investors have begun to recognize their rewards in comparison with other, riskier asset classes. This shift positions municipal credits -- especially lower-rated credits -- with solid price appreciation potential going forward." -- Richard P. Wyke, portfolio manager, Putnam Massachusetts Tax Exempt Income Fund During the first half of fiscal 2001, credit yield spreads, the difference in yield between lower- and higher-quality bonds, continued to widen to extraordinary levels. They reached their widest point in December 2000, and then began to narrow in the new year. Spreads widened again in March, before narrowing further. We took advantage of these widening periods to add portfolio holdings at attractive prices. With increased demand for municipal investments and the Fed's aggressive easing of short-term rates, we believe the narrowing trend will continue and are enthusiastic about the likelihood of a sustained period of outperformance from municipal bonds, especially lower-credit municipal bonds. Indeed, the fund's lower-credit rated holdings not only provided high levels of income over the period but began to enjoy some price appreciation as credit yield spreads contracted. * DURATION SHIFTS, SECTOR ALLOCATIONS REMAIN INTACT We adjusted the fund's duration several times over the period to position the portfolio to benefit from price appreciation. (Duration is an indication of a bond's price sensitivity to interest rate movements, measured in years.) The longer a bond's (or bond fund's) duration, the more sensitive it will be to changes in interest rates. We kept portfolio duration long during the bond market rally at the beginning of 2001, maximizing the rally's appreciation potential. In anticipation of the cyclical buildup of the municipal bond supply in March and April, we shortened duration to a neutral stance relative to the fund's benchmark index. At this point, bond prices had risen considerably and we expected little additional price appreciation for the time being. Toward the end of the period, we extended duration again to a point that is longer than that of our benchmark indexes. The Fed has been taking aggressive action to lower interest rates, and the economy appears to be slowing more than current interest rate levels reflect. In this environment, we believe rates will fall further, providing opportunity for additional municipal bond price appreciation. The fund remains focused on many of the same sectors that have contributed to performance thus far. Utility holdings continue to outperform, and the hospital and health-care sector remains the portfolio's largest concentration, making up 49.2% of portfolio holdings. The Massachusetts health-care industry is one of the state's largest employers, and the health facility authorities continue to be extremely active in financing nursing home, assisted living, elder housing, and continuing care projects. While there is some uncertainty in the sector as this industry waits to see whether the Bush administration will continue reforms begun under the Clinton administration, many bonds in your fund's portfolio carry the highest credit quality rating of Aaa/AAA. Those with lower credit ratings have been meticulously researched by Putnam's analytical team, and undergo ongoing scrutiny for any changes that might influence their continued strength. Over the period, we continued to add hospital and health-care holdings. For example, in April we purchased bonds issued by the Partners Healthcare System (AA- rated, with a 6.0% coupon) issued to finance construction of a new ambulatory care facility at Massachusetts General Hospital. In the view of Putnam's analysts, Partners is the best-managed health-care municipal bond issuer in the state, enjoying a solid financial position and excellent management resources. Among higher-yielding, lower credit-rating health-care revenue bonds, in April we added some unrated revenue refunding bonds issued by Massachusetts Development Finance Agency Health Facilities for Beverly Enterprises (considered BB- by our analysts, with a 7.375% coupon) to refinance one of this nursing home company's facilities in Dedham. We also added bonds issued by the Massachusetts Health Educational Facilities for University of Massachusetts Memorial Hospital in Worcester (Baa2 rated, with a 6.5% coupon). These bonds will be used by the teaching hospital to rebuild their emergency room facility. While these holdings, along with others discussed in this report, were viewed favorably at the end of the period, all are subject to review and adjustment in accordance with the fund's investment strategy and may vary in the future. * FAVORABLE ENVIRONMENT FOR BONDS SEEN The fund's longer duration positions it well to take advantage of additional municipal bond price appreciation that may come in the wake of the June/July coupon reinvestment period and beyond. The Fed's vigilance in accommodating growth and reinvigorating the economy should have a positive effect on narrowing credit spreads and the potential for additional bond price appreciation among lower-rated credits. Meanwhile, Massachusetts appears to be in a solid financial position, providing a positive backdrop for the municipal market. Our view of the economy for the next 12 months is that it will be weak, but not recessionary. The general perception in January was that a recession was likely, if not a sure thing. We disagreed with that forecast, and while we do not expect growth to surge in the near term, we believe it is probable that the economy will grow at an annualized rate of 2% to 3% in the next three quarters. The composition of this growth will be slightly stronger in the second quarter and slightly weaker in the third and fourth quarters. We are also not anticipating any significant increase in inflation. As a result, this slow to moderate growth with continued low inflation should provide a favorable backdrop for performance in the tax-exempt markets. The views expressed here are exclusively those of Putnam Management. They are not meant as investment advice. Although the described holdings were viewed favorably as of 5/31/01, there is no guarantee the fund will continue to hold these securities in the future. This fund concentrates its investments in one state and involves more risk than a fund that invests more broadly. PUTNAM'S POLICY ON CONFIDENTIALITY In order to conduct business with our shareholders, we must obtain certain personal information such as account holders' addresses, telephone numbers, Social Security numbers, and the names of their financial advisors. We use this information to assign you an account number and to help us maintain accurate records of transactions and account balances. It is our policy to protect the confidentiality of your information, whether or not you currently own shares of our funds and, in particular, not to sell information about you or your accounts to outside marketing firms. We have safeguards in place designed to prevent unauthorized access to our computer systems and procedures to protect personal information from unauthorized use. Under certain circumstances, we share this information with outside vendors who provide