Putnam
Massachusetts
Tax Exempt
Income
Fund
ANNUAL REPORT
May 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* Morningstar, an independent rating agency, gave Putnam
Massachusetts Tax Exempt Income Fund's class A shares its highest
ranking of 5 stars for overall performance as of 6/30/96 (based on the
fund's average annual returns for the 3- and 5-year periods). Only 10%
of all tax-exempt funds tracked receive 5 stars.*
* Lipper Analytical Services ranked the fund's class A shares 5
out of 49 Massachusetts tax-exempt funds tracked for 1-year performance,
4 of 26 such funds tracked for 3-year performance, and 3 of 20 tracked
for 5-year performance, based on results as of 6/30/96.+
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
13 Portfolio holdings
17 Financial statements
*Morningstar ratings reflect risk-adjusted performance through 6/30/96
and are subject to change every month. Morningstar ratings are
calculated from a fund's 3-, 5-, and 10-year returns (with fee
adjustments) in excess of 90-day Treasury bill returns and a risk factor
that reflects performance below 90-day Treasury bill returns. The 1-year
rating is calculated using the same methodology, but it is not a
component of the overall rating. For 3- and 5-year performance, the fund
received 4 and 5 stars, respectively. There were 924 and 536 municipal
funds rated. For the 1-year period, the fund received 3 stars and was
rated among 1,691 municipal bond funds. 10% of the funds in an investment
category receive 5 stars, and 22.5% receive 4 stars. Performance for
other share classes will vary. Past performance is not indicative of
future results.
+Lipper is an industry research firm whose rankings are based on total
return performance, vary over time, and do not reflect the effects of
sales charges. For the period ended 6/30/96, the fund's class B shares
ranked 14 out of 49 for 1-year performance and class M shares ranked 8
out of 49 funds for 1-year perfornance. These shares were not ranked
over larger periods. Performance of other share classes will vary. Past
performance is not indicative of future results.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
(copyright) Karsh, Ottawa
Dear Shareholder:
One of the fascinating things about market watching is that you can
never tell what's going to trigger a defining event. Often what seems
like a defining event one moment is history the next. Who would have
guessed, for example, that a flat-tax proposal would swirl out of the
presidential primary election campaign to douse the municipal bond
market, only to blow away just as the rest of the bond market was
stumbling on statistics suggesting that inflation might flare up?
These were some of the challenges facing Fund Manager Richard Wyke
during Putnam Massachusetts Tax Exempt Income Fund's fiscal year, which
closed on May 31, 1996. Rick, who has been with Putnam since 1987 and
assumed management of the fund in January 1996, has proved more than
equal to these challenges as results on the following pages reveal.
Besides having the luxury of leaving the day-to-day details to Rick,
shareholders with a long-term investment perspective have the added
advantage of being able to let such events run their course without
undue concern.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Manager
Richard P. Wyke
During the second half of fiscal 1996, the municipal bond market
presented a much sterner face to investors than it had earlier in the
period. Nevertheless, we are pleased to report that despite this year's
challenges, Putnam Massachusetts Tax Exempt Income Fund has been able to
continue its successful performance. Your fund remains firmly stationed
in the top quartile of the 49 Massachusetts tax-exempt funds tracked by
Lipper Analytical Services (see page 2), having delivered a total return
of 4.81% for class A shares at net asset value (-0.17% at public
offering price) for the 12 months ended May 31, 1996. Results for class
B and class M shares, as well as results for longer periods, can be seen
on pages 8 through 10.
The first few months of the fiscal year provided relatively smooth
sailing, occurring during an environment of prevailing low interest
rates. Lingering flat-tax fears have had their effect, however,
dampening performance of municipal bond funds when other sectors of the
fixed-income market were showing signs of recovery. More recently, these
flat-tax concerns have receded further, brightening municipal bond
prospects somewhat even as the fixed-income universe is faltering in
anticipation of higher interest rates. Given our expectations of
increasing volatility, we have begun to take a more aggressive approach
toward preserving the value of the fund's holdings -- chiefly by
adjusting portfolio duration -- while continuing, of course, to pursue
an attractive level of tax-free income.
*DURATION MANAGEMENT: KEY TO DEFENSIVE STRATEGY
In light of the economy's ongoing strength and the potential for higher
interest rates in the months ahead, managing the portfolio's duration
has emerged as probably the most important aspect of our investment
strategy. Duration is a mathematical formula that indicates how
sensitive a portfolio of securities will be to changes in interest
rates. Like maturity, duration is measured in years. Shorter durations
generally go hand in hand with lower levels of volatility, but they may
prevent a fund from realizing full appreciation potential if bonds
rally; longer durations allow a fund to participate more fully in a
rally but may subject the fund to higher levels of interest-rate risk.
