-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sn8ciC+vqinbm1nGkpFCckvfOWiIjxL684zAaExcMbjIaoFA915D/Etzfg9f1H0D T1rVleDLDE/05hzOx0fQIQ== 0000928816-03-000485.txt : 20030724 0000928816-03-000485.hdr.sgml : 20030724 20030724115834 ACCESSION NUMBER: 0000928816-03-000485 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030531 FILED AS OF DATE: 20030724 EFFECTIVENESS DATE: 20030724 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUTNAM MASSACHUSETTS TAX EXEMPT INCOME FUND II CENTRAL INDEX KEY: 0000792288 IRS NUMBER: 046626127 STATE OF INCORPORATION: MA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04518 FILM NUMBER: 03800123 BUSINESS ADDRESS: STREET 1: ONE POST OFFICE SQ CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 617-292-14 FORMER COMPANY: FORMER CONFORMED NAME: PUTNAM MASSACHUSETTS TAX EXEMPT INCOME FUND /MA/ DATE OF NAME CHANGE: 19920609 N-CSR 1 mte1.txt PUTNAM MASSACHUSSETTS TAX EXEMPT INCOME FUND Putnam Massachusetts Tax Exempt Income Fund Item 1. Report to Stockholders: - ------------------------------- The following is a copy of the report transmitted to stockholders pursuant to Rule 30e-1 under the Investment Company Act of 1940: ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 5-31-03 [GRAPHIC OMITTED: CRANBERRIES] [SCALE LOGO OMITTED] FROM THE TRUSTEES [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM III] Dear Fellow Shareholder: While we are pleased to report positive results for Putnam Massachusetts Tax Exempt Income Fund for the fiscal year ended May 31, 2003, your fund underperformed both its benchmark and its Lipper peer group category average during the period. Details of these results can be found on page 8. Significant declines in state and local tax revenues, accompanied by credit rating downgrades of both municipalities and the corporate beneficiaries of industrial development bonds, continued to plague the municipal bond market. The market was further tested as it faced the challenge of digesting a record level of new issuance during the period. In the following report, your fund's management team discusses performance and strategy in detail and provides its view of prospects for the fiscal year that has just begun. In bringing you this news of your fund's performance, we would also like to take the opportunity to tell you how much we appreciate your confidence in Putnam. We will continue to do our utmost to deliver the best possible results for your fund. 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 16, 2003 REPORT FROM FUND MANAGEMENT FUND HIGHLIGHTS * Putnam Massachusetts Tax Exempt Income Fund advanced strongly on an absolute basis for the year ended May 31, 2003, with class A shares returning 9.39% at net asset value and 4.15% at public offering price. * Due to differences in portfolio composition, the fund underperformed its benchmark, the Lehman Municipal Bond Index, which returned 10.36% for the period. * The fund's performance at net asset value slightly lagged the average return of 9.69% recorded by its Lipper category, Massachusetts Municipal Debt Funds, primarily due to the fund's more defensive positioning. * See the Performance Summary on page 8 for complete fund performance, comparative performance, and Lipper data. * PERFORMANCE COMMENTARY In a year marked by historically high volatility in the capital markets, Putnam Massachusetts Tax Exempt Income Fund delivered strong returns at net asset value. However, the fund's results lagged those of the Lehman Municipal Bond Index and the average of its Lipper peer group, due primarily to its slightly defensive positioning amid a bond market rally. A heavier weighting to longer-term bonds, greater exposure to bonds at the lower end of the quality spectrum, and continued fiscal problems in Massachusetts also contributed to the fund's underperformance versus its benchmark, which is nationally diversified, includes only investment-grade bonds, and has greater exposure to the shorter portions of the yield curve. Shorter- and inter-mediate-maturity bonds fared well amid a rally driven primarily by multiple short-term rate cuts by the U.S. Federal Reserve Board. Fund Profile Putnam Massachusetts Tax Exempt Income Fund seeks to provide as high a level of current income free from federal and Massachusetts state personal income taxes, as believed to be consistent with the preservation of capital. It may be suitable for Massachusetts investors seeking tax-free income through a diversified portfolio of municipal bonds issued primarily in Massachusetts. * MARKET OVERVIEW The first half of the fiscal year was generally positive for the municipal bond market. In an environment marked by earnings disappointments, economic weakness, and numerous allegations of corporate malfeasance, investors sought the relative safety of high-quality bonds. Increased demand for bonds pushed their prices higher, and many of your fund's holdings benefited. In the fiscal second half, several factors tempered municipal bond performance, including significant declines in tax revenues and subsequent downgrades in municipalities' credit quality. United Airlines, which had provided credit backing for several municipal bond issues, filed for bankruptcy in December, as had US Airways in the months before. In late April, American Airlines narrowly avoided a similar fate. Various segments of the electric power sector were under duress as well. These difficulties put pressure on industrial development bonds (IDBs), which are issued by municipalities but backed by companies benefiting from the financing. Lastly, over $357 billion in municipal bonds was issued in 2002 -- an all-time record. The California Department of Water Resources had the single largest bond issue ever brought to market. In 2003, supply continues to swell, and is on track to exceed the previous year's record. These factors had a dampening effect on municipal bond prices. MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 5/31/03 Bonds Lehman Municipal Bond Index 10.36% - ----------------------------------------------------------------------- Lehman Aggregate Bond Index (taxable bonds) 11.58% - ----------------------------------------------------------------------- Lehman Intermediate Government Bond Index (intermediate-maturity government bonds) 10.16% - ----------------------------------------------------------------------- Citigroup World Government Bond Index 24.14% - ----------------------------------------------------------------------- Equities S&P 500 Index (broad stock market) -8.06% - ----------------------------------------------------------------------- Russell 2000 Index (small- to midsize-company stocks) -8.18% - ----------------------------------------------------------------------- MSCI EAFE Index (international stocks) -12.30% - ----------------------------------------------------------------------- These indexes provide an overview of performance in different market sectors for the 12 months ended 5/31/03. * STRATEGY OVERVIEW Interest-rate sensitivity is an important consideration in the management of bond portfolios. Duration, an investment term that measures this sensitivity, can be calculated from bond coupon rates and maturities. During the summer of 2002, we began implementing a defensive strategy (shorter duration, less sensitivity) in anticipation of rising interest rates. When interest rates rose in October, we returned to a more neutral duration that drifted modestly shorter as the bond market rally resumed -- a position that detracted from results. The fund's duration profile would have moved even shorter had we not worked to maintain it in the falling rate environment by swapping into discount coupon and noncallable bonds. In early 2003, tax-exempt municipal bonds offered investors almost the same yield as comparable Treasury bonds. To take advantage of this opportunity, we established a cross-market arbitrage position, in which we bought intermediate-term municipal bonds and shorted 10-year Treasury futures contracts. Our thesis was that if interest rates should rise (causing bond prices to fall), the fund would have a loss on the municipal bonds, and yet, potential gains on the Treasury futures contracts could more than compensate for the loss. On the other hand, if rates should fall (causing bond prices to rise), a loss on the Treasury futures contracts could be mitigated by a gain on the municipal bonds. We have seen the latter scenario begin to develop as municipal bonds appreciated in price during the second half of the fiscal period. [GRAPHIC OMITTED: vertical bar chart THE FUND'S MATURITY AND DURATION COMPARED] THE FUND'S MATURITY AND DURATION COMPARED* This chart compares changes in the fund's duration (a measure of its sensitivity to interest-rate changes) and its average effective maturity (a weighted average of the holdings' maturities). 11/30/02 5/31/03 Average effective maturity in years 10.7 9.1 Duration in years 6.6 6.0 Footnote reads: *Average effective maturity also takes into account put and call features, where applicable, and reflects prepayments for mortgage-backed securities. * HOW KEY ALLOCATIONS AND HOLDINGS AFFECTED PERFORMANCE The management team seeks to diversify the fund's holdings across the credit quality spectrum, including selective exposure to lower-rated, higher-yielding securities. During the period, the team's pursuit of this strategy was impeded by the low supply of lower-rated bonds issued in Massachusetts that met their investment criteria. Although the fund's existing lower-rated bond holdings negatively affected performance during the period -- due to investor preference for the safety of higher-grade securities amid geopolitical uncertainty -- we believe a diversified exposure across the quality spectrum is an appropriate long-term strategy. We believe the fund remains well diversified across the different industry sectors of the municipal bond universe. However, given the fluid nature of all sectors of the economy, some sectors represent better value at different times. As this report was being written, we believed that an improving investment climate made the hospital sector attractive. We've seen a number of uninsured hospital municipal bonds coming to market in recent months. In addition to refinancing older, more expensive debt at today's historically low interest rates, hospitals in high-growth locations are requiring more resources to finance their expansion to meet increasing patient demand. Furthermore, hospitals are becoming more specialized and moving beyond their core medical services by developing niches in such fields as cardiology or oncology. We look for hospitals with dominant market positions, strong management teams, and high-quality services. We've found some holdings in the Baa/BBB credit quality range that meet our criteria, including bonds issued by the Massachusetts Health and Education Facilities Authority for Berkshire Health Systems. Despite a recent drop in operating income due