services to us, such as mailing and proxy solicitation. In those cases, the service providers enter into confidentiality agreements with us, and we provide only the information necessary to process transactions and perform other services related to your account. We may also share this information with our Putnam affiliates to service your account or provide you with information about other Putnam products or services. It is also our policy to share account information with your financial advisor, if you've listed one on your Putnam account. If you would like clarification about our confidentiality policies or have any questions or concerns, please don't hesitate to contact us at 1-800-225-1581, Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00 a.m. to 5:00 p.m., Eastern Time. PERFORMANCE SUMMARY This section provides information about your fund's performance, which should always be considered in light of its investment strategy. Putnam Massachusetts Tax Exempt Income Fund is designed for investors seeking high current income free from federal and state income taxes, consistent with capital preservation. TOTAL RETURN FOR PERIODS ENDED 5/31/01 Class A Class B Class M (inception dates) (10/23/89) (7/15/93) (5/12/95) NAV POP NAV CDSC NAV POP ------------------------------------------------------------------------------ 1 year 10.95% 5.63% 10.24% 5.24% 10.61% 7.06% ------------------------------------------------------------------------------ 5 years 32.31 26.09 28.06 26.06 30.49 26.20 Annual average 5.76 4.75 5.07 4.74 5.47 4.76 ------------------------------------------------------------------------------ 10 years 93.59 84.47 80.03 80.03 86.98 80.85 Annual average 6.83 6.31 6.06 6.06 6.46 6.10 ------------------------------------------------------------------------------ Annual average (life of fund) 7.12 6.67 6.33 6.33 6.73 6.43 ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/01 Lehman Brothers Municipal Consumer Bond Index price index -------------------------------------------------------------------- 1 year 12.16% 3.50% -------------------------------------------------------------------- 5 years 37.88 13.35 Annual average 6.64 2.54 -------------------------------------------------------------------- 10 years 98.26 30.90 Annual average 7.08 2.73 -------------------------------------------------------------------- Annual average (life of fund) 7.38 3.03 -------------------------------------------------------------------- Past performance is no assurance of future results. More recent returns may be more or less than those shown. Returns for class A and class M shares reflect the current maximum initial sales charges of 4.75% and 3.25% respectively. Class B share returns for the 1-year, 5- and 10-year, if available, and life-of-fund periods reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declines to 1% in the sixth year, and is eliminated thereafter. Returns shown for class B and class M shares for periods prior to their inception are derived from the historical performance of class A shares, adjusted to reflect both the initial sales charge or CDSC, if any, currently applicable to each class and in the case of class B and class M shares the higher operating expenses applicable to such shares. All returns assume reinvestment of distributions at NAV. Investment return and principal value will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. [GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT] GROWTH OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment since 5/31/91 Lehman Brothers Fund's class A Municipal Bond Consumer price Date shares at POP Index index 5/31/91 9,525 10,000 10,000 5/31/92 10,751 10,982 10,302 5/31/93 12,098 12,296 10,634 5/31/94 12,401 12,599 10,878 5/31/95 13,142 13,751 11,224 5/31/96 13,880 14,379 11,549 5/31/97 15,258 15,572 11,807 5/31/98 16,410 17,034 12,006 5/31/99 17,000 17,830 12,257 5/31/00 16,969 17,677 12,647 5/31/01 $18,447 $19,826 $13,090 Footnote reads: Past performance is no assurance of future results. At the end of the same time period, a $10,000 investment in the fund's class B shares would have been valued at $18,003 and no contingent deferred sales charges would apply; a $10,000 investment in the fund's class M shares would have been valued at $18,698 ($18,085 at public offering price). PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/01 Class A Class B Class M ------------------------------------------------------------------------------ Distributions (number) 12 12 12 ------------------------------------------------------------------------------ Income 1 $0.482043 $0.422209 $0.454443 ------------------------------------------------------------------------------ Capital gains 1 -- -- -- ------------------------------------------------------------------------------ Total $0.482043 $0.422209 $0.454443 ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV POP ------------------------------------------------------------------------------ 5/31/00 $8.74 $9.18 $8.73 $8.74 $9.03 ------------------------------------------------------------------------------ 5/31/01 9.20 9.66 9.19 9.20 9.51 ------------------------------------------------------------------------------ Current return (end of period) ------------------------------------------------------------------------------ Current dividend rate 2 5.30% 5.04% 4.65% 5.00% 4.83% ------------------------------------------------------------------------------ Taxable equivalent 3 9.22 8.77 8.09 8.70 8.40 ------------------------------------------------------------------------------ Current 30-day SEC yield 4 4.89 4.66 4.24 4.59 4.44 ------------------------------------------------------------------------------ Taxable equivalent 3 8.51 8.11 7.38 7.98 7.72 ------------------------------------------------------------------------------ 1 Capital gains, if any, are taxable for federal and, in most cases, state tax purposes. For some investors, investment income may also be subject to the federal alternative minimum tax. Investment income may be subject to state and local taxes. 2 Income portion of most recent distribution, annualized and divided by NAV or POP at end of period. 3 Assumes maximum 42.51% combined 2001 federal and state tax rates. Results for investors subject to lower tax rates would not be as advantageous. 4 Based only on investment income, calculated using SEC guidelines. TOTAL RETURN FOR PERIODS ENDED 6/30/01 (most recent calendar quarter) Class A Class B Class M (inception dates) (10/23/89) (7/15/93) (5/12/95) NAV POP NAV CDSC NAV POP ------------------------------------------------------------------------------ 1 year 8.96% 3.73% 8.28% 3.28% 8.52% 5.00% ------------------------------------------------------------------------------ 5 years 31.99 25.68 27.66 25.66 29.91 25.66 Annual average 5.71 4.68 5.00 4.67 5.37 4.67 ------------------------------------------------------------------------------ 10 years 94.40 85.23 80.96 80.96 87.74 81.55 Annual average 6.87 6.36 6.11 6.11 6.50 6.15 ------------------------------------------------------------------------------ Annual average (life of fund) 7.13 6.69 6.35 6.35 6.74 6.44 ------------------------------------------------------------------------------ Past performance is no assurance of future results. More recent returns may be more or less than those shown. They do not take into account any adjustment for taxes payable on reinvested distributions. Investment returns and principal value will fluctuate so that an investor's shares when sold may be worth more or less than their original cost. See first page of performance section for performance calculation method. