<PAGE>
PUTNAM
MASSACHUSETTS
TAX EXEMPT
INCOME FUND II
ANNUAL REPORT
MAY 31, 1995
[LOGO]
BOSTON * LONDON * TOKYO
<PAGE>
PERFORMANCE HIGHLIGHTS
"The gap is narrowing between Treasury and municipal yields, making
munis look increasingly attractive. Among municipal bond experts,
there is little concern that any radical change in the tax system
could happen before 1997 and plenty of doubt that any such
revolution will happen at all."
- --The Wall Street Journal, May 19, 1995
FISCAL 1995 RESULTS AT A GLANCE
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C>
CLASS A CLASS B
TOTAL RETURN: NAV POP NAV CDSC
- --------------------------------------------------------------------
(change in value during period
plus reinvested distributions)
12 months ended 5/31/95 8.45% 3.31% 7.64% 2.64%
- --------------------------------------------------------------------
CLASS A CLASS B CLASS M
SHARE VALUE: NAV POP NAV NAV POP
- --------------------------------------------------------------------
5/31/94 $9.05 $9.50 $9.05 -- --
5/12/95 -- -- -- $9.10 $9.41
5/31/95 9.21 9.67 9.20 9.21 9.52
- --------------------------------------------------------------------
CAPITAL GAINS(1)
LONG- SHORT-
DISTRIBUTIONS: NO. INCOME TERM TERM TOTAL
- --------------------------------------------------------------------
Class A 13 $0.546145 -- $0.018 $0.564145
Class B 13 0.489115 -- 0.018 0.507115
Class M 1 0.028613 -- -- 0.028613
- --------------------------------------------------------------------
Class A Class B
Current return: NAV POP NAV
- --------------------------------------------------------------------
End of period
Current dividend rate(2) 5.86% 5.58% 5.24%
Taxable equivalent(3) 11.03 10.50 9.86
Current 30-day SEC yield(4) 5.58 5.31 4.92
Taxable equivalent(3) 10.50 9.99 9.26
- --------------------------------------------------------------------
<FN>
Performance data represent past results and is not indicative of
future results. For performance over longer periods, see pages 8 and
9. POP assumes 4.75% maximum sales charge for class A shares and
3.25% for class M shares. CDSC assumes 5% maximum contingent
deferred sales charge. Performance for class M shares, which
commenced operations on 5/12/95, is not shown due to brevity of the
reporting period. (1) Capital gains are taxable for federal and, in
most cases, state tax purposes. For some investors, investment
income may also be subject to the federal alternative minimum tax.
Investment income may be subject to state and local taxes. (2)
Income portion of most recent distribution, annualized and divided
by NAV or POP at end of period. (3) Assumes maximum combined state
and federal tax rates of 46.85%. Results for investors subject to
lower tax rates would not be as advantageous. (4) Based only on
investment income, calculated using SEC guidelines.
</TABLE>
<PAGE>
FROM THE CHAIRMAN
[PHOTO OF GEORGE PUTNAM]
(C) KARSH, OTTAWA
DEAR SHAREHOLDER:
PUTNAM MASSACHUSETTS TAX EXEMPT INCOME FUND II'S MANAGER, TRIET
NGUYEN, COULDN'T BE MORE PLEASED WITH THE MUNICIPAL BOND MARKET'S
IMPRESSIVE COMEBACK FROM THE SUSTAINED DECLINE OF 1994. MINDFUL OF
THE UNCERTAINTIES STILL HOVERING IN THE BACKGROUND, HOWEVER, HE HAS
BEGUN TAKING STEPS AIMED AT PRESERVING SOME OF THE FUND'S GAINS
ACHIEVED DURING THE FINAL MONTHS OF THE FISCAL YEAR ENDED MAY 31,
1995.
AT THE SAME TIME, TRIET IS OPTIMISTIC ABOUT PROSPECTS FOR FISCAL
1996. THE RECOVERY IN THE TAX-EXEMPT BOND MARKET, WHILE SUBSTANTIAL,
HAS LAGGED THAT OF OTHER FIXED-INCOME MARKETS, LEADING HIM TO
BELIEVE THE RALLY MAY HAVE SOME STAYING POWER.
MUNICIPAL BOND INVESTORS ALREADY HAVE SHAKEN OFF THE JITTERS IGNITED
BY A FLAT-TAX PROPOSAL RECENTLY THROWN INTO THE LEGISLATIVE HOPPER.
IN ITS PUREST FORM, A FLAT TAX WOULD ELIMINATE THE FEDERAL INCOME
TAX ADVANTAGE CURRENTLY ENJOYED BY MUNICIPAL BONDS. WE DO NOT
BELIEVE CONGRESS WOULD ENACT ANY SUCH RESTRICTIVE PROVISION.
TRIET PROVIDES MORE DISCUSSION OF THESE AND OTHER ISSUES IN THE
REPORT THAT FOLLOWS.
RESPECTFULLY YOURS,
[SIGNATURE]
GEORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
JULY 19, 1995
<PAGE>
REPORT FROM THE FUND MANAGER
TRIET M. NGUYEN
Like most fixed-income investments, Putnam Massachusetts Tax Exempt
Income Fund II began its fiscal year in one of the most hostile bond
market environments in recent memory. Fortunately, the year ended on
a much brighter note. For the 12 months ended May 31, 1995, the fund
provided shareholders with a total return of 8.45% for class A
shares and 7.64% for class B shares, both at net asset value.
Your fund also continued to provide a high level of current double-
tax-free income during the period. For the 12 months ended May 31,
1995, the fund's class A shares yielded 5.96%, a very competitive
figure when compared with the 5.40% average yield of the 28
Massachusetts funds tracked by Lipper Analytical Services that have
12 month yields.
ECONOMIC SLOWDOWN SPARKS MARKET RALLY
For much of 1994, fixed-income markets were turned upside- down by
the Federal Reserve Board's tighter stance on U.S. monetary policy
and by bond investors' fears of inflation -- all in response to
accelerating economic growth. Ultimately, the Fed raised interest
rates six times during the annual period, and finally succeeded in
calming inflation fears considerably.
During the first quarter of 1995, the municipal bond market, along
with most other fixed-income investments, began to rally. Several
factors contributed to this welcome change. First, some weakness had
begun to emerge in housing sales and consumer spending; at last the
U.S. economy appeared to be heading for a "soft landing" of steady
growth and low inflation. Meanwhile, as the impact of the Mexican
currency crisis began to fade, central banks around the world began
purchasing U.S. Treasury bonds to support the dollar. This helped
spark a rally in Treasuries, which, in turn, produced a rally in the
municipal bond market.