to higher labor costs, Berkshire Health Systems' dominant market share in its region allows it to successfully offset its rising costs by charging higher fees. Proceeds from the issue are being used to fund construction and install a new computer system. The fund also purchased bonds issued by Massachusetts Health and Education Facilities Authority for Milford-Whitinsville Hospital. Like Berkshire, Milford has a dominant market share in a desirable market area and is using the proceeds from its issue for hospital renovation and construction. [GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW] CREDIT QUALITY OVERVIEW* Aaa/AAA -- 60.8% Aa/AA -- 20.3% A -- 4.6% Baa/BBB -- 9.1% Ba/BB -- 2.9% B and lower -- 0.5% Other (VMIG1) -- 1.8% Footnote reads: *As a percentage of market value as of 5/31/03. A bond rated Baa/BBB or higher is considered investment grade. All ratings reflect Moody's and Standard & Poor's descriptions unless noted otherwise; percentages may include unrated bonds considered by Putnam Management to be of comparable quality. Ratings will vary over time. Over the course of the fiscal year, the management team's decisions about the types of municipal bonds to consider for purchase have been affected by Massachusetts' declining economy. The governor and legislature have worked hard to balance the budget at the state level, which we believe means that state-issued general obligation bonds are less likely to be downgraded and Moody's current credit watch for the state is likely to be removed. However, the state government has achieved a balanced budget at the expense of municipalities, a policy that has affected the credit quality of local municipal bond issuers. Local governments do not have the broad taxing power of the state government and rely almost exclusively on property taxes for revenue. While property values in Massachusetts have generally increased, despite the economic slowdown, the rise in property tax revenue has not been sufficient to offset cuts in state support. Therefore, we have taken care to avoid uninsured local general obligation bonds. While we believe that the economy is bottoming and see signs that development is picking up again, we believe it will be a while before property taxes from development have a positive impact on the bottom line of the state's municipalities. Please note that all holdings discussed in this report are subject to review in accordance with the fund's investment strategy and may vary in the future. * THE FUND'S MANAGEMENT TEAM The fund is managed by the Putnam Tax Exempt Fixed-Income Team. The members of the team are Richard Wyke (Portfolio Leader), Paul Drury (Portfolio Member), David Hamlin (Portfolio Member), Susan McCormack (Portfolio Member), Joyce Dragone, and Jerome Jacobs. THE OUTLOOK FOR YOUR FUND The following commentary reflects anticipated developments that could affect your fund over the next six months, as well as your management team's plans for responding to them. Our current outlook for the municipal bond market is cautiously optimistic. The conflict with Iraq is largely over, and investors are focused on economic concerns on the home front. While serious issues remain, the level of uncertainty in the world seems to have eased a bit, though we expect continued volatility. Further, we believe that market yields may move higher in the near term as a weakening dollar, Fed policy, the recently enacted tax cut package, and growing federal budget deficits take effect. Accordingly, at the very end of the period, we began the process of shifting back toward a defensive duration. Municipal budgets will continue to face significant pressures in the months ahead. Governments will wrangle with how to implement costly home-front protection measures while at the same time pushing tax cuts to stimulate economic growth. Historically, improvement in the credit quality of state and local governments has lagged a general economic recovery, so we expect municipal credit quality to remain fragile for some time to come. Over the next few months, we believe the ratio of municipal-bond yields to comparable Treasury yields is likely to return to more normal levels. Accordingly, we will look for opportunities to reduce our cross-market arbitrage position and we expect the fund will profit from the transactions. In our opinion, the market continues to offer attractive value and compelling risk/reward characteristics. With credit spreads remaining very generous, we believe credit risk is worth taking in moderate amounts. We believe municipal bonds could perform well relative to other fixed-income sectors, because demand for the bonds is firm and supply should moderate as rates move higher. We believe we have positioned your fund to take advantage of the market's potential. The views expressed in this report are exclusively those of Putnam Management. They are not meant as investment advice. The fund concentrates its investments in one state and involves more risk than a fund that invests more broadly. PERFORMANCE SUMMARY This section provides information about your fund's performance during its fiscal year, which ended May 31, 2003. In accordance with regulatory requirements, we also include performance for the most current calendar quarter-end. Performance should always be considered in light of a fund's investment strategy. Past performance does not indicate future results. More recent returns may be less or more than those shown. Investment return and principal value will fluctuate and you may have a gain or a loss when you sell your shares. A profile of your fund's strategy appears on the first page of this report. See page 10 for definitions of some terms used in this section. TOTAL RETURN FOR PERIODS ENDED 5/31/03 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 9.39% 4.15% 8.69% 3.69% 9.18% 5.67% - ------------------------------------------------------------------------------- 5 years 31.09 24.85 26.75 24.75 29.13 24.97 Annual average 5.56 4.54 4.86 4.52 5.25 4.56 - ------------------------------------------------------------------------------- 10 years 78.74 70.18 66.72 66.72 73.10 67.52 Annual average 5.98 5.46 5.24 5.24 5.64 5.29 - ------------------------------------------------------------------------------- Annual average (life of fund) 7.24 6.86 6.47 6.47 6.86 6.61 - ------------------------------------------------------------------------------- Performance assumes reinvestment of distributions and does not account for taxes. Returns at public offering price (POP) for class A and M shares reflect a sales charge of 4.75% and 3.25%, respectively. Class B share returns reflect the applicable contingent deferred sales charge (CDSC), which is 5% in the first year, declining to 1% in the sixth year, and is eliminated thereafter. Performance for class B and M shares before their inception is derived from the historical performance of class A shares, adjusted for the applicable sales charge (or CDSC) and higher operating expenses for such shares. For a portion of the period, this fund had limited expenses, without which returns would have been lower. COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/03 Lipper Massachusetts Lehman Municipal Debt Municipal Funds category Bond Index average* - ------------------------------------------------------------------------------- 1 year 10.36% 9.69% - ------------------------------------------------------------------------------- 5 years 36.79 29.44 Annual average 6.47 5.29 - ------------------------------------------------------------------------------- 10 years 89.42 76.40 Annual average 6.60 5.83 - ------------------------------------------------------------------------------- Annual average (life of fund) 7.53 6.97 - ------------------------------------------------------------------------------- *Index and Lipper results should be compared to fund performance at net asset value. Over the 1-, 5-, and 10-year periods ended 5/31/03, there were 52, 43, and 20 funds, respectively, in this Lipper category. [GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT] CHANGE IN THE VALUE OF A $10,000 INVESTMENT Cumulative total return of a $10,000 investment since 5/31/93 Fund's class A Lehman Municipal Date shares at POP Bond Index 5/31/93 9,525 10,000 5/31/94 9,811 10,247 5/31/95 10,398 11,180 5/31/96 10,981 11,691 5/31/97 12,071 12,659 5/31/98 12,983 13,847 5/31/99 13,449 14,494 5/31/00 13,424 14,370 5/31/01 14,705 16,114 5/31/02 15,657 17,163 5/31/03 $17,018 $18,942 Footnote reads: Past performance does not indicate 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 $16,672 and no contingent deferred sales charge would apply; a $10,000 investment in the fund's class M shares would have been valued at $17,310 ($16,752 at public offering price). See first page of performance section for performance calculation method. PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/03 Class A Class B Class M - ------------------------------------------------------------------------------- Distributions (number) 12 12 12 - ------------------------------------------------------------------------------- Income 1 $0.408051 $0.345790 $0.379360 - ------------------------------------------------------------------------------- Capital gains 1 -- -- -- - ------------------------------------------------------------------------------- Total $0.408051 $0.345790 $0.379360 - ------------------------------------------------------------------------------- Share value: NAV POP NAV NAV POP - ------------------------------------------------------------------------------- 5/31/02 $9.34 $9.81 $9.33 $9.33 $9.64 - ------------------------------------------------------------------------------- 5/31/03 9.79 10.28 9.78 9.79 10.12 - ------------------------------------------------------------------------------- Current return (end of period) - ------------------------------------------------------------------------------- Current dividend rate 2 4.21% 4.01% 3.58% 3.92% 3.79% - ------------------------------------------------------------------------------- Taxable equivalent 3 6.84 6.52 5.82 6.37 6.16 - ------------------------------------------------------------------------------- Current 30-day SEC yield 4 3.36 3.20 2.71 3.06 2.96 - ------------------------------------------------------------------------------- Taxable equivalent 3 5.46 5.20 4.40 4.97 4.81 - ------------------------------------------------------------------------------- 1 Capital gains, if any, are taxable for federal and, in most cases, state purposes. For some investors, investment income may be subject to the federal alternative minimum tax. Income from federally exempt funds may be subject to state and local taxes. 2 Most recent distribution, excluding capital gains, annualized and divided by NAV or POP at end of period. 3 Assumes maximum 38.45% federal and state combined tax rate for 2003. 