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Class A shares are generally subject to an initial sales charge. Class B shares may be subject to a sales charge upon redemption. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares, not including any initial or contingent deferred sales charge. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 4.75% maximum sales charge for class A shares and 3.25% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund's CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. COMPARATIVE BENCHMARKS Lehman Brothers Municipal Bond Index is an index of approximately 20,000 investment-grade, fixed-rate tax-exempt bonds. It assumes reinvestment of all distributions and interest payments and does not take into account brokerage fees or taxes. Securities in the fund do not match those in the index and performance of the fund will differ. It is not possible to invest directly in an index. Consumer price index (CPI) is a commonly used measure of inflation; it does not represent an investment return. A GUIDE TO THE FINANCIAL STATEMENTS These sections of the report, preceded by the Report of independent accountants, constitute the fund's financial statements. The fund's portfolio lists all the fund's investments and their values as of the last day of the reporting period. Holdings are organized by asset type and industry sector, country, or state to show areas of concentration and diversification. Statement of assets and liabilities shows how the fund's net assets and share price are determined. All investment and noninvestment assets are added together. Any unpaid expenses and other liabilities are subtracted from this total. The result is divided by the number of shares to determine the net asset value per share, which is calculated separately for each class of shares. (For funds with preferred shares, the amount subtracted from total assets includes the net assets allocated to remarketed preferred shares.) Statement of operations shows the fund's net investment gain or loss for the reporting period. This is determined by adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses. This statement also lists any net gain or loss the fund realized on the sales of its holdings and -- for holdings that remain in the portfolio -- any change in unrealized gains or losses over the period. Statement of changes in net assets shows how the fund's net assets were affected by distributions to shareholders and by changes in the number of the fund's shares. It lists distributions and their sources (net investment income or realized capital gains) over the current reporting period and the most recent fiscal year-end. The distributions listed here may not match the sources listed in the Statement of operations because the distributions are determined on a tax basis and may be paid in a different period from the one in which they were earned. Financial highlights provide an overview of the fund's investment results, per-share distributions, expense ratios, net investment income ratios and portfolio turnover in one summary table, reflecting the five most recent reporting periods. In a semiannual report, the highlight table also includes the current reporting period. For open-end funds, a separate table is provided for each share class. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees and Shareholders of Putnam Massachusetts Tax Exempt Income Fund: In our opinion, the accompanying statement of assets and liabilities, including the fund's portfolio (except for bond ratings), and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Putnam Massachusetts Tax Exempt Income Fund (the "fund") at May 31, 2001, and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of investments owned at May 31, 2001 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts July 12, 2001
THE FUND'S PORTFOLIO May 31, 2001 KEY TO ABBREVIATIONS AMBAC -- AMBAC Indemnity Corporation FGIC -- Financial Guaranty Insurance Corporation FNMA Coll. -- Federal National Mortgage Association Collateralized FRB -- Floating Rate Bonds FSA -- Financial Security Assurance GNMA Coll. -- Government National Mortgage Association Collateralized G.O. Bonds -- General Obligation Bonds IFB -- Inverse Floating Rate Bonds MBIA -- Municipal Bond Investors Assurance Corporation U.S. Govt. Coll. -- U.S. Government Collateralized VRDN -- Variable Rate Demand Notes MUNICIPAL BONDS AND NOTES (98.2%) (a) PRINCIPAL AMOUNT RATING (RAT) VALUE Massachusetts (93.3%) ------------------------------------------------------------------------------------------------------------------- $ 4,000,000 Boston, Indl. Dev. Fin. Auth. Rev. Bonds (Springhouse, Inc.), 6s, 7/1/28 BB-/P $ 3,150,000 7,000,000 Boston, Indl. Dev. Fin. Auth. Swr. Fac. Rev. Bonds (Harbor Elec. Energy Co.), 7 3/8s, 5/15/15 Baa1 7,157,500 7,935,000 Boston, Wtr. & Swr. Commn. Rev. Bonds, Ser. A, 5 3/4s, 11/1/13 AA- 8,668,988 2,100,000 Framingham, Hsg. Auth. Rev. Bonds, (Beaver Terrace), Ser. A, GNMA Coll., 6.35s, 2/20/32 AAA 2,226,000 5,185,000 Holden, G.O. Bonds, FGIC, 5 1/2s, 3/1/20 Aaa 5,334,069 MA Bay Trans. Auth. Rev. Bonds 3,550,000 Ser. B, 6.2s, 3/1/16 AA 4,038,125 7,500,000 (Gen. Trans. Syst.), Ser. B, 5.9s, 3/1/24 AA 8,109,375 4,000,000 (Gen. Trans. Syst.), Ser. A, 5 1/2s, 3/1/12 AA 4,310,000 MA State Dev. Fin. Agcy. Rev. Bonds 1,650,000 (Health Facilities-Beverly, Inc.), 7 3/8s, 4/1/09 BB-/P 1,656,188 3,420,000 (Lasell Village), Ser. A, 6 3/8s, 12/1/25 BB-/P 3,048,075 1,950,000 (MA Biomedical Research), Ser. C, 6 1/8s, 8/1/12 A2 2,074,313 1,300,000 (Worcester Redev. Auth. Issue), 6s, 6/1/24 AA 1,378,000 1,830,000 (MA Biomedical Research), Ser. C, 5 7/8s, 8/1/10 A2 1,930,650 1,750,000 (Boston Biomedical Research), 5 3/4s, 2/1/29 Baa3 1,570,625 2,000,000 (Eastern Nazarine College), 5 5/8s, 4/1/29 BBB- 1,697,500 1,000,000 MA State Dev. Fin. Agcy. VRDN (Alliance of Mass, Inc.), Ser. A, 3.0s, 1/1/26 A-1 1,000,000 5,000,000 MA State Edl. Fin. Auth. Rev. Bonds, Ser. E, AMBAC, 5s, 1/1/13 AAA 4,881,250 1,935,000 MA State FRB, Ser. 35, 8.77s, 11/1/11 (acquired 8/13/98, cost $2,401,142) (RES) Aa3 2,440,519 MA State G.O. Bonds 5,075,000 AMBAC, 8.85s, 11/1/14 (acquired 5/11/98, cost $6,660,938) (RES) AAA/P 6,889,313 2,000,000 Ser. B, 5 3/4s, 6/1/10 Aa2 2,205,000 5,000,000 Ser. A, 5 1/2s, 1/1/10 Aa2 5,406,250 3,750,000 Ser. C, 5 1/4s, 8/1/15 Aa2 3,839,063 MA State Hlth. & Edl. Fac. Auth. IFB 2,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.97s, 8/12/21 Aaa 2,096,440 7,500,000 (Boston U.), MBIA, 9.467s, 10/1/31 Aaa 7,891,650 6,000,000 (Beth Israel Deaconess Hosp.), Ser. L, AMBAC, 8.268s, 7/1/25 Aaa 6,232,500 7,900,000 (New England Medical Ctr.), 6.18s, 7/1/18 Aaa 7,771,625 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds 4,760,000 (Goddard Memorial Hosp.), Ser. B, 9s, 7/1/15 Baa3 4,284,000 2,000,000 (Nichols College), Ser. B, 8 1/2s, 10/1/16 BB-/P 2,075,240 5,710,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 AAA/P 6,466,575 6,220,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba1 6,363,869 8,185,000 (Cooley Dickinson Hosp.), Ser A, 7 1/8s, 11/15/18 AAA/P 8,931,881 3,000,000 (Winchester Hosp.), Ser. E, 6 3/4s, 7/1/30 BBB 3,045,000 1,900,000 (Sisters Providence Hlth. Syst.), Ser. A, 6 5/8s, 11/15/22 Aaa 2,094,750 1,550,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 AAA 1,648,813 3,125,000 (UMass Memorial Healthcare), Ser. C, 6 1/2s, 7/1/21 Baa2 3,105,469 3,880,000 (Metro West Hlth., Inc.), Ser. C, 6 1/2s, 11/15/18 Aaa 4,146,750 5,000,000 (MA Gen. Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/20 Aaa 5,393,750 5,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 Aaa 5,725,000 9,850,000 (MA Gen. Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/12 Aaa 11,229,000 1,000,000 (Learning Ctr. for Deaf Children), Ser. C, 6 1/8s, 7/1/29 Ba2 931,250 7,250,000 (Newton-Wellesley Hosp.), Ser. E, MBIA, 6s, 7/1/25 Aaa 7,594,375 2,100,000 (Partners Healthcare Syst.), 6s, 7/1/15 AA- 2,218,125 1,460,000 (Partners Healthcare Syst.), Ser. C, 6s, 7/1/14 AA- 1,554,900 4,000,000 (Partners Healthcare Syst.), Ser. C, 5 3/4s, 7/1/32 AA- 3,935,000 4,500,000 (Caritas Christian Oblig. Group), Ser. A, 5 5/8s, 7/1/20 Baa2 3,971,250 3,665,000 (Williams College), Ser. G, 5 1/2s, 7/1/14 Aaa 3,852,831 2,250,000 (Cape Cod Healthcare), Ser. B, 5.45s, 11/15/23 BBB+ 1,923,750 3,000,000 (Jordan Hosp.), Ser. D, 5 3/8s, 10/1/28 BBB+ 2,501,250 4,250,000 (Boston College), Ser. K, 5 3/8s, 6/1/14 AA- 4,462,500 3,000,000 (Partners Healthcare Syst.), Ser. B, 5 1/4s, 7/1/11 AA- 3,097,500 10,000,000 (MA Inst. of Tech.), Ser. I-1, 5.2s, 1/1/28 (SEG) Aaa 9,937,500 10,915,000 (Boston College), Ser. L, 4 3/4s, 6/1/31 Aa3 9,687,063 MA State Hsg. Fin. Agcy. Rev. Bonds 6,000,000 (Res. Park Mtg. Ctr.), Ser. C, FNMA Coll., 6.9s, 11/15/21 Aaa 6,229,500 2,000,000 (Res. Dev.), Ser. E, FNMA Coll., 6 1/4s, 11/15/12 Aaa 2,087,500 2,000,000 (Rental Mtge.), Ser. E, AMBAC, 5.9s, 7/1/25 Aaa 2,032,500 5,000,000 (Rental Mtge.), Ser. C, AMBAC, 5 5/8s, 7/1/40 Aaa 4,975,000 4,250,000 MA State Indl. Fin. Agcy. Poll. Control Rev. Bonds (MA Eastern Edison Co.), 5 7/8s, 8/1/08 A+ 4,409,375 MA State Indl. Fin. Agcy. Resource Recvy. Rev. Bonds (Southeastern MA) 6,500,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 6,711,315 3,410,000 Ser. A, 9s, 7/1/15 BB-/P 3,520,518 MA State Indl. Fin. Agcy. Rev. Bonds 6,000,000 (Orchard Cove, Inc.), U.S. Govt. Coll., 9s, 5/1/22 AAA/P 6,495,300 3,000,000 (1st Mtge. Stone Institution & Newton), 7.9s, 1/1/24 BB-/P 3,037,500 5,140,000 (1st Mtge. Loomis & Village), 7 5/8s, 7/1/25 AAA 5,981,675 6,650,000 (Merrimack College), 7 1/8s, 7/1/12 AAA 7,082,117 3,500,000 (1st. Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB/P 3,548,125 1,165,000 (Clark U.), Ser. E, 7s, 7/1/12 A 1,190,583 2,605,000 (Clark U.), Ser. F, 7s, 7/1/11 A 2,664,576 3,000,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB/P 3,097,500 5,875,000 (American Hingham, Wtr. Treatment), 6 3/4s, 12/1/25 BBB/P 6,154,063 6,000,000 (1st Mtge. Berkshire Retirement), Ser. A, 6 5/8s, 7/1/16 BBB 5,932,500 2,000,000 (1st Mtge. Brookhaven), Ser. B, 6.6s, 1/1/17 BBB/P 1,967,500 1,160,000 (Worcester Visiting Nurse Assn.), 6.4s, 9/15/10 A-/P 1,186,100 3,385,000 (Park School), 5.9s, 9/1/26 A3 3,448,469 1,650,000 (Wentworth Inst. of Tech.), 5 3/4s, 10/1/28 Baa1 1,608,750 2,000,000 (Babson College), Ser. A, MBIA, 4 3/4s, 10/1/28 Aaa 1,802,500 12,250,000 (Tufts U.), Ser. H, MBIA, 4 3/4s, 2/15/28 Aaa 11,055,625 22,100,000 MA State Tpk. Auth. Hwy. Syst. Rev. Bonds, Ser. A, MBIA, 5s, 1/1/37 Aaa 20,249,120 7,000,000 MA State Wtr. Poll. Abatement Rev. Bonds (Pool Program), Ser. 5, 5 3/8s, 8/1/27 Aaa 7,043,750 5,000,000 MA State Wtr. Resources Auth. FRB, 7 1/2s, 8/1/39 (acquired 3/9/00, cost $4,652,700) (RES) A+ 5,406,250 MA State Wtr. Resources Auth. Rev. Bonds 10,000,000 Ser. A, 6 1/2s, 7/15/19 AA 11,625,000 2,900,000 Ser. C, MBIA, 5 1/4s, 12/1/15 AAA 3,005,125 2,000,000 MA State Wtr. Resources Auth. VRDN (General Multi. Modal), Ser. B, FGIC, 2.8s, 8/1/37 VMIG1 2,000,000 5,000,000 Quincy, IFB (Quincy Hosp.), FSA, 7.07s, 1/15/11 Aaa 5,268,750 Somerville, Hsg. Auth. Rev. Bonds (Clarendon-Hill Mtge.), GNMA Coll. 2,000,000 7.95s, 11/20/30 AAA 2,034,400 1,175,000 7.85s, 11/20/10 AAA 1,195,892 1,000,000 Westford, G.O. Bonds, FGIC, 5 1/4s, 4/1/20 Aaa 1,003,750 2,950,000 Worcester, Mtge. Rev. Bonds (Briarwood), 9 1/4s, 12/1/22 AAA/P 3,270,813 ------------- 385,501,850 Puerto Rico (4.9%) ------------------------------------------------------------------------------------------------------------------- Cnmwlth. of PR, G.O. Bonds, FSA 1,700,000 6 1/2s, 7/1/13 AAA 2,006,000 4,000,000 5 1/2s, 7/1/10 Aaa 4,375,000 1,000,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA, 2.75s, 12/1/15 VMIG1 1,000,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds, MBIA 2,925,000 Ser. Z, 6 1/4s, 7/1/13 Aaa 3,382,031 5,000,000 Ser. W, 5 1/2s, 7/1/15 Aaa 5,400,000 1,500,000 Cmnwlth. of PR, Hwy. & Trans. Auth. VRDN, Ser. A, AMBAC, 2.5s, 7/1/28 VMIG1 1,500,000 2,600,000 PR Indl. Med. & Env. Poll. Control Fac. Fin. Auth. Rev. Bonds (Special Facilities-American Airlines, Inc.), Ser. A, 6.45s, 12/1/25 Baa3 2,736,500 ------------- 20,399,531 ------------------------------------------------------------------------------------------------------------------- Total Investments (cost $395,175,339) (b) $ 405,901,381 ------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $413,188,126. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at May 31, 2001 for the securities listed. Ratings are generally ascribed to securities at the time of issuance. While the agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings do not necessarily represent what the agencies would ascribe to these securities at May 31, 2001. Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of independent accountants. (b) The aggregate identified cost on a tax basis is $395,175,339, resulting in gross unrealized appreciation and depreciation of $19,052,146 and $8,326,104, respectively, or net unrealized appreciation of $10,726,042. (RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at May 31, 2001 was $14,736,082 or 3.6% of net assets. (SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for future contracts at May 31, 2001. The rates shown on IFB's, which are securities paying interest rates that vary inversely to changes in the market interest rate, FRB's, and VRDN's, are the current interest rates at May 31, 2001. The fund had the following industry group concentrations greater than 10% at May 31, 2001 (as a percentage of net assets): Health care/hospitals 49.2% Water and sewer 11.6 Transportation 11.3 The fund had the following insurance concentrations concentrations greater than 10% at May 31, 2001 (as a percentage of net assets): MBIA 14.9% AMBAC 10.4 ------------------------------------------------------------------------------ Futures Contracts Outstanding at May 31, 2001 Unrealized Aggregate Face Expiration