Economic data in April and May continued to support the notion that
the U.S. economy was indeed slowing down, and the fixed-income
market rally continued. At the same time, however, Congressional
lawmakers began to consider proposals
<PAGE>
for tax reform. Concern about the potential effects of such
legislation dampened investor demand for municipal securities
somewhat toward the end of the annual period, although the market
did continue to rally, albeit less vigorously.
FOCUSED ON INCOME AND AFTER-TAX RETURNS
Your fund's primary goal is to maximize after-tax returns, and our
tendency has been to preserve the fund's tax-free income stream
through all kinds of market conditions. The prospect of tax reform
ahead makes this focus on current income more appropriate than ever.
Municipal securities are unlikely to appreciate much until these tax
issues are settled, but tax-free income will continue to be highly
prized, especially since few other investment tax shelters remain.
Actually, the recent decline in demand for municipal securities has
enhanced the effectiveness of your fund's investment strategy.
Municipals now offer some of the best values in years. Most experts
concur that tax reform -- if it occurs at all -- is unlikely to take
place until at least 1997, after the next presidential election. In
the meantime, although we remain somewhat cautious and protective of
the fund's net asset value, Putnam's superior research capabilities
are enabling us to uncover some excellent buying opportunities in
the resource- recovery (which includes alternative waste-disposal
facilities and companies), college and university, and health-care
sectors.
[PI CHART]
PORTFOLIO QUALITY PROFILE*
- --------------------------------------------------------------------
AAA 29%
AA 7%
A 16%
BBB 22%
BB 19%
Below BB 2%
VMIG (Short-term Investments) 2%
* Based on portfolio market value as of 5/31/95, and will vary
over time. Based on Standard and Poor's rating terminology.
While the fund has the flexibility to invest in higher-yielding
lower-rated bonds, generally at least 75% of the portfolio will
be investment grade. Investment-grade securities are those
rated BBB or higher by Standard & Poor's, or Baa or higher by
Moody's Investor Service, Inc.
<PAGE>
In fact, our college and university bonds, which were purchased at
good values and enjoyed some price appreciation, were the fund's
best-performing holdings during the recent annual period.
We also are maintaining the barbell portfolio structure discussed in
the semiannual report. This structure anchors portfolio holdings at
the highest level, AAA, and the lowest level, BBB, of the investment-
grade bond spectrum. It represents our effort to tap the current
income and price appreciation potential of certain issues while
taking advantage of the volatility-dampening effects of others. This
strategy contributed strongly to the fund's solid performance over
fiscal 1995.
SUPPLY SHORTAGE EXERTS POSITIVE INFLUENCE
For some time, we have been discussing the prospect of an upcoming
supply/demand imbalance that could be favorable for municipal bond
funds like yours. At this point, supply of new and outstanding
Massachusetts municipal issues has become low.
In fact, 1995 will be the first year in which both the new and
outstanding supply of municipal bonds, across the country, will
shrink relative to the demand for these securities. Higher interest
rates and a high debt load incurred by massive financing undertaken
in the 1980s have discouraged municipalities from issuing new bonds
or refinancing older ones.
Municipal bond supply in the first quarter of 1995 has already
dropped 45% compared with new issuances and refinancings in the
first quarter of 1994. In July 1995, a huge number of municipal
issues will mature and be called out of the market. The resulting
surge in demand will exceed the available supply of new municipal
securities for the first time in history. While there can be no
assurances, this huge inequity between supply and demand could help
support stronger municipal bond performance ahead.
POSITIVE ECONOMICS AHEAD/CAUTIOUSLY OPTIMISTIC
Along with the Fed's Board of Governors, we believe it is too early
to tell whether the economy is headed for the desired "soft landing"
of moderate growth and low inflation or the slowdown will be more
dramatic. Either situation should lead
<PAGE>
TOP 10 HOLDINGS (5/31/95)
- --------------------------------------------------------------------
MA State Health & Educational Facility Authority
Revenue bonds
- --------------------------------------------------------------------
MA State Industrial Finance Agency
Revenue bonds
- --------------------------------------------------------------------
MA State Industrial Finance Agency
Resource recovery revenue bonds
- --------------------------------------------------------------------
MA State Water Resource Authority
Revenue bonds
- --------------------------------------------------------------------
MA State Housing Finance Agency
Revenue bonds
- --------------------------------------------------------------------
Boston Water & Sewer Commission
Revenue bonds
- --------------------------------------------------------------------
MA Bay Transit Authority
Revenue bonds
- --------------------------------------------------------------------
Commonwealth of Puerto Rico
Revenue bonds
- --------------------------------------------------------------------
MA State
Revenue bonds
- --------------------------------------------------------------------
Boston
Revenue bonds
- --------------------------------------------------------------------
These holdings represent 77.5% of the fund's assets. Portfolio
holdings will vary over time.
to stable or declining interest rates, which would create a positive
environment for fixed-income investments, including municipal
securities. The big unknown is how the tax reform proposal now
before Congress will affect municipal bond market psychology.
Given this uncertainty, we are keeping the fund flexible while
monitoring carefully the Fed, the economy, and all tax-reform
developments. We will continue to emphasize current income by
pursuing appropriate investment opportunities as they arise. At the
same time, we will protect the fund's net asset value by keeping the
portfolio average duration relatively neutral, rather than
aggressively long. In the meantime, although the market will
probably remain somewhat volatile in the months ahead, fundamentals
remain exceptionally strong and investors continue to find the
double tax-free returns of Massachusetts municipal securities quite
appealing.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described
holdings were viewed favorably as of 5/31/95, there is no guarantee
the fund will continue to hold these securities in the future.
<PAGE>
PERFORMANCE SUMMARY
This section provides, at a glance, information about your fund's
performance. 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 back into the fund. We show
total return in two ways: on a cumulative long-term basis and on
average how the fund might have grown each year over varying
periods.
Performance should always be considered in light of a fund's
investment strategy. Putnam Massachusetts Tax Exempt Income Fund II
is designed for investors seeking a high level of current income
free from federal income tax and Massachusetts personal income taxes
consistent with preservation of capital.
TOTAL RETURN FOR PERIODS ENDED 5/31/95
<TABLE><CAPTION>
<S> <C> <C> <C> <C> <C>
LEHMAN BROS.