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 6/30/03 (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 7.99% 2.84% 7.29% 2.29% 7.66% 4.12% - ------------------------------------------------------------------------------- 5 years 30.28 24.08 26.10 24.10 28.47 24.32 Annual average 5.43 4.41 4.75 4.41 5.14 4.45 - ------------------------------------------------------------------------------- 10 years 75.15 66.86 63.45 63.45 69.60 64.03 Annual average 5.76 5.25 5.04 5.04 5.42 5.07 - ------------------------------------------------------------------------------- Annual average (life of fund) 7.18 6.80 6.40 6.40 6.80 6.54 - ------------------------------------------------------------------------------- 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. Net asset value (NAV) is the price, or value, of one share of a mutual fund, without a sales charge. NAVs fluctuate with market conditions. The NAV is calculated by dividing the net value of all the fund's assets by the number of outstanding shares. 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 class B CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. Class A shares are generally subject to an initial sales charge and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). Class B shares may be subject to a sales charge upon redemption. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption (except on certain redemptions of shares bought without an initial sales charge). COMPARATIVE INDEXES Lehman Municipal Bond Index is an unmanaged index of long-term, fixed-rate, investment-grade tax-exempt bonds. Lehman Aggregate Bond Index is an unmanaged index of U.S. fixed income securities. Lehman Intermediate Government Bond Index is an unmanaged index of government bonds with maturities between 1 and 10 years. Citigroup World Government Bond Index is an unmanaged index of government bonds from 14 countries. S&P 500 Index is an unmanaged index of common stock performance. Russell 2000 Index is an unmanaged index of common stocks that generally measure performance of small to midsize companies within the Russell 3000 Index. Morgan Stanley Capital International (MSCI) EAFE Index is an unmanaged index of international stocks from Europe, Australasia, and the Far East. Indexes assume reinvestment of all distributions and do not account for fees. Securities and performance of a fund and an index will differ. You cannot invest directly in an index. Lipper Inc. is a third-party industry ranking entity that ranks funds (without sales charges) with similar current investment styles or objectives as determined by Lipper. Lipper category averages reflect performance trends for funds within a category and are based on results at net asset value. 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 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. A GUIDE TO THE FINANCIAL STATEMENTS These sections of the report, as well as the accompanying Notes, 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. This is done by first adding up all the fund's earnings -- from dividends and interest income -- and subtracting its operating expenses to determine net investment income (or loss). Then, any net gain or loss the fund realized on the sales of its holdings -- as well as any unrealized gains or losses over the period -- is added to or subtracted from the net investment result to determine the fund's net gain or loss for the fiscal year. 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, 2003, 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, 2003, by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts July 11, 2003
THE FUND'S PORTFOLIO May 31, 2003 KEY TO ABBREVIATIONS AMBAC -- AMBAC Indemnity Corporation FGIC -- Financial Guaranty Insurance Company FSA -- Financial Security Assurance GNMA Coll. -- Government National Mortgage Association Collateralized G.O. Bonds -- General Obligation Bonds IFB -- Inverse Floating Rate Bonds MBIA -- MBIA Insurance Company VRDN -- Variable Rate Demand Notes XLCA -- XL Capital Assurance MUNICIPAL BONDS AND NOTES (98.2%) (a) PRINCIPAL AMOUNT RATING (RAT) VALUE Massachusetts (88.4%) - ------------------------------------------------------------------------------------------------------------------- Boston, G.O. Bonds, Ser. A $2,815,000 4s, 2/1/08 Aa2 $3,057,794 1,100,000 4s, 2/1/07 Aa2 1,186,625 2,750,000 Boston, Indl. Dev. Fin. Auth. Rev. Bonds (Springhouse, Inc.), 6s, 7/1/28 BB-/P 2,557,500 6,525,000 Boston, Indl. Dev. Fin. Auth. Swr. Fac. Rev. Bonds (Harbor Elec. Energy Co.), 7 3/8s, 5/15/15 Aa3 6,555,537 7,935,000 Boston, Wtr. & Swr. Comm. Rev. Bonds, Ser. A, 5 3/4s, 11/1/13 AA- 9,660,863 Fall River, G.O. Bonds, FSA 1,990,000 5s, 2/1/13 Aaa 2,290,980 1,950,000 5s, 2/1/12 Aaa 2,240,063 2,100,000 Framingham, Hsg. Auth. Rev. Bonds, GNMA Coll., 6.35s, 2/20/32 AAA 2,349,375 5,185,000 Holden, G.O. Bonds, FGIC, 5 1/2s, 3/1/20 Aaa 5,794,238 MA Bay Trans. Auth. Rev. Bonds 3,550,000 Ser. B, 6.2s, 3/1/16 AA 4,433,063 7,500,000 (Gen. Trans. Syst.), Ser. B, 5.9s, 3/1/24 AA 7,919,625 4,000,000 (Gen. Trans. Syst.), Ser. A, 5 1/2s, 3/1/12 AA 4,640,000 6,420,000 MA Bay Trans. Auth. Sales Tax Rev. Bonds, Ser. A, 5 1/4s, 7/1/21 AAA 7,455,225 MA Hlth. & Edl. Fac. Auth. Rev. Bonds 3,015,000 (Newton-Wellesley Hosp.), Ser. E, MBIA, 5.9s, 7/1/11 Aaa 3,312,731 1,265,000 (Milton Hosp.), Ser. C, 5 1/2s, 7/1/11 BBB+ 1,397,825 2,105,000 (Caregroup), Ser. A, MBIA, 5s, 7/1/06 Aaa 2,320,763 3,055,000 MA Muni. Whsl. Elec. Co. Pwr. Supply Syst. Rev. Bonds (Project 6-A), MBIA, 5s, 7/1/06 Aaa 3,356,681 6,000,000 MA Port Auth. Rev. Bonds (Delta Airlines, Inc.), Ser. A, AMBAC, 5s, 1/1/27 Aaa 6,052,500 4,000,000 MA State College Bldg. Auth. Rev. Bonds, Ser. B, XLCA, 5 1/2s, 5/1/28 Aaa 4,695,000 7,500,000 MA State Dev. Fin. Agcy. Res. Recvy. Rev. Bonds (Semass Syst.), Ser. A, MBIA, 5 1/2s, 1/1/10 Aaa 8,625,000 MA State Dev. Fin. Agcy. Rev. Bonds 1,450,000 (Beverly Enterprises, Inc.), 7 3/8s, 4/1/09 B+/P 1,506,188 3,960,000 (Lasell College), 6 3/4s, 7/1/31 BB+/P 4,123,350 2,520,000 (Lasell Village Project), Ser. A, 6 3/8s, 12/1/25 BB/P 2,516,850 1,950,000 (MA Biomedical Research), Ser. C, 6 1/8s, 8/1/12 A1 2,269,313 1,300,000 (Worcester Redev. Auth. Issue), 6s, 6/1/24 AA 1,467,375 1,830,000 (MA Biomedical Research), Ser. C, 5 7/8s, 8/1/10 A1 2,127,375 12,500,000 (WGBH Edl. Foundation), Ser. A, AMBAC, 5 3/4s, 1/1/42 Aaa 15,625,000 1,750,000 (Boston Biomedical Research), 5 3/4s, 2/1/29 Baa3 1,723,750 5,000,000 MA State Edl. Fin. Auth. Rev. Bonds, Ser. E, AMBAC, 5s, 1/1/13 AAA 5,406,250 MA State G.O. Bonds 10,150,000 Ser. A, AMBAC, 6 1/2s, 11/1/14 Aaa 13,144,250 5,500,000 Ser. D, 5 1/2s, 11/1/19 Aa2 6,579,375 7,500,000 Ser. C, FSA, 5 1/2s, 11/1/10 Aaa 8,859,375 3,750,000 Ser. C, 5 1/4s, 8/1/15 AAA 4,364,063 9,100,000 Ser. B, 5s, 5/1/12 AAA 10,487,750 MA State Hlth. & Edl. Fac. Auth. IFB 7,900,000 (New England Medical Ctr.), MBIA, 9.03s, 7/1/18 Aaa 8,445,495 12,000,000 AMBAC, 6s, 7/1/25 Aaa 12,149,520 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds 5,460,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 AAA/P 5,958,225 3,000,000 (Winchester Hosp.), Ser. E, 6 3/4s, 7/1/30 BBB 3,255,000 3,125,000 (UMass Memorial), Ser. C, 6 1/2s, 7/1/21 Baa2 3,308,594 2,000,000 (Milford-Whitinsville Hosp.), Ser. D, 6.35s, 7/15/32 Baa2 2,102,500 1,300,000 (Berkshire Hlth. Syst.), Ser. E, 6 1/4s, 10/1/31 BBB+ 1,365,000 5,000,000 (MA Gen. Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/20 Aaa 5,119,300 5,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 Aaa 6,475,000 1,000,000 (Learning Ctr. for Deaf Children), Ser. C, 6 1/8s, 7/1/29 Ba2 978,750 3,000,000 (Hlth. Care Syst. Covenant Hlth.), Ser. E, 6s, 7/1/31 A- 3,176,250 7,250,000 (Newton-Wellesley Hosp.), Ser. E, MBIA, 6s, 7/1/25 Aaa 7,938,750 2,100,000 (Partners Healthcare Syst.), Ser. C, 6s, 7/1/15 AA- 2,396,625 1,460,000 (Partners Healthcare Syst.), Ser. C, 6s, 7/1/14 AA- 1,684,475 4,000,000 (Partners Healthcare Syst.), Ser. C, 5 3/4s, 7/1/32 AA- 4,325,000 1,000,000 (Baystate Med. Ctr.), Ser. F, 5.7s, 7/1/27 A1 1,057,500 1,860,000 (Caritas Christian Oblig. Group), Ser. A, 5 5/8s, 7/1/20 BBB 1,701,900 800,000 (Milton Hosp.), Ser. C, 5 1/2s, 7/1/16 BBB+ 834,000 3,665,000 (Williams College), Ser. G, 5 1/2s, 7/1/14 Aa1 4,201,006 2,250,000 (Cape Cod Healthcare), Ser. B, 5.45s, 11/15/23 BBB+ 2,235,938 3,000,000 (Jordan Hosp.), Ser. D, 5 3/8s, 10/1/28 BBB- 2,936,250 4,250,000 (Boston College), Ser. K, 5 3/8s, 6/1/14 AA- 5,041,563 3,000,000 (Partners Healthcare Syst.), Ser. B, 5 1/4s, 7/1/11 Aa3 3,352,500 10,000,000 (MA Inst. of Tech.), Ser. I-1, 5.2s, 1/1/28 (SEG) Aaa 11,512,500 1,000,000 (Wellesley College), 5s, 7/1/17 Aa1 1,115,000 3,145,000 5s, 5/15/11 AAA/P 4,450,175 2,500,000 (Boston College), Ser. L, 4 3/4s, 6/1/31 Aa3 2,546,875 MA State Hsg. Fin. Agcy. Rev. Bonds 2,000,000 (Rental Mtge.), Ser. E, AMBAC, 5.9s, 7/1/25 Aaa 2,102,500 5,000,000 (Rental Mtge.), Ser. C, AMBAC, 5 5/8s, 7/1/40 Aaa 5,175,000 4,070,000 (Single Fam.), Ser. 86, 5.2s, 12/1/32 Aa2 4,161,575 4,065,000 (Single Fam.), Ser. 86, 5.1s, 12/1/21 Aa2 4,176,788 1,590,000 (Rental Mtge.), Ser. E, FSA, 4.1s, 7/1/06 Aaa 1,661,550 1,520,000 (Rental Mtge.), Ser. E, FSA, 3.95s, 7/1/05 Aaa 1,577,000 1,650,000 (Rental Mtge.), Ser. E, FSA, 3.8s, 7/1/04 Aaa 1,678,760 MA State Hsg. Fin. Agcy. Single Fam. Mtge. Rev. Bonds, Ser. 84 980,000 4 1/4s, 12/1/07 AA 1,033,900 805,000 4.05s, 12/1/06 AA 845,250 905,000 3.9s, 12/1/05 AA 944,594 MA State Indl. Fin. Agcy. Rev. Bonds 3,000,000 (1st Mtge. Stone Institution & Newton), 7.9s, 1/1/24 BB-/P 3,112,500 5,140,000 (1st Mtge. Loomis & Village), 7 5/8s, 7/1/25 AAA 5,923,850 2,000,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB/P 2,072,580 3,000,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB/P 3,116,190 5,875,000 (American Hinghan, Wtr. Treatment), 6 3/4s, 12/1/25 BBB/P 6,168,750 6,000,000 (1st Mtge. Berkshire Retirement), Ser. A, 6 5/8s, 7/1/16 BBB- 6,150,000 965,000 (Worcester Visiting Nurse Assn.), 6.4s, 9/15/10 A-/P 1,002,394 3,385,000 (Park School), 5.9s, 9/1/26 A3 3,723,500 4,250,000 (MA Eastern Edison Co.), 5 7/8s, 8/1/08 A2 4,362,965 1,650,000 (Wentworth Inst. of Tech.), 5 3/4s, 10/1/28 Baa1 1,761,375 2,000,000 (1st Mtge. Brookhaven), Ser. B, 5 1/4s, 1/1/17 BBB/P 2,001,080 MA State Port Auth. Rev. Bonds, Ser. C, MBIA 2,000,000 5s, 7/1/08 Aaa 2,262,500 5,330,000 5s, 7/1/07 Aaa 5,962,938 5,685,000 5s, 7/1/06 Aaa 6,274,819 MA State Wtr. Poll. Abatement Rev. Bonds (Pool Program) 7,000,000 Ser. 5, 5 3/8s, 8/1/27 Aaa 7,586,250 1,340,000 Ser. 7, 5s, 8/1/06 Aaa 1,485,725 MA State Wtr. Res. Auth. Rev. Bonds 10,000,000 Ser. A, 6 1/2s, 7/15/19 AA 12,962,500 10,000,000 Ser. A, FGIC, 5 3/4s, 8/1/39 Aaa 11,475,000 2,900,000 Ser. C, MBIA, 5 1/4s, 12/1/15 AAA 3,382,125 Maynard, G.O. Bonds, MBIA 1,065,000 5s, 2/1/13 Aaa 1,226,081 565,000 5s, 2/1/12 Aaa 649,044 10,000,000 Quincy, IFB, FSA, 5.3s, 1/15/11 Aaa 10,341,800 Springfield, G.O. Bonds, MBIA 1,000,000 5s, 1/15/13 Aaa 1,146,250 3,665,000 5s, 1/15/12 Aaa 4,191,844 Westfield, G.O. Bonds, MBIA 2,190,000 5s, 9/1/11 AAA 2,523,975 2,190,000 5s, 9/1/10 AAA 2,521,238 1,000,000 Westford, G.O. Bonds, FGIC, 5 1/4s, 4/1/20 Aaa 1,101,250 ------------- 417,610,783 Puerto Rico (9.8%) - ------------------------------------------------------------------------------------------------------------------- 3,880,000 Children's Trust Fund Tobacco Settlement Rev. Bonds, 5 3/8s, 5/15/33 A- 3,375,600 Cmnwlth. of PR, G.O. Bonds, FSA 1,700,000 6 1/2s, 7/1/13 AAA 2,190,875 2,000,000 5 1/2s, 7/1/18 Aaa 2,420,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds 2,925,000 Ser. Z, MBIA, 6 1/4s, 7/1/13 Aaa 3,703,781 3,000,000 Ser. AA, MBIA, 5 1/2s, 7/1/19 Aaa 3,641,250 5,000,000 Ser. W, MBIA, 5 1/2s, 7/1/15 Aaa 6,050,000 8,300,000 Cmnwlth. of PR, Hwy & Trans. Auth. VRDN, Ser. A, AMBAC, 1.1s, 7/1/28 VMIG1 8,300,000 10,685,000 Cmnwlth. of PR, Muni. Fin. Agcy. Rev. Bonds, Ser. A, FSA, 4 1/2s, 8/1/11 Aaa 11,940,488 3,000,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. JJ, MBIA, 5 1/4s, 7/1/14 Aaa 3,543,750 2,600,000 PR Indl. Med. & Env. Poll. Control Fac. Fin. Auth. Rev. Bonds (Special Fac.