Appreciation/ Total Value Value Date (Depreciation) ------------------------------------------------------------------------------ Muni Bond Index (Long) $1,334,938 $1,346,481 Jun-01 $(11,543) Muni Bond Index (Long) 5,075,000 5,028,494 Sep-01 46,506 ------------------------------------------------------------------------------ $ 34,963 ------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES May 31, 2001 Assets ------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $395,175,339) (Note 1) $405,901,381 ------------------------------------------------------------------------------------------- Cash 637,077 ------------------------------------------------------------------------------------------- Interest and other receivables 7,528,970 ------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 1,075,831 ------------------------------------------------------------------------------------------- Receivable for variation margin (Note 1) 44,469 ------------------------------------------------------------------------------------------- Total assets 415,187,728 Liabilities ------------------------------------------------------------------------------------------- Distributions payable to shareholders 858,282 ------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 365,267 ------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 511,659 ------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 46,593 ------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 14,498 ------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,416 ------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 183,373 ------------------------------------------------------------------------------------------- Other accrued expenses 18,514 ------------------------------------------------------------------------------------------- Total liabilities 1,999,602 ------------------------------------------------------------------------------------------- Net assets $413,188,126 Represented by ------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $411,593,573 ------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (123,436) ------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (9,043,016) ------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 10,761,005 ------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $413,188,126 Computation of net asset value and offering price ------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($285,452,277 divided by 31,020,685 shares) $9.20 ------------------------------------------------------------------------------------------- Offering price per class A share (100/95.25 of $9.20)* $9.66 ------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($121,880,752 divided by 13,256,465 shares)+ $9.19 ------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($5,855,097 divided by 636,394 shares) $9.20 ------------------------------------------------------------------------------------------- Offering price per class M share (100/96.75 of $9.20)** $9.51 ------------------------------------------------------------------------------------------- * On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales, the offering price is reduced. ** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. + Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS Year ended May 31, 2001 Tax exempt interest income: $23,825,470 ------------------------------------------------------------------------------------------- Expenses: ------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 1,972,252 ------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 360,729 ------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 11,826 ------------------------------------------------------------------------------------------- Administrative services (Note 2) 6,898 ------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 542,755 ------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 997,665 ------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 25,936 ------------------------------------------------------------------------------------------- Other 108,122 ------------------------------------------------------------------------------------------- Total expenses 4,026,183 ------------------------------------------------------------------------------------------- Expense reduction (Note 2) (228,556) ------------------------------------------------------------------------------------------- Net expenses 3,797,627 ------------------------------------------------------------------------------------------- Net investment income 20,027,843 ------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 72,222 ------------------------------------------------------------------------------------------- Net realized loss on futures contracts (Note 1) (1,235,244) ------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and futures contracts during the year 20,822,812 ------------------------------------------------------------------------------------------- Net gain on investments 19,659,790 ------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $39,687,633 ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS Year ended May 31 --------------------------------- 2001 2000 -------------------------------------------------------------------------------------------------- Increase (decrease) in net assets -------------------------------------------------------------------------------------------------- Operations: -------------------------------------------------------------------------------------------------- Net investment income $ 20,027,843 $ 21,205,099 -------------------------------------------------------------------------------------------------- Net realized loss on investments (1,163,022) (1,035,834) -------------------------------------------------------------------------------------------------- Net unrealized appreciation (depreciation) of investments 20,822,812 (30,724,712) -------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 39,687,633 (10,555,447) -------------------------------------------------------------------------------------------------- Distributions to shareholders (Note 1): -------------------------------------------------------------------------------------------------- From net investment income Class A (14,338,207) (15,245,154) -------------------------------------------------------------------------------------------------- Class B (5,432,659) (5,724,606) -------------------------------------------------------------------------------------------------- Class M (252,397) (266,663) -------------------------------------------------------------------------------------------------- Increase (decrease) from capital share transactions (Note 4) 20,445,364 (21,375,109) -------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets 40,109,734 (53,166,979) Net assets -------------------------------------------------------------------------------------------------- Beginning of year 373,078,392 426,245,371 -------------------------------------------------------------------------------------------------- End of year (including distributions in excess of net investment