As bond prices fall, much of the market begins to price securities based
on eventual redemption at maturity. (Conversely, when bond prices are at
a premium, the market tends to price them based on redemption at the
first call date.) The former has the effect of lengthening a portfolio's
duration. To offset this trend, we moved about 5% of the portfolio out
of longer-term bonds into intermediate-term bonds, those with maturities
from 10 to 15 years. The shift happened to coincide with a steepening of
the yield curve, so the fund was able to benefit on two fronts.
Another change you may notice in the portfolio is a slight increase in
credit quality. This represents the positive aftereffect of several
prerefundings within the portfolio rather than a deliberate
repositioning. In a prerefunding, the issuer floats a new bond to raise
funds to pay off an older, higher-coupon issue. Proceeds for the new
bond are then invested in top-quality securities such as U.S.
Treasuries. Because of the safety of principal represented by these
securities, the older bond is now considered to have a higher credit
rating, generally AAA. This higher rating makes the bonds more
desirable, and the increased demand usually translates into higher
prices. Early this year, the Massachusetts Industrial Finance Agency
prerefunded some $3 million worth of bonds to finance improvements to
the Sumner and Callahan tunnels. Your fund held a large position in
these bonds, and their subsequent credit upgrade increased the
portfolio's overall credit quality.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS*]
Hospitals and health care 36.3%
Education 16.9%
Transportation 12.2%
Water and sewer 11.7%
Waste management 5.1%
Footnote reads:
*Based on net assets as of 5/31/96. Holdings will vary over time.
* HEALTH-CARE SECTOR CHANGES CONTRIBUTE TO PERFORMANCE
Another prerefunding within the portfolio reflects the increasing trend
toward hospital mergers and consolidations. The fund held some bonds
issued to finance improvements at Metro West Hospital in Framingham.
When this hospital recently became affiliated with Columbia Healthcare
Systems, these bonds were also prerefunded.
This phenomenon -- the acquisition of hospitals -- is a common thread we
see throughout the municipal market and has been of particular interest
to us because of your fund's heavy weighting in the health-care sector.
The consolidations in health care are rising because of the advantage a
large consortium has in spreading fixed cost over many participants. As
always, we evaluate hospital bonds on an individual basis, targeting
those facilities with solid market share and good relationships with
doctors and health maintenance organizations. These are the hospitals
more likely to form profitable affiliations, which can lead to increases
in the value of their bonds.
* INCOME-ORIENTED STRATEGIES CONTINUE TO SERVE FUND WELL
Two income-oriented strategies that have contributed to the fund's
successful long-term performance remain a key element of its current
approach. Maintaining a significant part of the portfolio in lower-
rated, higher-yielding securities -- while making use of Putnam's in-
depth credit research to identify what we believe are the soundest
issues -- has been part of the fund's style for several years. In fiscal
1996, it proved especially effective; because these securities had a
lower level of sensitivity to interest-rate changes, they contributed to
the stability of the portfolio.
Inverse floaters, variable-rate bonds whose coupons move in the opposite
direction of short-term interest rates, have also been used effectively
in the portfolio for some time. However, they underperformed slightly in
the latter half of the fiscal year. We attribute this primarily to lower
liquidity levels in the municipal bond market -- a reflection of the
lack of enthusiasm many individual and institutional investors have
recently exhibited for these bonds in the face of flat-tax fears and
potentially higher interest rates. As hybrid, or derivative, securities,
inverse floaters can enhance the fund's income stream during periods of
lower rates but may be more sensitive to liquidity and interest-rate
changes than traditional bonds.
[GRAPHIC OMITTED: pie chart PORTFOLIO QUALITY OVERVIEW 5/31/96]
A 19.2%
Aa 0.9%
Aaa 45.7%
B 0.9%
Ba 16.5%
Baa 15.6%
VMIGI 1.2%
Footnote reads:
*As a percentage of market value as of 5/31/96. A bond rated Baa or
higher is considered investment grade. All ratings reflect Moody's
rating terminology, unless noted otherwise and may include unrated
securities judged by Putnam Management to be of comparable quality.
Ratings will vary over time.
* GUARDED APPROACH PLANNED; PROSPECTS COULD BRIGHTEN THIS
SUMMER
A steadily growing economy presents a challenging environment for fixed-
income investing and clearly requires a more cautious strategy. Careful
attention to bond structure and emphasis on larger, well-known issuers
will play an important role in enhancing the price stability and
liquidity of your fund as it begins fiscal 1997.