-American Airlines, Inc.), Ser. A, 6.45s, 12/1/25 Caa2 988,000 ------------- 46,153,744 - ------------------------------------------------------------------------------------------------------------------- Total Investments (cost $428,131,427) $463,764,527 - ------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $472,484,469. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at May 31, 2003 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, 2003. Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings are not covered by the Report of independent accountants. (SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures contracts at May 31, 2003. The rates shown on VRDN are the current interest rates shown at May 31, 2003. The rates shown on IFB, which are securities paying interest rates that vary inversely to changes in the market interest rates, are the current interest rates at May 31, 2003. The fund had the following industry group concentrations greater than 10% at May 31, 2003 (as a percentage of net assets): Health care/hospitals 24.2% Water and sewer 11.1 Transportation 11.0 Education 10.5 The fund had the following insurance concentrations greater than 10% at May 31, 2003 (as a percentage of net assets): MBIA 17.2% AMBAC 15.5 - ------------------------------------------------------------------------------ Futures Contracts Outstanding at May 31, 2003 Market Aggregate Face Expiration Unrealized Value Value Date Depreciation - ------------------------------------------------------------------------------ U.S. Treasury Note 10 yr (Short) $29,372,500 $29,215,922 Sep-03 $(156,578) - ------------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES May 31, 2003 Assets - ------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $428,131,427) (Note 1) $463,764,527 - ------------------------------------------------------------------------------------------- Cash 1,267,564 - ------------------------------------------------------------------------------------------- Interest and other receivables 7,247,451 - ------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 550,568 - ------------------------------------------------------------------------------------------- Receivable for securities sold 1,650,103 - ------------------------------------------------------------------------------------------- Receivable for variation margin (Note 1) 15,500 - ------------------------------------------------------------------------------------------- Total assets 474,495,713 Liabilities - ------------------------------------------------------------------------------------------- Distributions payable to shareholders 766,907 - ------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 370,110 - ------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 583,525 - ------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 40,729 - ------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 22,655 - ------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 775 - ------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 203,446 - ------------------------------------------------------------------------------------------- Other accrued expenses 23,097 - ------------------------------------------------------------------------------------------- Total liabilities 2,011,244 - ------------------------------------------------------------------------------------------- Net assets $472,484,469 Represented by - ------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $443,212,433 - ------------------------------------------------------------------------------------------- Undistributed net investment income (Note 1) 747,746 - ------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (6,952,232) - ------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 35,476,522 - ------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $472,484,469 Computation of net asset value and offering price - ------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($344,041,752 divided by 35,147,851 shares) $9.79 - ------------------------------------------------------------------------------------------- Offering price per class A share (100/95.25 of $9.79)* $10.28 - ------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($122,435,875 divided by 12,517,393 shares)** $9.78 - ------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($6,006,842 divided by 613,780 shares) $9.79 - ------------------------------------------------------------------------------------------- Offering price per class M share (100/96.75 of $9.79)*** $10.12 - ------------------------------------------------------------------------------------------- * On single retail sales of less than $25,000. On sales of $25,000 or more and on group sales, the offering price is reduced. ** Redemption price per share is equal to net asset value less any applicable contingent deferred sales charge. *** On single retail sales of less than $50,000. On sales of $50,000 or more and on group sales, the offering price is reduced. The accompanying notes are an integral part of these financial statements.
STATEMENT OF OPERATIONS Year ended May 31, 2003 Interest income: $24,494,989 - ------------------------------------------------------------------------------------------- Expenses: - ------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 2,330,695 - ------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 461,909 - ------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 14,810 - ------------------------------------------------------------------------------------------- Administrative services (Note 2) 8,741 - ------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 677,427 - ------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 1,030,017 - ------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 31,053 - ------------------------------------------------------------------------------------------- Other 173,524 - ------------------------------------------------------------------------------------------- Total expenses 4,728,176 - ------------------------------------------------------------------------------------------- Expense reduction (Note 2) (39,620) - ------------------------------------------------------------------------------------------- Net expenses 4,688,556 - ------------------------------------------------------------------------------------------- Net investment income 19,806,433 - ------------------------------------------------------------------------------------------- Net realized gain on investments (Notes 1 and 3) 3,776,140 - ------------------------------------------------------------------------------------------- Net realized loss on swap contracts (Note 1) (368,813) - ------------------------------------------------------------------------------------------- Net realized loss on futures contracts (Note 1) (1,879,397) - ------------------------------------------------------------------------------------------- Net unrealized appreciation of investments and futures contracts during the year 19,771,856 - ------------------------------------------------------------------------------------------- Net gain on investments 21,299,786 - ------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations $41,106,219 - ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS Year ended May 31 -------------------------------------- 2003 2002 - ------------------------------------------------------------------------------------------------------- Increase in net assets - ------------------------------------------------------------------------------------------------------- Operations: - ------------------------------------------------------------------------------------------------------- Net investment income $19,806,433 $21,083,523 - ------------------------------------------------------------------------------------------------------- Net realized gain on investments 1,527,930 697,232 - ------------------------------------------------------------------------------------------------------- Net unrealized appreciation of investments 19,771,856 4,943,661 - ------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations 41,106,219 26,724,416 - ------------------------------------------------------------------------------------------------------- Distributions to shareholders: (Note 1) - ------------------------------------------------------------------------------------------------------- From ordinary income Class A -- (16,958) - ------------------------------------------------------------------------------------------------------- Class B -- (6,800) - ------------------------------------------------------------------------------------------------------- Class M -- (337) - ------------------------------------------------------------------------------------------------------- From tax-exempt income Class A (14,483,206) (15,468,835) - ------------------------------------------------------------------------------------------------------- Class B (4,390,318) (5,272,480) - ------------------------------------------------------------------------------------------------------- Class M (246,950) (267,268) - ------------------------------------------------------------------------------------------------------- Increase (decrease) from capital share transactions (Note 4) (12,175,578) 43,794,438 - ------------------------------------------------------------------------------------------------------- Total increase in net assets 9,810,167 49,486,176 Net assets - ------------------------------------------------------------------------------------------------------- Beginning of year 462,674,302 413,188,126 - ------------------------------------------------------------------------------------------------------- End of year (including undistributed net investment income of $747,746 and distributions in excess of net investment income of $111,827, respectively) $472,484,469 $462,674,302 - ------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $9.34 $9.20 $8.74 $9.45 $9.61 - ----------------------------------------------------------------------------------------------------- Investment operations: - ----------------------------------------------------------------------------------------------------- Net investment income .42 .46 .48 .50 .49 - ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .44 .14 .46 (.71) (.15) - ----------------------------------------------------------------------------------------------------- Total from investment operations .86 .60 .94 (.21) .34 - ----------------------------------------------------------------------------------------------------- Less distributions: - ----------------------------------------------------------------------------------------------------- From net investment income (.41) (.46) (.48) (.50) (.50) - ----------------------------------------------------------------------------------------------------- Total distributions (.41) (.46) (.48) (.50) (.50) - ----------------------------------------------------------------------------------------------------- Net asset value, end of period $9.79 $9.34 $9.20 $8.74 $9.45 - ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 9.39 6.61 10.95 (2.20) 3.60 - ----------------------------------------------------------------------------------------------------- Ratios and supplemental data - ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $344,042 $337,865 $285,452 $259,479 $298,243 - ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) .84 .83 .82 .84 .97 - ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 4.42 4.89 5.28 5.55 5.11 - ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 29.10 24.33 6.91 15.17 9.42 - ----------------------------------------------------------------------------------------------------- (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS B - ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended May 31 - ----------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $9.33 $9.19 $8.73 $9.44 $9.61 - ----------------------------------------------------------------------------------------------------- Investment operations: - ----------------------------------------------------------------------------------------------------- Net investment income .36 .40 .42 .44 .43 - ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .44 .14 .46 (.71) (.16) - ----------------------------------------------------------------------------------------------------- Total from investment operations .80 .54 .88 (.27) .27 - ----------------------------------------------------------------------------------------------------- Less distributions: - ----------------------------------------------------------------------------------------------------- From net investment income (.35) (.40) (.42) (.44) (.44) - ----------------------------------------------------------------------------------------------------- Total distributions (.35) (.40) (.42) (.44) (.44) - ----------------------------------------------------------------------------------------------------- Net asset value, end of period $9.78 $9.33 $9.19 $8.73 $9.44 - ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 8.69 5.91 10.24 (2.85) 2.81 - ----------------------------------------------------------------------------------------------------- Ratios and supplemental data - ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $122,436 $118,486 $121,881 $109,426 $122,654 - ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.49 1.48 1.47 1.49 1.62 - ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 3.77 4.25 4.63 4.90 4.47 - ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 29.10 24.33 6.91 15.17 9.42 - ----------------------------------------------------------------------------------------------------- (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a common share outstanding throughout the period) CLASS M - ----------------------------------------------------------------------------------------------------- Per-share operating performance Year ended May 31 - ----------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------- Net asset value, beginning of period $9.33 $9.20 $8.74 $9.45 $9.61 - ----------------------------------------------------------------------------------------------------- Investment operations: - ----------------------------------------------------------------------------------------------------- Net investment income .39 .43 .45 .47 .46 - ----------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments .45 .13 .46 (.71) (.15) - ----------------------------------------------------------------------------------------------------- Total from investment operations .84 .56 .91 (.24) .31 - ----------------------------------------------------------------------------------------------------- Less distributions: - ----------------------------------------------------------------------------------------------------- From net investment income (.38) (.43) (.45) (.47) (.47) - ----------------------------------------------------------------------------------------------------- Total distributions (.38) (.43) (.45) (.47) (.47) - ----------------------------------------------------------------------------------------------------- Net asset value, end of period $9.79 $9.33 $9.20 $8.74 $9.45 - ----------------------------------------------------------------------------------------------------- Total return at net asset value (%)(a) 9.18 6.17 10.61 (2.50) 3.29 - ----------------------------------------------------------------------------------------------------- Ratios and supplemental data - ----------------------------------------------------------------------------------------------------- Net assets, end of period (in thousands) $6,007 $6,324 $5,855 $4,174 $5,349 - ----------------------------------------------------------------------------------------------------- Ratio of expenses to average net assets (%)(b) 1.14 1.13 1.12 1.14 1.27 - ----------------------------------------------------------------------------------------------------- Ratio of net investment income to average net assets (%) 4.12 4.60 4.98 5.25 4.81 - ----------------------------------------------------------------------------------------------------- Portfolio turnover (%) 29.10 24.33 6.91 15.17 9.42 - ----------------------------------------------------------------------------------------------------- (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) Includes amounts paid through expense offset arrangements (Note 2). The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS May 31, 2003 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, an indirect wholly-owned subsidiary of Putnam, LLC, believes is consistent with preservation of capital by investing primarily in a portfolio of investment-grade Massachusetts tax-exempt securities with intermediate- to long-term maturities. 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 and class M shares, and are subject to a contingent deferred sales charge, if those shares are redeemed within six years of purchase. Class M shares are sold with a maximum front-end sales charge of 3.25% and pay an ongoing distribution fee that is higher than class A but lower than class B shares. 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 fund may be affected by economic and political developments in the state of Massachusetts. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States of America and requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A) Security valuation Tax-exempt bonds and notes are valued on the basis of valuations provided by an independent pricing service, approved by the Trustees. Such services use information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining value. Restricted securities are valued at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. B) Security transactions and related investment income Security transactions are recorded on the trade date (date the order to buy or sell is executed). Gains or losses on securities sold are determined on the identified cost basis. Interest income is recorded on the accrual basis. All premiums/discounts are amortized/accreted on a yield-to-maturity basis. The premium in excess of the call price, if any, is amortized to the call date; thereafter, any remaining premium is amortized to maturity. C) 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. The fund and the broker agree to exchange an amount of cash equal to the daily fluctuation in the value of the futures contract. Such receipts or payments are known as "variation margin." 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. Futures and written option contracts outstanding at period end are listed after The fund's portfolio. D) Total return swap contracts The fund may enter into total return swap contracts, which are arrangements to exchange a market linked return for an interest payment, both based on a notional principal amount. To the extent that the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the fund will receive a payment from or make a payment to the counterparty, respectively. Total return swap contracts are marked to market daily based upon quotations from market makers and the change, if any, is recorded as unrealized gain or loss. Payments received or made at the end of the measurement period are recorded as realized gains or losses. The fund could be exposed to credit or market risk due to unfavorable changes in the fluctuation of interest rates or in the price of the underlying security or index, the possibility that there is no liquid market for these agreements or that the counterparty may default on its obligation to perform. Total return swap contracts outstanding at period end are listed after The fund's portfolio. E) 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 maintain an asset coverage ratio of at least 300% and that borrowings not exceed prospectus limitations. For the year ended May 31, 2003, the fund had no borrowings against the line of credit. F) 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, 2003, the fund had a capital loss carryover of approximately $3,612,000 available to the extent allowed by tax law to offset future net capital gains, if any. The amount of the carryover and the expiration dates are: Loss Carryover Expiration - -------------- ------------------ $358,000 May 31, 2007 2,162,000 May 31, 2008 1,092,000 May 31, 2009 G) Distributions to shareholders Income dividends are recorded daily by the fund and are paid monthly. Distributions from capital gains, if any, are recorded on the ex-dividend date and paid at least annually. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences include temporary and permanent differences of dividends payable, realized and unrealized gains and losses on certain futures contracts, market discount and straddle-loss deferrals. 