income of $123,436 and $246,148, respectively) $413,188,126 $373,078,392 -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS A ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended May 31 ----------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $8.74 $9.45 $9.61 $9.31 $9.11 ----------------------------------------------------------------------------------------------------- Investment operations ----------------------------------------------------------------------------------------------------- Net investment income .48 .50 .49 .51 .52 ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .46 (.71) (.15) .30 .21 ----------------------------------------------------------------------------------------------------- Total from investment operations .94 (.21) .34 .81 .73 ----------------------------------------------------------------------------------------------------- Less distributions: ----------------------------------------------------------------------------------------------------- From net investment income (.48) (.50) (.50) (.51) (.53) ----------------------------------------------------------------------------------------------------- Total distributions (.48) (.50) (.50) (.51) (.53) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $9.20 $8.74 $9.45 $9.61 $9.31 ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 10.95 (2.20) 3.60 8.86 8.17 ----------------------------------------------------------------------------------------------------- Ratios and supplemental data ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $285,452 $259,479 $298,243 $293,978 $280,402 ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) .82 .84 .97 .95 .96 ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 5.28 5.55 5.11 5.33 5.67 ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 6.91 15.17 9.42 31.13 19.12 ----------------------------------------------------------------------------------------------------- (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets includes amounts paid through expense offset arrangements (Note 2).
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS B ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended May 31 ----------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $8.73 $9.44 $9.61 $9.30 $9.10 ----------------------------------------------------------------------------------------------------- Investment operations ----------------------------------------------------------------------------------------------------- Net investment income .42 .44 .43 .45 .46 ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .46 (.71) (.16) .30 .21 ----------------------------------------------------------------------------------------------------- Total from investment operations .88 (.27) .27 .75 .67 ----------------------------------------------------------------------------------------------------- Less distributions: ----------------------------------------------------------------------------------------------------- From net investment income (.42) (.44) (.44) (.44) (.47) ----------------------------------------------------------------------------------------------------- Total distributions (.42) (.44) (.44) (.44) (.47) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $9.19 $8.73 $9.44 $9.61 $9.30 ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 10.24 (2.85) 2.81 8.27 7.47 ----------------------------------------------------------------------------------------------------- Ratios and supplemental data ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $121,881 $109,426 $122,654 $105,351 $85,192 ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.47 1.49 1.62 1.60 1.61 ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 4.63 4.90 4.47 4.67 4.99 ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 6.91 15.17 9.42 31.13 19.12 ----------------------------------------------------------------------------------------------------- (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets includes amounts paid through expense offset arrangements (Note 2).
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS M ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended May 31 ----------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $8.74 $9.45 $9.61 $9.31 $9.10 ----------------------------------------------------------------------------------------------------- Investment operations ----------------------------------------------------------------------------------------------------- Net investment income .45 .47 .46 .48 .50 ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .46 (.71) (.15) .30 .21 ----------------------------------------------------------------------------------------------------- Total from investment operations .91 (.24) .31 .78 .71 ----------------------------------------------------------------------------------------------------- Less distributions: ----------------------------------------------------------------------------------------------------- From net investment income (.45) (.47) (.47) (.48) (.50) ----------------------------------------------------------------------------------------------------- Total distributions (.45) (.47) (.47) (.48) (.50) ----------------------------------------------------------------------------------------------------- Net asset value, end of period $9.20 $8.74 $9.45 $9.61 $9.31 ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 10.61 (2.50) 3.29 8.55 7.96 ----------------------------------------------------------------------------------------------------- Ratios and supplemental data ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $5,855 $4,174 $5,349 $2,570 $2,839 ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.12 1.14 1.27 1.25 1.26 ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 4.98 5.25 4.81 5.05 5.30 ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 6.91 15.17 9.42 31.13 19.12 ----------------------------------------------------------------------------------------------------- (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets includes amounts paid through expense offset arrangements (Note 2).