Perhaps the brightest spot for municipals in the near term is the
possibility of a significant inflow of cash. The summer months have
historically been friendly to municipal bonds, since cash from interest
payments and bond calls is frequently reinvested in the tax-exempt
market. In June and July, investors are expected to receive over $60
billion from municipal bond calls, maturities, and interest payments.
Should even a portion of this cash re-enter the municipal market, we
suspect prices could react quite positively. Furthermore, new issue
supply over the next few months is not expected to keep pace with this
year's potential demand, creating the opportunity for a favorable
supply/demand imbalance.
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 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance Summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Massachusetts Tax Exempt Income Fund is designed for
investors seeking a high level of current income free from federal and
state income tax consistent with preservation of capital.
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 in the fund.
TOTAL RETURN FOR PERIODS ENDED 5/31/96
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (5/12/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 Year 4.81% 0.17% 4.12% -0.83% 4.37% 0.79%
- ------------------------------------------------------------------------
5 years 46.30 39.40 -- -- -- --
Annual average 7.91 6.87 -- -- -- --
- ------------------------------------------------------------------------
Life of class 67.78 59.87 10.78 7.97 5.96 2.28
Annual average 8.14 7.36 3.62 2.70 5.63 2.15
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/96
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
1 year 4.57% 2.89%
- ------------------------------------------------------------------------
5 years 41.06 15.49
Annual average 7.12 2.92
- ------------------------------------------------------------------------
Life of class A 62.31 24.68
Annual average 7.64 3.39
- ------------------------------------------------------------------------
Life of class B 12.69 8.45
Annual average 4.31 2.86
- ------------------------------------------------------------------------
Life of class M 7.91 3.09
Annual average 7.25 2.92
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions or
for distribution fees prior to implementation of the class A
distribution plan in 1990. Investment returns and principal value will
fluctuate so that an investor's shares, when sold, may be worth more or
less than their original cost. POP assumes 4.75% maximum sales charge
for class A shares and 3.25% for class M shares. CDSC for class B shares
assumes 5% maximum contingent deferred sales charge, declining to 1% in
the sixth year
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (5/12/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------
1 year 6.78% 1.73% 6.22% 1.22% 6.47% 2.88%
- ------------------------------------------------------------------------
5 years 46.96 40.03 -- -- -- --
Annual average 8.00 6.97 -- -- -- --
- ------------------------------------------------------------------------
Life of class 69.16 61.18 11.78 8.95 6.94 3.21
Annual average 8.18 7.40 3.84 2.94 6.06 2.81
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. They do not take into
account any adjustment for taxes payable on reinvested distributions.
Investment returns and principal value will fluctuate so that an
investor's shares, when sold, may be worth more or less than their
original cost.
[GRAPHIC OMITTED: Worm chart GROWTH OF A $10,000 INVESTMENT]
Information in chart reads:
Cumulative total return of a $10,000 investment since 10/23/89
Starting value (Insert ending Total)
$9,525 Fund's class A shares at POP $15,987
$10,000 Lehman Bros. Municipal Bond Index $16,231
$10,000 Consumer Price Index $12,468
(plot points for 10-year total return mountain chart)
Lehman Bros.
Date/year Fund at POP Muni Bond Index CPI
10/23/89 9,525 10,000 10,000
5/31/90 9,926 10,453 10,287
5/31/91 10,929 11,506 10,796
5/31/92 12,236 12,636 11,123
5/31/93 13,803 14,148 11,481
5/31/94 14,067 14,497 11,744
5/31/95 15,255 15,522 12,118
5/31/96 15,987 16,231 12,468
Past performance is no assurance of future results. A $10,000 investment
in the fund's class B shares at inception on 7/15/93 would have been
valued at $11,078 on 5/31/96 ($10,797 with a redemption at the end of
the period). A $10,000 investment in the fund's class M shares at
inception on 5/12/95 would have been valued at $10,596 at net asset
value on 5/31/96 ($10,228 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/96
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------
Income $0.535236 $0.473570 $0.506233
- ------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------
Total $0.535236 $0.473570 $0.506233
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
5/31/95 $9.21 $9.67 $9.20 $9.21 $9.52
- ------------------------------------------------------------------------
5/31/96 9.11 9.56 9.10 9.10 9.41
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate2 5.81% 5.53% 5.15% 5.51% 5.33%
- ------------------------------------------------------------------------
Taxable equivalent3 10.93 10.40 9.69 10.37 10.03
- ------------------------------------------------------------------------
Current 30-day SEC yield4 5.59 5.32 4.93 5.29 5.12
- ------------------------------------------------------------------------
Taxable equivalent3 10.52 10.01 9.28 9.95 9.63
- ------------------------------------------------------------------------
1Capital 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.
2Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3Assumes maximum 46.85% combined federal and state tax rate. Results
for investors subject to lower tax rates would not be as advantageous.
4Based only on investment income, calculated using SEC guidelines.
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 number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 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.
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 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
(the "fund"), formerly Putnam Massachusetts Tax Exempt Income Fund II,
at May 31, 1996, 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 (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 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, 1996 by correspondence with
the custodian and brokers, provide a reasonable basis for the opinion
expressed above.
Price Waterhouse LLP
Boston, Massachusetts
July 9, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31,1996
Key to Abbreviations
AMBAC -AMBAC Indemnity Corporation
CLI Insd. -Connie Lee Insurance Insured
FGIC -Financial Guaranty Insurance Company
FNMA Coll.-Federal National Mortgage Association Collateralized
FSA -Financial Security Assurance
GNMA Coll.-Government National Mortgage Association Collateralized
G.O. Bonds-General Obligation Bonds
IFB -Inverse Floating Rate Bonds
LOC -Letter of Credit
MBIA -Municipal Bond Investors Assurance Corporation
VRDN -Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.3%) *
PRINCIPAL AMOUNT RATINGS ** VALUE
<S> <C> <C> <C> <C>
Massachusetts (89.0%)
- -------------------------------------------------------------------------------------------------------------------------------
$5,500,000 Agawam, Rev. Bonds (Springfield Resource Recvy. Project), 8 1/2s, 12/1/08 BBB $5,737,435
7,000,000 Boston, Indl. Dev. Fin. Auth. Swr. Fac. Rev. Bonds (Harbor Elec. Energy Co.
Project), 7 3/8s, 5/15/15 Baa 7,472,500
2,805,000 Boston, Indl. Dev. Fin. Auth. Indl. Rev. Bonds (Mass. College of Pharmacy),
Ser. A, CLI Insd., 5 1/4s, 10/1/26 AAA 2,450,869
1,295,000 Boston, Nursing Home Rev. Bonds (St. Joseph Nursing Care Ctr. Inc.), 10s, 1/1/20 BB/P 1,422,881
7,935,000 Boston, Wtr. & Swr. Commn. Rev. Bonds, Ser. A, 5 3/4s, 11/1/13 A 7,895,325
5,000,000 City of Quincy, IFB (Quincy Hosp.), FSA, 6.57s, 1/15/11 # AAA 4,500,000
1,675,000 Holyoke, G.O. Bonds, 9.85s, 11/1/08 Aaa 1,840,406
1,040,000 Holyoke, Poll. Control (Holyoke Wtr. Pwr. Project), VRDN, 3 3/4s, 11/1/13 A 1,040,000
Lowell, G.O. Bonds
1,250,000 8.4s, 1/15/09 Aaa 1,421,875
2,455,000 8.3s, 2/15/05 Aaa 2,872,350
MA Bay Trans. Auth. Rev. Bonds
3,550,000 Ser. B, 6.2s, 3/1/16 A 3,714,188
4,000,000 Ser. A, 5 1/2s, 3/1/12 A 3,915,000
7,400,000 (Gen. Trans. Syst.), Ser. B, AMBAC, 5 3/8s, 3/1/25 Aaa 6,743,250
1,000,000 MA College Bldg. Auth. Project Rev. Bonds, Ser. A, 7.8s, 5/1/16 AAA 1,080,000
6,000,000 MA G.O. Bonds, Ser. B, MBIA, 5.4s, 11/1/07 Aaa 6,015,000
MA Cons. Loan G.O. Bonds
1,000,000 Ser. A, 7 5/8s, 6/1/08 Baa 1,142,500
4,400,000 Ser. B, 6 1/2s, 8/1/08 A 4,829,000
1,665,000 Ser. D, FGIC, 5 1/8s, 11/1/10 Aaa 1,592,156
MA Indl. Fin. Agy. Museum Rev. Bonds (Museum of Fine Arts Boston)
1,000,000 MBIA, 5 3/8s, 1/1/07 Aaa 1,006,250
1,000,000 MBIA, 5 3/8s, 1/1/06 Aaa 1,012,500
1,725,000 MBIA, 5 3/8s, 1/1/05 Aaa 1,755,188
MA State Hlth. & Edl. Fac. Auth. IFB
2,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.551s, 8/15/21 Aaa 2,215,000