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. For the year ended May 31, 2003, the fund reclassified $173,614 to increase undistributed net investment income with an increase to accumulated net realized losses of $173,614. The tax basis components of distributable earnings and the federal tax cost as of period end were as follows: Unrealized appreciation $38,395,905 Unrealized depreciation (2,762,805) ------------------ Net unrealized appreciation 35,633,100 Undistributed tax-exempt income 1,066,239 Undistributed ordinary income 171,026 Capital loss carryforward (3,611,962) Post-October loss -- Cost for federal income tax purposes $428,131,427 Note 2 Management fee, administrative services and other transactions Putnam Management is paid for management and investment advisory services quarterly based on the average net assets of the fund. Such fee is based on the lesser of (i) an annual rate of 0.50% of the average net assets of the fund or (ii) the following annual rates expressed as a percentage of the fund's average net assets: 0.60% of the first $500 million, 0.50% of the next $500 million, 0.45% of the next $500 million, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355% of the next $5 billion, 0.34% of the next $5 billion and 0.33% thereafter. The fund reimburses Putnam Management an allocated amount for the compensation and related expenses of certain officers of the fund and their staff who provide administrative services to the fund. The aggregate amount of all such reimbursements is determined annually by the Trustees. Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam, LLC. 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, 2003, the fund's expenses were reduced by $39,620 under these arrangements. Each independent Trustee of the fund receives an annual Trustee fee, of which $710 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, 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 of up to 0.35%, 1.00% and 1.00% of the average net assets attributable to class A, class B and class M shares, respectively. The Trustees have approved payment by the fund at the annual rates of 0.20%, 0.85% and 0.50% of the average net assets attributable to class A, class B and class M shares, respectively. For the year ended May 31, 2003, Putnam Retail Management, acting as underwriter, received net commissions of $55,772 and $1,396 from the sale of class A and class M shares, respectively, and received $213,017 in contingent deferred sales charges from redemptions of class B shares. A deferred sales charge of up to 1.00% is assessed on certain redemptions of class A shares that were purchased without an initial sales charge as part of an investment of $1 million or more. For the year ended May 31, 2003, Putnam Retail Management, acting as underwriter, received $6,113 on class A redemptions. Note 3 Purchases and sales of securities During the year ended May 31, 2003, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $130,904,646 and $135,417,563, respectively. There were no purchases and sales of U.S. government obligations. Note 4 Capital shares At May 31, 2003, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended May 31, 2003 - --------------------------------------------------------------------------- Class A Shares Amount - --------------------------------------------------------------------------- Shares sold 7,002,210 $66,566,076 - --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 936,413 9,077,022 - --------------------------------------------------------------------------- 7,938,623 75,643,098 Shares repurchased (8,981,312) (85,431,581) - --------------------------------------------------------------------------- Net decrease (1,042,689) $(9,788,483) - --------------------------------------------------------------------------- Year ended May 31, 2002 - --------------------------------------------------------------------------- Class A Shares Amount - --------------------------------------------------------------------------- Shares sold 12,713,854 $118,850,452 - --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 962,258 8,977,896 - --------------------------------------------------------------------------- 13,676,112 127,828,348 Shares repurchased (8,506,257) (79,274,279) - --------------------------------------------------------------------------- Net increase 5,169,855 $48,554,069 - --------------------------------------------------------------------------- Year ended May 31, 2003 - --------------------------------------------------------------------------- Class B Shares Amount - --------------------------------------------------------------------------- Shares sold 2,022,693 $19,260,439 - --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 300,936 2,867,042 - --------------------------------------------------------------------------- 2,323,629 22,127,481 Shares repurchased (2,507,296) (23,907,957) - --------------------------------------------------------------------------- Net decrease (183,667) $(1,780,476) - --------------------------------------------------------------------------- Year ended May 31, 2002 - --------------------------------------------------------------------------- Class B Shares Amount - --------------------------------------------------------------------------- Shares sold 2,818,315 $26,337,786 - --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 336,183 3,134,922 - --------------------------------------------------------------------------- 3,154,498 29,472,708 Shares repurchased (3,709,903) (34,609,127) - --------------------------------------------------------------------------- Net decrease (555,405) $(5,136,419) - --------------------------------------------------------------------------- Year ended May 31, 2003 - --------------------------------------------------------------------------- Class M Shares Amount - --------------------------------------------------------------------------- Shares sold 80,814 $766,755 - --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 11,963 113,997 - --------------------------------------------------------------------------- 92,777 880,752 Shares repurchased (156,490) (1,487,371) - --------------------------------------------------------------------------- Net decrease (63,713) $(606,619) - --------------------------------------------------------------------------- Year ended May 31, 2002 - --------------------------------------------------------------------------- Class M Shares Amount - --------------------------------------------------------------------------- Shares sold 222,027 $2,074,168 - --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 12,377 115,436 - --------------------------------------------------------------------------- 234,404 2,189,604 Shares repurchased (193,305) (1,812,816) - --------------------------------------------------------------------------- Net increase 41,099 $376,788 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- 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 2004 will show the tax status of all distributions paid to your account in calendar 2003.
TRUSTEES Name, Address, 1 Date of Birth, Position(s) Held with Fund and Length of Service Principal Occupation(s) as a Putnam Fund Trustee 2 During Past 5 Years Other Directorships Held by Trustee - ------------------------------------------------------------------------------------------------------------ Jameson A. Baxter (9/6/43), President, Baxter Director of ASHTA Chemicals, Inc., Trustee since 1994 Associates, Inc. Banta Corporation (a printing and (a consulting and digital imaging firm), Ryerson Tull, private investment Inc. (a steel service corporation), firm) Advocate Health Care, and the National Center for Nonprofit Boards. Chairman Emeritus of the Board of Trustees, Mount Holyoke College. Until 2002, Mrs. Baxter was a director of Intermatic Corporation, a manufacturer of energy control products. Also held various positions in investment banking and corporate finance, including Vice President and principal of the Regency Group and Vice President of and consultant to First Boston Corp. Charles B. Curtis (4/27/40), President and Chief Member of the Council on Foreign Trustee since 2001 Operating Officer, Relations and the Trustee Advisory Nuclear Threat Council of the Applied Physics Initiative (a private Laboratory at Johns Hopkins foundation dealing University. Until 2003, Mr. Curtis with national security was a Member of the Electric Power issues), also serves as Research Institute Advisory Council, Senior Advisor to the and the University of Chicago Board United Nations of Governors for Argonne National Foundation Laboratory. Prior to 2002, Mr. Curtis was a Member of the Board of Directors of the Gas Technology Institute and the Board of Directors of the Environment and Natural Resources Program Steering Committee, John F. Kennedy School of Government, Harvard University. Until 2001, Mr. Curtis was a Member of the Department of Defense Policy Board and Director of EG&G Technical Services, Inc. (fossil energy research and development support). Prior to May 1997, Mr. Curtis was Deputy Secretary of Energy. He served as Chairman of the Federal Energy Regulatory Commission from 1977 to 1987 and has held positions on the staff of the U.S. House of Representatives, the U.S. Treasury Department, and the Securities and Exchange Commission. Mr. Curtis is also a lawyer with over 15 years of experience. John A. Hill (1/31/42), Vice-Chairman and Director of Devon Energy Trustee since 1985 and Managing Director, Corporation (formerly known as Chairman since 2000 First Reserve Snyder Oil Corporation), Corporation TransMontaigne Oil Company, (a registered investment Continuum Health Partners of advisor investing in New York, Sarah Lawrence College, companies in the and various private companies owned world-wide energy by First Reserve Corporation. industry on behalf of Trustee of TH Lee, Putnam institutional investors) Investment Trust (a closed-end investment company). Prior to acquiring First Reserve in 1983, Mr. Hill held executive positions with several advisory firms and various positions with the federal government, including Associate Director of the Office of Management and Budget and Deputy Director of the Federal Energy Administration. Ronald J. Jackson Private investor Former Chairman, President, and (12/17/43), Chief Executive Officer of Fisher- Trustee since 1996 Price, Inc. (a toy manufacturer). Previously served as President and Chief Executive Officer of Stride-Rite, Inc. and Kenner Parker Toys. Also held financial and marketing positions with General Mills, Parker Brothers, and Talbots. President of the Kathleen and Ronald J. Jackson Foundation (charitable trust). Member of the Board of Overseers of WGBH (public television and radio). Member of the Board of Overseers of the Peabody Essex Museum. Paul L. Joskow (6/30/47), Elizabeth and James Director, National Grid Transco Trustee since 1997 Killian Professor of (formerly National