NOTES TO FINANCIAL STATEMENTS May 31, 2001 Note 1 Significant accounting policies Putnam Massachusetts Tax Exempt Income Fund (the "fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The fund seeks as high a level of current income exempt from federal income tax and Massachusetts personal income tax as Putnam Investment Management, LLC ("Putnam Management"), the fund's manager, a wholly-owned subsidiary of Putnam Investments, LLC, believes is consistent with preservation of capital by investing primarily in a portfolio of Massachusetts tax-exempt securities. The fund offers class A, class B and class M shares. Class A shares are sold with a maximum front-end sales charge of 4.75%. Class B shares, which convert to class A shares after approximately eight years, do not pay a front-end sales charge, but pay a higher ongoing distribution fee than class A shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class M shares are sold with a maximum front-end sales charge of 3.25% and pay an ongoing distribution fee that is higher than class A but lower than class B shares. Expenses of the fund are borne pro-rata by the holders of each class of shares, except that each class bears expenses unique to that class (including the distribution fees applicable to such class). Each class votes as a class only with respect to its own distribution plan or other matters on which a class vote is required by law or determined by the Trustees. Shares of each class would receive their pro-rata share of the net assets of the fund, if the fund were liquidated. In addition, the Trustees declare separate dividends on each class of shares. The following is a summary of significant accounting policies consistently followed by the fund in the preparation of its financial statements. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Tax-exempt bonds and notes are stated on the basis of valuations provided by an independent 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. Restricted securities are stated at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. B) Security transactions and related investment income Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. C) Futures and options contracts The fund may use futures and options contracts to hedge against changes in the values of securities the fund owns or expects to purchase. The fund may also write options on securities it owns or in which it may invest to increase its current returns. The potential risk to the fund is that the change in value of futures and options contracts may not correspond to the change in value of the hedged instruments. In addition, losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparty to the contract is unable to perform. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by dealers. D) Line of credit The fund has entered into a committed line of credit with certain banks. This line of credit agreement includes restrictions that the fund maintains an asset coverage ratio of at least 300% and borrowings must not exceed prospectus limitations. For the year ended May 31, 2001, the fund had no borrowings against the line of credit. E) Federal taxes It is the policy of the fund to distribute all of its income within the prescribed time and otherwise comply with the provisions of the Internal Revenue Code applicable to regulated investment companies. It is also the intention of the fund to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Internal Revenue Code of 1986, as amended. Therefore, no provision has been made for federal taxes on income, capital gains or unrealized appreciation on securities held nor for excise tax on income and capital gains. At May 31, 2001, the fund had a capital loss carryover of approximately $6,990,000 available to offset future capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration -------------- ------------------ $1,126,000 May 31, 2003 2,014,000 May 31, 2004 596,000 May 31, 2007 2,162,000 May 31, 2008 1,092,000 May 31, 2009 F) Distributions to shareholders Income dividends are recorded daily by the fund and are paid monthly. Capital gain distributions, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Reclassifications are made to the fund's capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These differences include temporary and permanent differences of dividends payable, realized and unrealized gains and losses on certain future contracts, market discount and straddle loss deferrals. For the year ended May 31, 2001, the fund reclassified $118,132 to decrease distributions in excess of net investment income and $130,904 to decrease paid-in-capital, with a decrease to accumulated net realized losses of $12,772. The calculation of net investment income per share in the financial highlights table excludes these adjustments. G) Amortization of bond premium and accretion of bond discount Any premium resulting from the purchase of securities in excess of maturity value is amortized on a yield-to-maturity basis. The premium in excess of the call price, if any, is amortized to the call date; thereafter, the remaining excess premium is amortized to maturity. Discounts on original issue discount bonds are accreted according to the yield-to-maturity basis. Note 2 Management fee, administrative services and other transactions Compensation of Putnam Management, for management and investment advisory services is paid quarterly based on the average net assets of the fund. Such fee is based upon the lesser of (i) an annual rate of 0.50% of the average net asset value of the fund or (ii) 0.60% of the first $500 million of average net assets, 0.50% of the next $500 million, 0.45% of the next $500 million, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34% of the next $5 billion and 0.33% thereafter. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, LLC. Investor servicing agent functions are provided by Putnam Investor Services, a division of PFTC. The fund has entered into an arrangement with PFTC whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's expenses. For the year ended May 31, 2001, the fund's expenses were reduced by $228,556 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $572 has been allocated to the fund, and an additional fee for each Trustees meeting attended. Trustees receive additional fees for attendance at certain committee meetings. The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which allows the Trustees to defer the receipt of all or a portion of Trustees Fees payable on or after July 1, 1995. The deferred fees remain invested in certain Putnam funds until distribution in accordance with the Deferral Plan. The fund has adopted an unfunded noncontributory defined benefit pension plan (the "Pension Plan") covering all Trustees of the fund who have served as a Trustee for at least five years. Benefits under the Pension Plan are equal to 50% of the Trustee's average total retainer and meeting fees for the three years preceding retirement. Pension expense for the fund is included in Compensation of Trustees in the Statement of operations. Accrued pension liability is included in Payable for compensation of Trustees in the Statement of assets and liabilities. The fund has adopted distribution plans (the "Plans") with respect to its class A, class B and class M shares pursuant to Rule 12b-1 under the Investment Company Act of 1940. The purpose of the Plans is to compensate Putnam Retail Management, a wholly-owned subsidiary of Putnam Investments, LLC and Putnam Retail Management GP, Inc., for services provided and expenses incurred by it in distributing shares of the fund. The Plans provide for payments by the fund to Putnam Retail Management at an annual rate up to 0.35%, 1.00% and 1.00% of the average net assets attributable to class A, class B and class M shares, respectively. The Trustees have approved payment by the fund at an annual rate of 0.20%, 0.85% and 0.50% of the average net assets attributable to class A, class B and class M shares, respectively. For the year ended May 31, 2001, Putnam Retail Management, acting as underwriter received net commissions of $41,078 and $2,900 from the sale of class A and class M shares, respectively, and $204,543 in contingent deferred