CLASS A CLASS B MUNICIPAL
NAV POP NAV CDSC BOND INDEX
- --------------------------------------------------------------------
1 year 8.45% 3.31% 7.64% 2.64% 9.11%
- --------------------------------------------------------------------
5 years 53.67 46.45 -- -- 51.33
Annual average 8.97 7.93 -- -- 8.64
- --------------------------------------------------------------------
Life of class A 60.09 52.53 -- -- 58.18
Annual Average 8.75 7.82 -- -- 8.52
- --------------------------------------------------------------------
Life of class B -- -- 6.41 2.62 9.97
Annual average -- -- 3.36 1.38 5.18
- --------------------------------------------------------------------
</TABLE>
TOTAL RETURN FOR PERIODS ENDED 6/30/95
(most recent calendar quarter)
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
CLASS A CLASS B
NAV POP NAV CDSC
- --------------------------------------------------------------------
1 year 7.49% 2.35% 6.72% 1.72%
- --------------------------------------------------------------------
5 years 50.25 43.03 -- --
Annual average 8.48 7.42 -- --
- --------------------------------------------------------------------
Life of class A 58.04 50.58 -- --
Annual average 8.38 7.46 -- --
- --------------------------------------------------------------------
Life of class B -- -- 5.01 1.28
Annual average -- -- 2.53 0.65
- --------------------------------------------------------------------
<FN>
Fund performance data do not take into account any adjustment for
taxes payable on reinvested distributions or for class A share
distribution fees prior to implementation of the distribution plan
in 1990. The fund began operations on 10/23/89 offering shares now
known as class A. The fund commenced operations of its class B
shares on 7/15/93 and its class M shares on 5/12/95. Performance for
class M shares is not shown because of the brevity of the reporting
period. Performance data represent past results, are no assurance of
future results and will differ for each share class. Investment
returns and net asset value will fluctuate so an investor's shares,
when sold, may be worth more or less than their original cost.
<PAGE>
[MOUNTAIN CHART]
GROWTH OF A $10,000 INVESTMENT
- --------------------------------------------------------------------
Date POP Competitive Index CPI
10/23/89 $9,595 $10,000 $10,000
5/31/90 9926 $10,453 $10,287
5/31/91 10929 $11,506 $10,796
5/31/92 12236 $12,636 $11,123
5/31/93 13803 $14,148 $11,481
5/31/94 14067 $14,497 $11,744
5/31/95 15255 $15,818 $12,118
Past performance is no assurance of future results. A $10,000
investment in the fundOs class B shares at inception on 7/15/93
would have been valued at $10,641 on 5/31/95 ($10,262 with a
redemption at the end of the period).
TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
CLASS M SHARES have a lower initial sales charge and a higher 12b-1
fee than class A shares and no sales charge on redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus
any liabilities divided by the numbers of outstanding shares, not
including any initial or contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus
the maximum sales charge levied at the time of purchase. POP
performance figures shown here assume the maximum 4.75% sales charge
for class A shares and 3.25% for class M shares.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the
time of the redemption of class B shares and assumes redemption at
the end of the period. Your fund's CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth
year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
LEHMAN BROTHERS MUNICIPAL BOND INDEX is an unmanaged list of long-
term fixed-rate investment-grade tax-exempt bonds representative of
the municipal bond market. The index does not take into account
brokerage commissions or other costs, may include bonds different
from those in the fund, and may pose different risks than the fund.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation;
it does not represent an investment return.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
for the fiscal year ended May 31, 1995
To the Trustees and Shareholders of
Putnam Massachusetts Tax Exempt Income Fund II
In our opinion, the accompanying statement of assets and
liabilities, including the portfolio of investments owned (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 II (the "Fund") at May 31,
1995, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereinafter 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 generally accepted
auditing standards, 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, 1995 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 13, 1995
<PAGE>
PORTFOLIO OF INVESTMENTS OWNED
May 31, 1995
KEY TO ABBREVATIONS
IFB--Inverse Floating Rate Bonds
GO Bonds--General Obligation Bonds
VRDN--Variable Rate Demand Notes
AMBAC--AMBAC Indemnity Corporation
FHA--Federal Housing Administration
FNMA--Federal National Mortgage Association
FSA--Financial Security Assurance
GNMA--Government National Mortgage Association
MBIA--Municipal Bond Investors Assurance Corporation
Connie-Lee--College Construction Loan Insurance Association
MUNICIPAL BONDS AND NOTES (97.6%)*
PRINCIPAL AMOUNT RATINGS** VALUE
MASSACHUSETTS (92.5%)
- --------------------------------------------------------------------
$5,500,000 Agawam, Resource Recvy. Rev. Bonds
(Springfield Resources Recvy. Project),
8 1/2s, 12/1/08# BBB $ 5,857,500
5,000,000 Boston, Indl. Dev. Fin. Auth. Swr.
Fac. Rev. Bonds (Harbor Elec. Energy
Co. Project), 7 3/8s, 5/15/15 BBB 5,356,250
2,135,000 Boston, Indl. Dev. Fing. Auth. Indl.
Rev. Bonds (Mass. College of Pharmacy)
Connie-Lee, Ser. A, 5 1/4s, 10/1/26 AAA 1,937,513
1,305,000 Boston, Nursing Home Rev. Bonds
(St. Joseph Nursing Care Ctr. Inc.),
10s, 1/1/20 BB/P 1,446,919
6,500,000 Boston, Rev. Bonds (Boston City
Hospital), Ser. B, FHA, 5 3/4s,
2/15/23 AA 6,313,125
7,935,000 Boston, Wtr. & Swr. Commn. Rev. Bonds,
Ser. A, 5 3/4s, 11/1/13 A 8,014,350
1,760,000 Holyoke, G.O. Bonds, Prerefunded
9.85s, 11/1/08 Aaa 2,013,000
Lowell, G.O. Bonds Prerefunded
1,250,000 8.4s, 1/15/09 Aaa 1,457,813
2,455,000 8.3s, 2/15/05 Aaa 2,952,138
MA Bay Trans. Auth. Rev. Bonds
3,550,000 Ser. B, 6.2s, 3/1/16 A 3,745,250
4,000,000 (General Trans. Syst.), Ser. A, 5 1/2s,
3/1/12 A 3,940,000
1,000,000 MA Collg. Bldg. Auth. Project Rev.
Bonds, Ser. A, 7.8s, 5/1/16 A 1,103,750
1,000,000 MA G.O. Cons. Loan Bonds Prerefunded,
Ser. A, 7 5/8s, 6/1/08 AAA 1,168,750
6,500,000 MA State G.O. Bonds, VRDN, Ser. B,
5.15s, 12/1/97 VMIG1 6,500,000
MA State Hlth. & Edl. Fac. Auth. IFB
6,000,000 (Beth Israel Hosp.) AMBAC,
7.863s, 7/1/25 AAA 6,157,500
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,900,000 (New England Med. Ctr.) MBIA
5.48s, 7/1/18 AAA 2,613,625
2,000,000 (1st Mtge. Fairview Extended Care)
Ser. A, 10 1/4s, 1/1/21 BB/P 2,267,500
2,000,000 (St. Elizabeth's Hosp.), Ser. E,
FSA 9.02s, 8/15/21 AAA 2,242,500
865,000 (Summerfield Nursing Home),
Ser. A, 9 1/2s, 7/1/14 B/P 885,544
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
MASSACHUSETTS (continued)
- --------------------------------------------------------------------
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
$2,000,000 (Nichols College), Ser. B,
8 1/2s, 10/1/16 BBB $ 2,315,000
2,500,000 (Waltham-Weston Hosp. & Med. Ctr.),
Ser. B, 8 3/8s, 7/1/15 Baa 2,659,375
4,250,000 (Suffolk U.), Ser. A, 8 1/8s, 7/1/20 Baa 4,945,929
2,150,000 Prerefunded (Valley Regl. Hlth.