Grid Group, Economics and a UK-based holding company Management and with interests in electric and gas Director of the Center transmission and distribution and for Energy and telecommunications infrastructure), Environmental Policy and the Whitehead Institute for Research, Massachusetts Biomedical Research (a non-profit Institute of Technology research institution). President of the Yale University Council. Prior to February 2002, March 2000, and September 1998, Dr. Joskow was a Director of State Farm Indemnity Company (an automobile insurance company), Director of New England Electric System (a public utility holding company) and a consultant to National Economic Research Associates, respectively. Elizabeth T. Kennan Chairman, Cambus- Director, Northeast Utilities, and (2/25/38), Kenneth Bloodstock (a Talbots (a distributor of women's Trustee since 1992 limited liability company apparel). Trustee of Centre College. involved in thoroughbred Prior to 2001, Dr. Kennan was a horse breeding and member of the Oversight Committee farming), President of Folger Shakespeare Library. Emeritus of Mount Prior to September 2000, June 2000, Holyoke College and November 1999, Dr. Kennan was a Director of Chastain Real Estate, Bell Atlantic, and Kentucky Home Life Insurance, respectively. Prior to 1995, Dr. Kennan was a Trustee of Notre Dame University. For 12 years, she was on the faculty of Catholic University. John H. Mullin, III Chairman and CEO Director Alex. Brown Realty, Inc., (6/15/41), of Ridgeway Farm Sonoco Products, Inc. (a packaging Trustee since 1997 (a limited liability company), The Liberty Corporation company engaged in (a company engaged in the timber and farming) broadcasting industry), and Progress Energy, Inc. (a utility company, formerly known as Carolina Power & Light). Trustee Emeritus of Washington & Lee University. Prior to October 1997, January 1998, and May 2001, Mr. Mullin was a Director of Dillon, Read & Co. Inc., The Ryland Group, Inc., and Graphic Packaging International Corp., respectively. Robert E. Patterson Senior Partner of Cabot Chairman of the Joslin Diabetes (3/15/45), Properties, L.P. and Center, Trustee of SEA Education Trustee since 1984 Chairman of Cabot Association, and Director of Properties, Inc. Brandywine Trust Company (a trust company). Prior to February 1998, Mr. Patterson was Executive Vice President and Director of Acquisitions of Cabot Partners Limited Partnership. Prior to December 2001, Mr. Patterson was President and Trustee of Cabot Industrial Trust (publicly traded real estate investment trust). Prior to 1990, Mr. Patterson was Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, the predecessor of Cabot Partners, and prior to that was Senior Vice President of the Beal Companies. W. Thomas Stephens Corporate Director Director of Xcel Energy Incorporated (9/2/42), (public utility company), TransCanada Trustee since 1997 Pipelines, Norske Canada, Inc. (paper manufacturer), and Qwest Communications (communications company). Until 2003, Mr. Stephens was a Director of Mail-Well, a printing and envelope company. Prior to July 2001 and October 1999, Mr. Stephens was Chairman of Mail- Well and MacMillan-Bloedel (forest products company). Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of Johns Manville. W. Nicholas Thorndike Director of various Trustee of Northeastern University and (3/28/33), corporations and Honorary Trustee of Massachusetts Trustee since 1992 charitable organizations, General Hospital. Prior to including Courier September 2000, April 2000, and Corporation (a book December 2001, Mr. Thorndike was manufacturer and a Director of Bradley Real Estate, publisher) and Inc., a Trustee of Eastern Utilities Providence Journal Co. Associates, and a Trustee of Cabot (a newspaper publisher) Industrial Trust, respectively. Previously served as Chairman of the Board and managing partner of Wellington Management/Thorndike Doran Paine & Lewis, and Chairman and Director of Ivest Fund. Lawrence J. Lasser* President and Chief Director of Marsh & McLennan (11/1/42), Executive Officer of Companies, Inc. and the United Way Trustee since 1992 Putnam Investments of Massachusetts Bay. Member of the Vice President since 1981 and Putnam Board of Governors of the Investment Management Company Institute, Trustee of the Museum of Fine Arts, Boston, a Trustee and Member of the Finance and Executive Committees of Beth Israel Deaconess Medical Center, Boston, and a Member of the CareGroup Board of Managers Investment Committee, the Council on Foreign Relations, and the Commercial Club of Boston. George Putnam, III* President, New Director of The Boston Family (8/10/51), Generation Research, Office, L.L.C. (registered investment Trustee since 1984 and Inc. (a publisher of advisor), Trustee of St. Mark's President since 2000 financial advisory and School, and Trustee of Shore other research services Country Day School. Until 2002, relating to bankrupt and Mr. Putnam was a Trustee of the distressed companies) SEA Education Association. and New Generation Previously, Mr. Putnam was an Advisers, Inc. attorney with the firm of Dechert (a registered Price & Rhoads. investment adviser) A.J.C. Smith* (4/13/34), Director of Marsh & Director of Trident Corp. (a limited Trustee since 1986 McLennan partnership with over 30 institutional Companies, Inc. investors). Trustee of the Carnegie Hall Society, the Educational Broadcasting Corporation and the National Museums of Scotland. Chairman of the Central Park Conservancy. Member of the Board of Overseers of the Joan and Sanford I. Weill Graduate School of Medical Sciences of Cornell University. Fellow of the Faculty of Actuaries in Edinburgh, the Canadian Institute of Actuaries, and the Conference of Actuaries. Associate of the Society of Actuaries. Member of the American Actuaries, the International Actuarial Association and the International Association of Consulting Actuaries. Prior to May 2000 and November 1999, Mr. Smith was Chairman and CEO, respectively, of Marsh & McLennan Companies, Inc. - ------------------------------------------------------------------------------------------------------------ 1 The address of each Trustee is One Post Office Square, Boston, MA 02109. As of May 31, 2003, there were 104 Putnam Funds. 2 Each Trustee serves for an indefinite term, until his or her resignation, death, or removal. * Trustees who are or may be deemed to be "interested persons" (as defined in the Investment Company Act of 1940) of the fund, Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc., the parent company of Putnam LLC and its affiliated companies. Messrs. Putnam, III, Lasser and Smith are deemed "interested persons" by virtue of their positions as officers or shareholders of the fund or Putnam Management, Putnam Retail Management or Marsh & McLennan Companies, Inc. George Putnam, III is the President of your fund and each of the other Putnam funds. Lawrence J. Lasser is the President and Chief Executive Officer of Putnam Investments and Putnam Management. Mr. Lasser and Mr. Smith serve as Directors of Marsh & McLennan Companies, Inc.
OFFICERS In addition to George Putnam III and Lawrence J. Lasser, the other officers of the fund are shown below: Name, Address, 1 Date of Birth, Length of Service with Position(s) Held with Fund the Putnam Funds Principal Occupation(s) During Past 5 Years - ------------------------------------------------------------------------------------------------------------ Charles E. Porter Since 1989 Managing Director, Putnam Investments (7/26/38), Executive Vice and Putnam Management President, Treasurer and Principal Financial Officer Patricia C. Flaherty Since 1993 Senior Vice President, Putnam Investments (12/1/46), Senior Vice and Putnam Management President Karnig H. Durgarian Since 2002 Senior Managing Director, Putnam (1/13/56), Vice President and Investments Principal Executive Officer Steven D. Krichmar Since 2002 Managing Director, Putnam Investments. (6/27/58), Vice President and Prior to July 2001, Partner, Principal Financial Officer PricewaterhouseCoopers LLP Michael T. Healy Since 2000 Managing Director, Putnam Investments (1/24/58), Assistant Treasurer and Principal Accounting Officer Brett C. Browchuk Since 1994 Managing Director, Putnam Investments (2/27/63), Vice President and Putnam Management Charles E. Haldeman Jr. Since 2002 Senior Managing Director, Putnam (10/29/48), Vice President Investments and Putnam Management. Prior to October 2002, Chief Executive Officer, Lincoln National Investment Companies; prior to January 2000, President and Chief Operating Officer, United Asset Management. Beth S. Mazor Since 2002 Senior Vice President, Putnam Investments (4/6/58), Vice President Richard A. Monaghan Since 1998 Senior Managing Director, Putnam (8/25/54), Vice President Investments and Putnam Retail Management. Prior to November 1998, Managing Director, Merrill Lynch Stephen M. Oristaglio Since 1998 Senior Managing Director, Putnam (8/21/55), Vice President Investments and Putnam Management. Prior to July 1998, Managing Director, Swiss Bank Corp. Gordon H. Silver Since 1990 Senior Managing Director, Putnam (7/3/47), Vice President Investments, Putnam Management and Putnam Retail Management Mark C. Trenchard Since 2002 Senior Vice President, Putnam Investments (6/5/62), Vice President Judith Cohen Since 1993 Clerk and Assistant Treasurer, The (6/7/45), Clerk and Putnam Funds Assistant Treasurer Jerome J. Jacobs Since 1996 Managing Director of Putnam Management (8/20/58), Vice President - ------------------------------------------------------------------------------------------------------------ 1 The address of each Officer is One Post Office Square, Boston, MA 02109.