sales charges from redemptions of class B shares. A deferred sales charge of up to 1% is assessed on certain redemptions of class A shares. For the year ended May 31, 2001, Putnam Retail Management, acting as underwriter received $14,037 on class A redemptions. Note 3 Purchases and sales of securities During the year ended May 31, 2001, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $46,942,656 and $26,411,656, respectively. There were no purchases or sales of U.S. government obligations. Note 4 Capital shares At May 31, 2001, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended May 31, 2001 --------------------------------------------------------------------------- Class A Shares Amount --------------------------------------------------------------------------- Shares sold 5,258,446 $ 48,276,605 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 861,824 7,878,454 --------------------------------------------------------------------------- 6,120,270 56,155,059 Shares repurchased (4,787,103) (43,781,078) --------------------------------------------------------------------------- Net increase 1,333,167 $ 12,373,981 --------------------------------------------------------------------------- Year ended May 31, 2000 --------------------------------------------------------------------------- Class A Shares Amount --------------------------------------------------------------------------- Shares sold 4,596,184 $ 41,068,854 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 942,621 8,429,557 --------------------------------------------------------------------------- 5,538,805 49,498,411 Shares repurchased (7,409,585) (66,211,334) --------------------------------------------------------------------------- Net decrease (1,870,780) $(16,712,923) --------------------------------------------------------------------------- Year ended May 31, 2001 --------------------------------------------------------------------------- Class B Shares Amount --------------------------------------------------------------------------- Shares sold 2,231,595 $ 20,359,739 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 336,200 3,070,927 --------------------------------------------------------------------------- 2,567,795 23,430,666 Shares repurchased (1,841,878) (16,809,214) --------------------------------------------------------------------------- Net increase 725,917 $ 6,621,452 --------------------------------------------------------------------------- Year ended May 31, 2000 --------------------------------------------------------------------------- Class B Shares Amount --------------------------------------------------------------------------- Shares sold 2,262,650 $ 20,346,821 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 372,562 3,328,320 --------------------------------------------------------------------------- 2,635,212 23,675,141 Shares repurchased (3,095,073) (27,566,890) --------------------------------------------------------------------------- Net decrease (459,861) $ (3,891,749) --------------------------------------------------------------------------- Year ended May 31, 2001 --------------------------------------------------------------------------- Class M Shares Amount --------------------------------------------------------------------------- Shares sold 248,498 $2,263,316 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 11,296 103,376 --------------------------------------------------------------------------- 259,794 2,366,692 Shares repurchased (101,094) (916,761) --------------------------------------------------------------------------- Net increase 158,700 $1,449,931 --------------------------------------------------------------------------- Year ended May 31, 2000 --------------------------------------------------------------------------- Class M Shares Amount --------------------------------------------------------------------------- Shares sold 640,087 $ 5,912,990 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 13,114 117,306 --------------------------------------------------------------------------- 653,201 6,030,296 Shares repurchased (741,701) (6,800,733) --------------------------------------------------------------------------- Net decrease (88,500) $ (770,437) --------------------------------------------------------------------------- Note 5 New accounting pronouncement In November 2000, the AICPA issued a revised Audit and Accounting Guide, Audits of Investment Companies, which is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the fund to amortize premium and accrete discount on all fixed-income securities, and classify as interest income gains and losses realized on paydowns on mortgage-backed securities which are presently included in realized gain/loss. Adopting these accounting principles will not affect the fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of operations. The adoption of this principle will not be material to the financial statements. FEDERAL TAX INFORMATION (Unaudited) The fund has designated 100% of dividends paid from net investment income during the fiscal year as tax exempt for Federal income tax purposes. The Form 1099 you receive in January 2002 will show the tax status of all distributions paid to your account in calendar 2001. FUND INFORMATION WEB SITE www.putnaminvestments.com INVESTMENT MANAGER Putnam Investment Management, LLC One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Retail Management One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP TRUSTEES John A. Hill, Chairman Jameson Adkins Baxter Hans H. Estin Ronald J. Jackson Paul L. Joskow Elizabeth T. Kennan Lawrence J. Lasser John H. Mullin III Robert E. Patterson George Putnam, III A.J.C. Smith W. Thomas Stephens W. Nicholas Thorndike OFFICERS George Putnam, III President Charles E. Porter Executive Vice President and Treasurer Patricia C. Flaherty Senior Vice President Lawrence J. Lasser Vice President Gordon H. Silver Vice President Ian C. Ferguson Vice President Brett C. Browchuk Vice President Stephen Oristaglio Vice President Jerome J. Jacobs Vice President Richard P. Wyke Vice President and Fund Manager Richard A. Monaghan Vice President Richard G. Leibovitch Vice President John R. Verani Vice President This report is for the information of shareholders of Putnam Massachusetts Tax Exempt Income Fund. It may also be used as sales literature when preceded or accompanied by the current prospectus, which gives details of sales charges, investment objectives, and operating policies of the fund, and the most recent copy of Putnam's Quarterly Performance Summary and Putnam's Quarterly Ranking Summary. For more information or to request a prospectus, call toll free: 1-800-225-1581. You can also learn more at Putnam Investments' Web site: www.putnaminvestments.com. NOT FDIC INSURED, MAY LOSE VALUE, NO BANK GUARANTEE [LOGO OMITTED] PUTNAM INVESTMENTS The Putnam Funds One Post Office Square Boston, Massachusetts 02109 --------------------- PRSRT STD U.S. POSTAGE PAID PUTNAM INVESTMENTS --------------------- For account balances, economic forecasts, and the latest on Putnam funds, visit www.putnaminvestments.com AN047/72894 845/236/258/ 7/01