Syst.Issue), Ser. B, 8s, 7/1/18 Aaa 2,507,438
3,300,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 BB 3,221,625
4,010,000 (Rehab. Hosp. Cape & Islands),
Ser. A, 7 7/8s, 8/15/24 BB/P 4,065,138
1,125,000 (Norwood Hosp.), Ser. E, 7 3/4s,
7/1/07 BB 1,082,813
3,000,000 (Stonehill College Issue), Ser. D,
AMBAC 7.7s, 7/1/20# AAA 3,465,000
2,820,000 (MA Eye & Ear Infirmary), Ser. A,
7 3/8s, 7/1/11 Baa 2,777,700
9,310,000 (Cooley Dickinson Hosp. Issue) Ser. A,
7 1/8s, 11/15/18 BB/P 8,891,050
1,550,000 (Worcester Polytech Inst.) Ser. E,
6 5/8s, 9/1/17 A 1,625,563
3,880,000 (Metro West Hlth. Inc.), Ser. C,
6 1/2s, 11/15/18 Baa 3,855,750
2,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 AAA 2,177,500
4,850,000 (MA General Hosp.), Ser. F, AMBAC,
6 1/4s, 7/1/12 AAA 5,207,688
6,705,000 (Smith College), Ser. D, 5 3/4s,
7/1/24 AA 6,679,856
2,100,000 (Harvard U.) Ser. M, 5 1/2s, 12/1/15 AAA 2,102,625
2,000,000 (Williams College), Ser. D,
5 1/2s, 7/1/12 AA 1,997,500
5,500,000 (Boston College), Ser. K,
5 3/8s, 6/1/14 A 5,266,250
3,475,000 (Boston College), 5 1/4s, 6/1/23 A 3,192,656
1,000,000 (Wheaton College), Ser. C,
5 1/4s, 7/1/19 A 916,250
3,365,000 (MA Inst. of Techn.), Ser. H,
5s, 7/1/23 AAA 3,028,500
6,500,000 MA State Hlth. & Edl. Facs. Auth. IFB
(Boston U.), Ser. L, MBIA, 8.736s,
10/1/31 AAA 7,353,125
MA State Hsg. Fin. Agcy. Rev. Bonds
2,000,000 (Multi-Fami. Mtge.), Ser. A, GNMA
Collateral, 9 1/8s, 12/1/20# AAA 2,077,500
6,000,000 (Residential Dev.) FNMA Collateral,
6.9s, 11/15/21 AAA 6,315,000
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
6,500,000 (Southeastern MA Project), Ser. B,
9 1/4s, 7/1/15 BB/P 7,231,250
3,410,000 (Southeastern MA Project), Ser. A, 9s,
7/1/15 BB/P 3,755,263
MA State Indl. Fin. Agcy. Rev. Bonds
2,775,000 Prerefunded (1st Mtge. Brookhaven-
Lexington), 10 1/4s, 1/1/18 AAA/P 3,236,344
3,100,000 (Alpha Inds.-Methuen), 10 1/4s,
8/1/04 BB/P 3,382,875
1,900,000 Prerefunded (1st Mtge. Berkshire
Retirement Home) , 9 7/8s, 7/1/18 AAA/P 2,085,250
2,100,000 (Odd Fellows Home of MA), 9.6s,
1/1/15 BB/P 2,275,875
2,000,000 (Orchard Cove Inc. Issue), 9s,
5/1/22 BB/P 2,262,500
2,015,000 Prerefunded (Morton Hosp. & Med.
Ctr.), Ser. A, 8 3/4s, 7/1/11 AAA 2,332,363
2,500,000 (Leominster Hosp.), Ser. A,
8 5/8s, 8/1/09 BB/P 2,915,625
3,600,000 Prerefunded (Cape Cod Hlth. Syst.
Issue), 8 1/2s, 11/15/20 Aaa 4,320,000
3,000,000 (1st. Mtge. Stone Institution &
Newton), 7.9s, 1/1/24 BB/P 3,086,250
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
MASSACHUSETTS (continued)
- --------------------------------------------------------------------
$3,500,000 (1st. Mtge. Evanswood Bethzatha),
Ser. A, 7 7/8s, 1/15/20 BB/P $ 3,565,625
5,140,000 (1st. Mtge. Loomis & Village
Projects), 7 5/8s, 7/1/25 BBB 5,281,350
8,330,000 (Merrimack College), 7 1/8s, 7/1/12 BBB 8,777,738
3,500,000 (1st. Mtge. Brookhaven) Ser A, 7s,
1/1/15 BBB/P 3,513,125
1,165,000 (Clark U.) Ser E, 7s, 7/1/12 A 1,258,200
2,605,000 (Clark U.), Ser F, 7s, 7/1/11 A 2,819,913
6,000,000 (1st Mtge. Berkshire Retirement
Home-A), 6 5/8s, 7/1/16 BBB/P 5,677,500
2,000,000 (1st Mtge. Brookhaven Project),
Ser B, 6.6s, 1/1/17 BBB/P 2,010,000
1,000,000 (Combined Jewish Philanthropies),
Ser. A, AMBAC, 6 3/8s, 2/1/15 AAA 1,048,750
8,065,000 (Lesley College Project) Connie-Lee,
Ser. A, 6.3s, 7/1/25 AAA 8,266,625
2,000,000 (Brooks School), 5.95s, 7/1/23 A 2,012,500
4,000,000 (Eastern Edison Co. Project),
5 7/8s, 8/1/08 Baa 3,875,000
4,000,000 (Boston Edison Co. Project),
Ser. A, 5 3/4s, 2/1/14 Baa 3,765,000
3,000,000 (1st. Mtge. Pioneer Valley Living
Ctr.), 7s, 10/1/20 B/P 2,767,500
1,985,677 (1st. Mtge. Pioneer Valley Living
Ctr.), zero %, 10/1/20+ B/P 2,482
3,950,000 9s, 10/1/20 BBB/P 4,300,563
3,225,000 MA State Port Auth. Rev. Bonds,
Ser. B, 5s, 7/1/13 AA 2,926,688
MA State Wtr. Resources Auth. Rev. Bonds
1,000,000 Ser. A, 6 1/2s, 7/15/19 A 1,106,250
2,100,000 Ser. B, MBIA, 5 1/2s, 3/1/17 AAA 2,026,500
2,900,000 Ser. C, MBIA, 5 1/4s, 12/1/15 AAA 2,715,125
4,890,000 Ser. B, 5 1/4s, 3/1/13 A 4,602,713
Somerville, Hsg. Auth. Rev. Bonds, GNMA Collateral
2,000,000 (Clarendon-Hill Mtge.), 7.95s, 11/20/30AAA 2,165,000
1,500,000 (Clarendon-Hill Mtge.), 7.85s, 11/20/10AAA 1,627,500
1,600,000 U. Mass. Bldg. Auth. Rev. Bonds,
Ser. A, 7 1/2s, 5/1/14 A 1,724,000
Worcester, Mtge. Rev. Bonds
3,100,000 (Briarwood Issue), 9 1/4s, 12/1/22 BB/P 3,363,500
1,350,000 6.4s, 9/15/10 BBB/P 1,388,813
Worcester, Rev. Bonds
2,000,000 (St. Francis Home), 9 3/4s, 7/1/19 BB/P 2,090,000
1,000,000 (St. Francis Home) 9.4s, 7/1/08 BB/P 1,021,250
------------
276,282,663
<PAGE>
MUNICIPAL BONDS AND NOTES
PRINCIPAL AMOUNT RATINGS** VALUE
PUERTO RICO (5.1%)
- --------------------------------------------------------------------
$5,000,000 Puerto Rico Commwlth. G.O Bonds,
MBIA, 5 3/8s, 7/1/22 AAA $ 4,775,000
Puerto Rico Commwlth. Hwy. &
Trans. Auth. Hwy. Rev. Bonds
5,000,000 Ser. W, 5 1/2s, 7/1/15 A 4,812,500
2,100,000 Ser. X, 5s, 7/1/22 A 1,827,000
2,600,000 Puerto Rico, Indl. Med. & Env. Poll.
Cntrl. Fac. Fin. Auth. Rev. Bonds
(Special Facilities- American
Airlines), Ser. A, 8 3/4s, 12/1/25 Baa 2,700,750
1,000,000 Puerto Rico, Pub. Bldgs. Auth. Rev.
GTD, Ser. K, 6 7/8s, 7/1/21 AAA 1,153,750
------------
15,269,000
- --------------------------------------------------------------------
TOTAL INVESTMENTS (cost $277,523,012)*** $291,551,663
- --------------------------------------------------------------------
<FN>
* Percentages indicated are based on net assets of $298,826,389,