FUND INFORMATION ABOUT PUTNAM INVESTMENTS One of the largest mutual fund families in the United States, Putnam Investments has a heritage of investment leadership dating back to Judge Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition and practice since 1830. Founded over 65 years ago, Putnam Investments was built around the concept that a balance between risk and reward is the hallmark of a well-rounded financial program. We presently manage over 100 mutual funds in growth, value, blend, fixed income, and international. INVESTMENT MANAGER Putnam Investment Management, LLC One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Retail Management One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray LLP INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP TRUSTEES John A. Hill, Chairman Jameson Adkins Baxter Charles B. Curtis 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, Treasurer and Principal Financial Officer Patricia C. Flaherty Senior Vice President Karnig H. Durgarian Vice President and Principal Executive Officer Steven D. Krichmar Vice President and Principal Financial Officer Michael T. Healy Assistant Treasurer and Principal Accounting Officer Brett C. Browchuk Vice President Charles E. Haldeman, Jr. Vice President Lawrence J. Lasser Vice President Beth S. Mazor Vice President Richard A. Monaghan Vice President Stephen M. Oristaglio Vice President Gordon H. Silver Vice President Mark C. Trenchard Vice President Jerome J. Jacobs Vice President Judith Cohen Clerk and Assistant Treasurer 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. The fund's Statement of Additional Information contains additional information about the fund's Trustees and is available without charge upon request by calling 1-800-225-1581. Visit www.putnaminvestments.com or call 1-800-225-1581. 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 AN047-88670 845/236/258 7/03 Item 2. Code of Ethics: - ----------------------- Not applicable Item 3. Audit Committee Financial Expert: - ----------------------------------------- Not applicable Item 4. Principal Accountant Fees and Services: - ----------------------------------------------- Not applicable Items 5-6. [Reserved] - --------------------- Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed End - ------------------------------------------------------------------------- Management Investment Companies: Not applicable -------------------------------- Item 8. [Reserved] - ------------------ Item 9. Controls and Procedures: - -------------------------------- The registrant's principal executive officer and principal financial officers have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report on Form N-CSR, that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the investment company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms. There have been no significant changes in the registrant's internal controls subsequent to the date of their evaluation. Item 10. Exhibits: - ------------------ (a) Not applicable (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Investment Company Act of 1940, as amended, and the officer certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 an the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAME OF REGISTRANT By (Signature and Title): /s/Michael T. Healy -------------------------- Michael T. Healy Principal Accounting Officer Date: July 24, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 an the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title): /s/Karnig H. Durgarian --------------------------- Karnig H. Durgarian Principal Executive Officer Date: July 24, 2003 By (Signature and Title): /s/Charles E. Porter --------------------------- Charles E. Porter Principal Financial Officer Date: July 24, 2003 By (Signature and Title): /s/Steven D. Krichmar --------------------------- Steven D. Krichmar Principal Financial Officer Date: July 24, 2003 EX-99.CERT 3 exnn2.txt EX-99.CERT Certifications - -------------- I, Charles E. Porter, a principal financial officer of the funds listed on Attachment A, certify that: 1. I have reviewed each report on Form N-CSR of the funds listed on Attachment A; 2. Based on my knowledge, each report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by each report; 3. Based on my knowledge, the financial statements, and other financial information included in each report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrants as of, and for, the periods presented in each report; 4. Each registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act) for the registrants and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrants, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which each report are being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in each report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Each registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to each registrant's auditors and the audit committee of each registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect each registrant's ability to record, process, summarize, and report financial data and have identified for each registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in each registrant's internal controls; and 6. Each registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/Charles E. Porter Date: July 23, 2003 - ---------------------- ------------------- Charles E. Porter, Principal Financial Officer Certifications - -------------- I, Karnig H. Durgarian, the principal executive officer of the funds listed on Attachment A, certify that: 1. I have reviewed each report on Form N-CSR of the funds listed on Attachment A; 2. Based on my knowledge, each report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by each report; 3. Based on my knowledge, the financial statements, and other financial information included in each report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrants as of, and for, the periods presented in each report; 4. Each registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act) for the registrants and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrants, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which each report are being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in each report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Each registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to each registrant's auditors and the audit committee of each registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect each registrant's ability to record, process, summarize, and report financial data and have identified for each registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in each registrant's internal controls; and 6. Each registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/Karnig H. Durgarian Date: July 22, 2003 - ---------------------- ------------------- Karnig H. Durgarian, Principal Executive Officer Certifications - -------------- I, Steven D. Krichmar, a principal financial officer of the funds listed on Attachment A, certify that: 1. I have reviewed each report on Form N-CSR of the funds listed on Attachment A; 2. Based on my knowledge, each report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by each report; 3. Based on my knowledge, the financial statements, and other financial information included in each report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrants as of, and for, the periods presented in each report; 4. Each registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-2(c) under the Investment Company Act) for the registrants and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrants, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which each report are being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) presented in each report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Each registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to each registrant's auditors and the audit committee of each registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect each registrant's ability to record, process, summarize, and report financial data and have identified for each registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in each registrant's internal controls; and 6. Each registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/Steven D. Krichmar Date: July 22, 2003 - ---------------------- ------------------- Steven D. Krichmar, Principal Financial Officer Attachment A - -------------- Period(s) ended May 31, 2003 012 Putnam Equity Income Fund 019 Putnam New Jersey Tax Exempt Income Fund 030 Putnam New York Tax Exempt Income Fund 037 Putnam Florida Tax Exempt Income Fund 047 Putnam Pennsylvania Tax Exempt Income Fund 058 Putnam Investment Grade Municipal Trust 060 Putnam High Yield Advantage Fund 063 Putnam New York Tax Exempt Money Market Fund 168 Putnam Tax-Free Health Care Fund 398 Putnam Intermediate U.S. Government Income Fund 433 Putnam Capital Appreciation Fund 590 Putnam Managed High Yield Trust 845 Putnam Massachusetts Tax Exempt Income Fund 846 Putnam Michigan Tax Exempt Income Fund 847 Putnam Minnesota Tax Exempt Income Fund 848 Putnam Ohio Tax Exempt Income Fund 854 Putnam New York Tax Exempt Opportunities Fund 855 Putnam Arizona Tax Exempt Income Fund 949 Putnam Classic Equity Fund EX-99.906CERT 4 exnos3.txt EX-99.906CERT Section 906 Certifications - --------------------------- I, Charles E. Porter, a principal financial officer of the Funds listed on Attachment A, certify that, to my knowledge: 1. The Form N-CSR of each of the Funds listed on Attachment A for the period ended May 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR of each of the Funds listed on Attachment A for the period ended May 31, 2003 fairly presents, in all material respects, the financial condition and results of operations of the Funds listed on Attachment A. /s/Charles E. Porter Date: July 23, 2003 - ---------------------- ------------------- Charles E. Porter, Principal Financial Officer Section 906 Certifications - --------------------------- I, Karnig H. Durgarian, the principal executive officer of the Funds listed on Attachment A, certify that, to my knowledge: 1. The Form N-CSR of each of the Funds listed on Attachment A for the period ended May 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR of each of the Funds listed on Attachment A for the period ended May 31, 2003 fairly presents, in all material respects, the financial condition and results of operations of the Funds listed on Attachment A. /s/Karnig H. Durgarian Date: July 22, 2003 - ---------------------- ------------------- Karnig H. Durgarian, Principal Executive Officer Section 906 Certifications - --------------------------- I, Steven D. Krichmar, a principal financial officer of the Funds listed on Attachment A, certify that, to my knowledge: 1. The Form N-CSR of each of the Funds listed on Attachment A for the period ended May 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR of each of the Funds listed on Attachment A for the period ended May 31, 2003 fairly presents, in all material respects, the financial condition and results of operations of the Funds listed on Attachment A. /s/Steven D. Krichmar Date: July 22, 2003 - ---------------------- ------------------- Steven D. Krichmar, Principal Financial Officer Attachment A - -------------- Period(s) ended May 31, 2003 012 Putnam Equity Income Fund 019 Putnam New Jersey Tax Exempt Income Fund 030 Putnam New York Tax Exempt Income Fund 037 Putnam Florida Tax Exempt Income Fund 047 Putnam Pennsylvania Tax Exempt Income Fund 058 Putnam Investment Grade Municipal Trust 060 Putnam High Yield Advantage Fund 063 Putnam New York Tax Exempt Money Market Fund 168 Putnam Tax-Free Health Care Fund 398 Putnam Intermediate U.S. Government Income Fund 433 Putnam Capital Appreciation Fund 590 Putnam Managed High Yield Trust 845 Putnam Massachusetts Tax Exempt Income Fund 846 Putnam Michigan Tax Exempt Income Fund 847 Putnam Minnesota Tax Exempt Income Fund 848 Putnam Ohio Tax Exempt Income Fund 854 Putnam New York Tax Exempt Opportunities Fund 855 Putnam Arizona Tax Exempt Income Fund 949 Putnam Classic Equity Fund -----END PRIVACY-ENHANCED MESSAGE-----