which correspond to a net asset value per class A share, class
B share and class M share of $9.21, $9.20 and $9.21,
respectively.
** The Moody's or Standard & Poor's ratings indicated are believed
to be the most recent ratings available at May 31, 1995 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, 1995.
Securities rated by Putnam are indicated by "/P" and are not
publicly rated. Ratings are not covered by the Report of
Independent Accountants.
*** The aggregate identified cost for federal income tax purposes
is $277,523,012, resulting in gross unrealized appreciation and
depreciation of $16,756,218 and $2,727,567, respectively, or
net unrealized appreciation of $14,028,651.
# A portion of this security was pledged to cover margin
requirements for futures contracts outstanding at May 31, 1995.
The market value of segregated securities with the custodian
for transactions on futures contracts was $6,049,313.
+ Non-income-producing security.
The fund had the following industry group concentrations
greater than 10% of net assets at May 31, 1995:
Hospitals/ Health Care 32.5%
Education 23.6
The rates shown on IFBs, which are securities paying variable
interest rates that vary inversely to changes in the market
interest rates and VRDNs are the current interest rates at May
31, 1995, which are subject to change based on the terms of the
security.
FUTURES CONTRACTS OUTSTANDING
at May 31, 1995
- --------------------------------------------------------------------
</TABLE>
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
TOTAL AGGREGATE EXPIRATION UNREALIZED
VALUE FACE VALUE DATE DEPRECIATION
- --------------------------------------------------------------------
U.S. Treasury Bond
Futures (Sell) $6,555,813 $6,158,875 June95 $(396,938)
- --------------------------------------------------------------------
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1995
</TABLE>
<TABLE>
<S> <C>
ASSETS
- --------------------------------------------------------------------
Investments in securities at value
(identified cost $277,523,012) (Note 1) $291,551,663
- --------------------------------------------------------------------
Cash 163,377
- --------------------------------------------------------------------
Receivable for securities sold 5,459,036
- --------------------------------------------------------------------
Interest receivable 5,972,120
- --------------------------------------------------------------------
Receivable for shares of the fund sold 1,624,436
- --------------------------------------------------------------------
TOTAL ASSETS 304,770,632
LIABILITIES
- --------------------------------------------------------------------
Payable for shares of the fund repurchased 1,189,734
- --------------------------------------------------------------------
Payable for securities purchased 3,505,146
- --------------------------------------------------------------------
Distributions payable to shareholders 654,365
- --------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 419,369
- --------------------------------------------------------------------
Payable for administrative services (Note 2) 1,562
- --------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 212
- --------------------------------------------------------------------
Payable for distribution fees (Note 2) 115,129
- --------------------------------------------------------------------
Payable for variation margin on futures contracts (Note 1) 5,437
- --------------------------------------------------------------------
Other accrued expenses 53,289
- --------------------------------------------------------------------
TOTAL LIABILITIES 5,944,243
- --------------------------------------------------------------------
NET ASSETS $298,826,389
- --------------------------------------------------------------------
REPRESENTED BY
- --------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $293,641,031
- --------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (98,234)
- --------------------------------------------------------------------
Accumulated net realized loss on investments,
written options and futures contracts (Note 1) (8,348,121)
- --------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts 13,631,713
- --------------------------------------------------------------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING $298,826,389
- --------------------------------------------------------------------
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- --------------------------------------------------------------------
Net asset value and redemption price of class A shares
($251,231,870 divided by 27,274,597 shares) $9.21
- --------------------------------------------------------------------
Offering price per share (100/95.25 of $9.21)* $9.67
- --------------------------------------------------------------------
Net asset value and offering price of class B shares
($47,572,932 divided by 5,169,525 shares)+ $9.20
- --------------------------------------------------------------------
Net asset value and redemption price of class M shares
($21,587 divided by 2,345 shares) $9.21
- --------------------------------------------------------------------
Offering price per share (100/96.75 of $9.21)** $9.52
- --------------------------------------------------------------------
<FN>
* On single retail sales of less than $25,000. On sales of
$25,000 or more and on group sales the offering price is
reduced.
** On single retail sales of less than $50,000. On sales of
$50,000 or more and on group sales the offering price is
reduced.
+ Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
Year ended May 31, 1995
<TABLE>
<S> <C>
TAX EXEMPT INTEREST INCOME $19,277,296
- --------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------
Compensation of Manager (Note 2) 1,638,366
- --------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 127,771
- --------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,917
- --------------------------------------------------------------------
Reports to shareholders 40,965
- --------------------------------------------------------------------
Registration fees 5,959
- --------------------------------------------------------------------
Auditing 27,751
- --------------------------------------------------------------------
Legal 19,251
- --------------------------------------------------------------------
Postage 1,659
- --------------------------------------------------------------------
Administrative services (Note 2) 8,858
- --------------------------------------------------------------------
Distribution fees -- class A (Note 2) 479,498
- --------------------------------------------------------------------
Distribution fees -- class B (Note 2) 284,736
- --------------------------------------------------------------------
Distribution fees -- class M (Note 2) 5
- --------------------------------------------------------------------
Amortization of organization expenses (Note 1) 2,751
- --------------------------------------------------------------------
Other expenses 9,214
- --------------------------------------------------------------------
TOTAL EXPENSES 2,658,701
- --------------------------------------------------------------------
NET INVESTMENT INCOME 16,618,595
- --------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (6,991,473)
- --------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (459,019)
- --------------------------------------------------------------------
Net realized loss on written options (Notes 1 and 3) (232,100)
- --------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts during the year 13,419,888
- --------------------------------------------------------------------
NET GAIN ON INVESTMENT TRANSACTIONS 5,737,296
- --------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $22,355,891
- --------------------------------------------------------------------
</TABLE>
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
<S> <C> <C>
YEAR ENDED MAY 31
-----------------------------
1995 1994
- --------------------------------------------------------------------
INCREASE IN NET ASSETS
- --------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------
Net investment income $16,618,595 $14,581,612
- --------------------------------------------------------------------
Net realized gain (loss) on investments,
written options and futures contracts (7,682,592) 1,623,609
- --------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments and futures contracts 13,419,888 (13,149,699)
- --------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 22,355,891 3,055,522
- --------------------------------------------------------------------
Distributions to shareholders from:
- --------------------------------------------------------------------
Net investment income
- --------------------------------------------------------------------
class A (14,766,465) (13,985,915)
- --------------------------------------------------------------------
class B (1,834,523) (595,696)
- --------------------------------------------------------------------
class M (73) --
- --------------------------------------------------------------------
In excess of net investment income
- --------------------------------------------------------------------
class A -- (62,493)
- --------------------------------------------------------------------
class B -- (6,844)
- --------------------------------------------------------------------
Net realized gains on investments
- --------------------------------------------------------------------
class A -- (3,941,191)
- --------------------------------------------------------------------
class B -- (229,597)
- --------------------------------------------------------------------
In excess of net realized gains on investments
- --------------------------------------------------------------------
class A (449,070) --
- --------------------------------------------------------------------
class B (65,122) --
- --------------------------------------------------------------------
Increase from capital share
transactions (Note 4) 26,049,687 67,691,698
- --------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 31,290,325 51,925,484
NET ASSETS
- --------------------------------------------------------------------
Beginning of year 267,536,064 215,610,580
- --------------------------------------------------------------------
END OF YEAR (including distributions in
excess of net investment income of
$98,234 and $118,519, respectively) $298,826,389 $267,536,064
- --------------------------------------------------------------------
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
<TABLE><CAPTION>
<S> <C> <C> <C>
FOR THE PERIOD FOR THE PERIOD
MAY 12, 1995 JULY 15, 1993
(COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) TO YEAR ENDED OF OPERATIONS) TO
MAY 31 MAY 31 MAY 31
- --------------------------------------------------------------------
1995 1995 1994
- --------------------------------------------------------------------
CLASS M* CLASS B
- --------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $9.10 $9.05 $9.71
- --------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .02 .49 .41
Net realized and unrealized
gain (loss) on investments .12 .17 (.51)
- --------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS.14 .66 (.10)
- --------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (.03) (.49) (.41)
Net realized gain on investments -- -- (.15)
- --------------------------------------------------------------------
In excess of net realized gain -- (.02) --
- --------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.03) (.51) (.56)
- --------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD$9.21 $9.20 $9.05
- --------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT
NET ASSET VALUE (%)(b) 1.53(c) 7.64 (1.15)(c)
- --------------------------------------------------------------------
NET ASSETS, END OF PERIOD
(in thousands) $22 $47,573 $23,017
- --------------------------------------------------------------------
Ratio of expenses to
average net assets (%) .06(c) 1.53 1.41(c)
- --------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .30(c) 5.46 4.32(c)
- --------------------------------------------------------------------
Portfolio turnover (%) 47.53 47.53 36.20
- --------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS (continued)
</TABLE>
<TABLE><CAPTION>
<C> <C> <C> <C> <C>
Year ended May 31
- --------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------
Class A
- --------------------------------------------------------------------
$9.05 $9.55 $9.02 $8.70 $8.50
- --------------------------------------------------------------------
.55 .55 .59 .61(a) .62(a)
.18 (.35) .54 .39 .20
- --------------------------------------------------------------------
.73 .20 1.13 1.00 .82
- --------------------------------------------------------------------
(.55) (.55) (.59) (.61) (.62)
-- (.15) (.01) (.07) --
- --------------------------------------------------------------------
(.02) -- -- -- --
- --------------------------------------------------------------------
(.57) (.70) (.60) (.68) (.62)
- --------------------------------------------------------------------
$9.21 $9.05 $9.55 $9.02 $8.70
- --------------------------------------------------------------------
8.45 1.92 12.80 11.96 10.10
- --------------------------------------------------------------------
$251,232 $244,519 $215,611 $149,011 $38,526
- --------------------------------------------------------------------
.89 .96 .97 .88(a) .86(a)
- --------------------------------------------------------------------
6.11 5.69 6.24 6.82(a) 7.27(a)
- --------------------------------------------------------------------
47.53 36.20 53.18 94.95(d) 123.29
- --------------------------------------------------------------------
<FN>
* Per share net investment income for the period ended May 31,
1995 has been determined on the basis of the weighted average
number of shares outstanding during the period.
(a) Reflects a voluntary expense limitation. As a result, net
investment income of the fund for the years ended May 31, 1992
and 1991 reflect expense reductions of approximately $0.01 and
$0.02 respectively.
(b) Total investment return assumes dividend reinvestment and does
not reflect the effect of sales charges.
(c) Not annualized
(d) Portfolio turnover excludes the impact from the acquisition of
Putnam Massachusetts Tax Exempt Income Fund.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATMENTS
May 31, 1995
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
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 the fund's
manager, Putnam Investment Management, Inc. ("Putnam Management") a
wholly- owned subsidiary of Putnam Investments, Inc., believes is
consistent with preservation of capital by investing primarily in a
portfolio of Massachusetts tax-exempt securities.
The fund offers class A, class B and class M shares. The fund
commenced its public operations of class M shares on May 12, 1995.
Class A shares are sold with a maximum front-end sales charge of
4.75%. Class B shares do not pay a front-end sales charge, but pay a
higher ongoing distribution fee than class A shares, and may be
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 a distribution fee
that is currently lower than class B shares and higher than class A
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 policies are in
conformity with generally accepted accounting principles.
A SECURITY VALUATION Tax-exempt bonds and notes are stated on the
basis of valuations provided by a pricing service, approved by the
Trustees, which uses information with respect to transactions in
bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities
in determining value.
B SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security
transactions are accounted for on the trade date (date the order to
buy or sell is executed). Interest income is recorded on the accrual
basis.
<PAGE>
C FUTURES The fund may purchase and sell financial futures
contracts to hedge against changes in the values of tax-exempt
municipal securities the fund owns or expects to purchase.
A futures contract is an agreement between two parties to buy or
sell units of a particular index or a certain amount of a U.S.
Government security at a set price on a future date.
Upon entering into such a contract the fund is required to pledge to
the broker an amount of cash or securities equal to the minimum
"initial margin" requirements of the futures. Pursuant to the
contract, the fund agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as "variation margin"
and are recorded by the fund as unrealized gains or losses. 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.
The potential risk to the fund is that the change in value of
futures contracts primarily corresponds with the value of the
underlying instruments which may not correspond to the change in
value of the hedged instruments. In addition, there is a risk that
the fund may not be able to close out its futures positions due to
an illiquid secondary market.
D OPTION ACCOUNTING PRINCIPLES The fund may, to the extent
consistent with its investment objective and policies, seek to
increase its current returns by writing covered call and put options
on securities it owns or in which it may invest. When a fund writes
a call or put option, an amount equal to the premium received by the
fund is included in the fund's "Statement of assets and liabilities"
as an asset and an equivalent liability. The amount of the liability
is subsequently "marked-to- market" to reflect the current market
value of an option written. The current market value of an option is
the last sale price or, in the absence of a sale, the last offering
price. If an option expires on its stipulated expiration date, or if
the fund enters into a closing purchase transaction, the fund
realizes a gain (or loss if the closing purchase transaction exceeds
the premium received when the option was written) without regard to
any unrealized gain or loss on the underlying security, and the
liability related to such option is extinguished. If a written call
option is exercised, the fund realizes a gain or loss from the sale
of the underlying security and the proceeds of the sale are
increased by the premium originally received. If a written put
option is exercised, the amount of the premium originally received
reduces the cost of the security that the fund purchases upon
exercise of the option.
The risk in writing a call option is that the fund relinquishes the
opportunity to profit if the market price of the underlying security
increases and the option is exercised. In writing a put option, the
fund assumes the risk of incurring a loss if the market price of the
underlying security decreases and the option is exercised. In
addition, there is the risk the fund may not be
<PAGE>
able to enter into a closing transaction because of an illiquid
secondary market.
The fund may also, to the extent consistent with its investment
objectives and policies, buy put options to protect its portfolio
holdings in an underlying security against a decline in market
value. The fund may buy call options to hedge against an increase in
the price of the securities that the fund ultimately wants to buy.
These funds may also buy and sell combinations of put and call
options on the same underlying security to earn additional income.
The premium paid by a fund for the purchase of a put or call option
is included in the fund's "Statement of assets and liabilities" as
an investment and is subsequently "marked-to-market" to reflect the
current market value of the option. If an option the fund has
purchased expires on the stipulated expiration date, the fund
realizes a loss in the amount of the cost of the option. If the fund
enters into a closing sale transaction, the fund realizes a gain or
loss, depending on whether proceeds from the closing sale
transaction are greater or less than the cost of the option. If the
fund exercises a call option, the cost of securities acquired by
exercising the call is increased by the premium paid to buy the
call. If the fund exercises a put option, it realizes a gain or loss
from the sale of the underlying security and the proceeds from such
sale are decreased by the premium originally paid. The risk
associated with purchasing options is limited to the premium
originally paid.
E FEDERAL TAXES It is the policy of the fund to distribute all of
its income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to
distribute an amount sufficient to avoid imposition of any excise
tax under Section 4982 of the Internal Revenue Code of 1986.
Therefore, no provision has been made for federal taxes on income,
capital gains or unrealized appreciation of securities held and
excise tax on income and capital gains.
At May 31, 1995 the fund had a capital loss carryover of
approximately $3,880,000 which may be available to offset future
realized capital gains to the extent provided by regulations. This
amount will expire on May 31, 2003.
F DISTRIBUTIONS TO SHAREHOLDERS Income dividends are recorded
daily by the fund and are distributed monthly. Capital gains
distributions, if any, are recorded on the ex-dividend date and paid
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 treatment of capital loss carryover, post
October losses, loss deferrals, dividends payable and unrealized
gains and losses on futures contracts. Reclassifications are made to
the fund's capital accounts to reflect income and gains available
for distributions (or available capital loss carryovers) under
income tax regulations.
For the year ended May 31, 1995 the fund reclassified $2,751 to
reduce distributions in excess of net investment income, $3,910 to
increase accumulated net realized loss and $1,159 to increase paid-
in capital.
<PAGE>
G AMORTIZATION OF BOND PREMIUM AND DISCOUNT Any premium resulting
from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discount on zero-coupon
bonds, original issue discount bonds and stepped-coupon bonds is
accreted according to the effective yield method.
H UNAMORTIZED ORGANIZATION EXPENSES Expenses incurred by the fund
in connection with its organization, its registration with the
Securities and Exchange Commission and with various states, and the
initial public offering of its shares aggregated $13,072. These
expenses were amortized over a five-year period based on current and
projected net asset levels.
NOTE 2
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Management for management and investment
advisory services is paid quarterly based on the average net assets
of the fund. Such fee is based on the following annual rates: 0.6%
of the first $500 million of average net assets, 0.5% of the next
$500 million, 0.45% of the next $500 million, and 0.4% of any amount
over $1.5 billion, subject to reduction in any year by the amount of
certain brokerage commissions and fees (less expenses) received by
affiliates of the Manager on the fund's portfolio transactions.
The fund also reimburses the Manager 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.
Trustees of the fund receive an annual Trustees fee of $780 and an
additional fee for each Trustees meeting attended. Trustees who are
not interested persons of the Manager and who serve on committees of
the Trustees receive additional fees for attendance at certain
committee meetings.
Custodial functions for the fund are provided by Putnam Fiduciary
Trust Company (PFTC), a wholly owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
Investor servicing and custodian fees reported in the Statement of
operations for the year ended May 31, 1995 have been reduced by
credits allowed by PFTC.
The fund has adopted distribution plans (the "Plans") with respect
to its class A shares, class B shares 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 Mutual Funds Corp., a wholly-owned
subsidiary of Putnam Investments Inc., for services provided and
expenses incurred by it in distributing shares of the fund.
<PAGE>
The Plans provide for payments by the fund to Putnam Mutual Funds
Corp., at an annual rate up to 0.35%, 1.00% and 1.00% of the average
net assets attributable to class A, class B and class M shares,
respectively. The trustees have approved payment by the fund at an
annual rate of 0.20%, 0.85% and 0.50% of the average net assets
attributable to class A, class B and class M shares, respectively.
For the year ended May 31, 1995 , Putnam Mutual Funds Corp., acting
as underwriter, received net commissions of $27,221 and $62 from the
sale of class A shares and M shares, respectively, and $35,500 in
contingent deferred sales charges from redemption of class B shares.
A deferred sales charge of up to 1% is assessed on certain
redemptions of class A shares purchased as part of an investment of
$1 million or more. For the year ended May 31, 1995, Putnam Mutual
Funds Corp., acting as an underwriter, received $680 on class A
redemptions.
NOTE 3
PURCHASES AND SALES OF SECURITIES
During the year ended May 31, 1995, purchases and sales of
investment securities other than short-term municipal obligations
aggregated $144,415,920 and $127,300,746, respectively. Purchases
and sales of short-term municipal obligations aggregated $12,300,000
and $5,800,000, respectively. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
The following is a summary of written options activity during the
year ended May 31, 1995.
<TABLE><CAPTION>
<S> <C> <C>
CONTRACT PREMIUMS
AMOUNT RECEIVED
- --------------------------------------------------------------------
Options outstanding at begining of year -- $ --
- --------------------------------------------------------------------
Options written 16,000,000 225,659
- --------------------------------------------------------------------
Options closed (16,000,000) (225,659)
- --------------------------------------------------------------------
Options outstanding at end of year -- $ --
- --------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 4
CAPITAL SHARES
At May 31, 1995, there was an unlimited number of shares of
beneficial interest authorized, divided into three classes, class A,
class B and class M capital stock. Transactions in capital shares
were as follows:
<TABLE><CAPTION>
<S> <C> <C>
YEAR ENDED MAY 31
- --------------------------------------------------------------------
1995
- --------------------------------------------------------------------
CLASS A SHARES AMOUNT
- --------------------------------------------------------------------
Shares sold 5,201,533 $45,927,477
Shares issued in connection with
reinvestment of distributions 995,911 8,827,656
- --------------------------------------------------------------------
6,197,444 54,755,133
- --------------------------------------------------------------------
Shares repurchased (5,929,229) (52,081,162)
- --------------------------------------------------------------------
NET INCREASE 268,215 $2,673,971
- --------------------------------------------------------------------
YEAR ENDED MAY 31
- --------------------------------------------------------------------
1994
- --------------------------------------------------------------------
CLASS A SHARES AMOUNT
- --------------------------------------------------------------------
Shares sold 6,728,726 $64,885,880
Shares issued in connection with
reinvestment of distributions 1,149,973 11,043,802
- --------------------------------------------------------------------
7,878,699 75,929,682
- --------------------------------------------------------------------
Shares repurchased (3,455,423) (32,760,636)
- --------------------------------------------------------------------
NET INCREASE 4,423,276 $43,169,046
- --------------------------------------------------------------------
Year ended May 31
- --------------------------------------------------------------------
1995
- --------------------------------------------------------------------
Class B Shares Amount
- --------------------------------------------------------------------
Shares sold 3,031,023 $26,913,769
Shares issued in connection with
reinvestment of distributions 131,326 1,163,043
- --------------------------------------------------------------------
3,162,349 28,076,812
- --------------------------------------------------------------------
Shares repurchased (535,729) (4,722,431)
- --------------------------------------------------------------------
NET INCREASE 2,626,620 $23,354,381
- --------------------------------------------------------------------
FOR THE PERIOD
JULY 15, 1993
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31
- --------------------------------------------------------------------
1994
- --------------------------------------------------------------------
CLASS B SHARES AMOUNT
- --------------------------------------------------------------------
Shares sold 2,685,178 $25,835,499
Shares issued in connection with
reinvestment of distributions 54,232 515,350
- --------------------------------------------------------------------
2,739,410 26,350,849
- --------------------------------------------------------------------
Shares repurchased (196,505) (1,828,197)
- --------------------------------------------------------------------
NET INCREASE 2,542,905 $24,522,652
- --------------------------------------------------------------------
FOR THE PERIOD
MAY 12, 1995
(COMMENCEMENT OF
OPERATIONS) TO
MAY 31
- --------------------------------------------------------------------
1995
- --------------------------------------------------------------------
CLASS M SHARES AMOUNT
- --------------------------------------------------------------------
Shares sold 2,342 $21,309
Shares issued in connection with
reinvestment of distributions 3 26
- --------------------------------------------------------------------
2,345 21,335
- --------------------------------------------------------------------
Shares repurchased -- --
- --------------------------------------------------------------------
NET INCREASE 2,345 $21,335
- --------------------------------------------------------------------
</TABLE>
<PAGE>
TAX INFORMATION
The fund has designated all dividends paid from net investments
during the fiscal year as exempt-interest dividends, thus 100% of
these distributions are exempt from federal income tax. The Form
1099 you will receive in January 1996 will tell you the tax status
of any distributions paid to your account in calendar 1995.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Triet Nguyen
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
John D. Hughes
Vice President and Treasurer
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam
Massachusetts Tax Exempt Income Fund II. 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. For more information
or to request a prospectus, call toll-free: 1-800-225-1581
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC), THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY, AND INVOLVE RISK, INCLUDING THE POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE>
PUTNAM INVESTMENTS
THE PUTNAM FUNDS
One Post Office Square
Boston, Massachusetts 02109
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
19001-845/236
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN
PRINTED AND
EDGAR-FILED TEXTS.
(1) Rule lines for tables are omitted.
(2) Italic typefaces is displayed in normal type.
(3) Boldface type is displayed in capital letters.
(4) Headers (e.g. the names of the fund) and footers (e.g. page
numbers and OThe accompanying notes are an integral part of
these financial statementsO) are omitted.
(5) Because the printed page breaks are not reflected, certain
tabular and columnar headings and symbols are displayed
differently in this filing.
(6) Bullet points and similar graphic symbols are omitted.
(7) Page numbering is different.