6,500,000 (Boston U.), Ser. L, MBIA, 9.355s, 10/1/31 Aaa 7,166,250
6,000,000 (Beth Israel Hosp.), AMBAC, 8.37s, 7/1/25 Aaa 5,962,500
7,900,000 (New England Med. Ctr. Hosp.), MBIA, 6.58s, 7/1/18 Aaa 6,596,500
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,000,000 (1st Mtge. Fairview Extended Care), Ser. A, 10 1/4s, 1/1/21 BB/P 2,267,500
2,000,000 (Nichols College), Ser. B, 8 1/2s, 10/1/16 BBB 2,275,000
2,500,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B, 8 3/8s, 7/1/15 Baa 2,671,875
4,250,000 (Suffolk U.), Ser. A, 8 1/8s, 7/1/20 AAA/P 4,829,063
2,150,000 (Valley Regl. Hlth. Syst.), Ser. B, 8s, 7/1/18 Aaa 2,445,625
3,300,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba 3,337,125
3,510,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 BB/P 3,593,363
1,125,000 (Norwood Hosp.), Ser. E, 7 3/4s, 7/1/07 Ba 1,127,813
3,000,000 (Stonehill College), Ser. D, AMBAC, 7.7s, 7/1/20 Aaa 3,386,250
2,220,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba 2,225,550
9,155,000 (Cooley Dickinson Hosp.), Ser. A, 7 1/8s, 11/15/18 AAA/P 10,413,807
1,550,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 A 1,598,438
3,880,000 (Metro West Hlth. Inc.), Ser. C, 6 1/2s, 11/15/18 Aaa 4,301,950
5,000,000 (MA General Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/20 Aaa 5,025,000
2,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 Aaa 2,107,500
4,850,000 (MA General Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/12 Aaa 5,110,688
5,500,000 (Boston College), Ser. K, 5 3/8s, 6/1/14 A 5,204,375
3,475,000 (Boston College), Ser. K, 5 1/4s, 6/1/23 A 3,097,094
1,000,000 (Wheaton College), Ser. C, 5 1/4s, 7/1/19 A 907,500
6,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds (Residential Dev.), FNMA Coll.,
Ser. C, 6.9s, 11/15/21 Aaa 6,337,500
MA State Indl. Fin. Agcy. Resource Recvy. Rev. Bonds
(Southeastern MA Project)
6,500,000 Ser. B, 9 1/4s, 7/1/15 BB/P 7,206,875
3,410,000 Ser. A, 9s, 7/1/15 BB/P 3,768,050
MA State Indl. Fin. Agcy. Rev. Bonds
2,775,000 (1st Mtge. Brookhaven-Lexington), 10 1/4s, 1/1/18 Aaa 3,104,531
2,050,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB/P 2,183,250
6,000,000 (Orchard Cove Inc.), 9s, 5/1/22 BB/P 6,757,500
1,960,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s, 7/1/11 Aaa 2,195,200
2,500,000 (Leominster Hosp.), Ser. A, 8 5/8s, 8/1/09 Aaa 2,840,625
3,600,000 (Cape Cod Hlth. Syst.), 8 1/2s, 11/15/20 Aaa 4,203,000
3,000,000 (1st Mtge. Stone Institution & Newton), 7.9s, 1/1/24 BB/P 3,150,000
3,500,000 (1st Mtge. Evanswood Bethzatha), Ser. A, 7 7/8s, 1/15/20 BB/P 3,478,125
5,140,000 (1st Mtge. Loomis House & Village Projects), 7 5/8s, 7/1/25 BBB 5,313,475
8,105,000 (Merrimack College), 7 1/8s, 7/1/12 BBB 8,500,119
3,000,000 (1st Mtge. Pioneer Valley Living Ctr.), 7s, 10/1/20 B/P 2,902,500
3,500,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB/P 3,548,125
1,165,000 (Clark U.), Ser. E, 7s, 7/1/12 A 1,245,094
2,605,000 (Clark U.), Ser. F, 7s, 7/1/11 A 2,810,144
3,000,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB/P 3,063,750
5,875,000 (American Hingham, Wtr. Treatment), 6 3/4s, 12/1/25 BBB/P 5,904,375
6,000,000 (1st Mtge. Berkshire Retirement Home), Ser. A, 6 5/8s, 7/1/16 BB/P 5,857,500
2,000,000 (1st Mtge. Brookhaven), Ser. B, 6.6s, 1/1/17 BBB/P 2,045,000
1,000,000 (Combined Jewish Philanthropies), Ser. A, AMBAC, 6 3/8s, 2/1/15 Aaa 1,025,000
1,250,000 (Brooks School), 5.95s, 7/1/23 A 1,226,563
1,985,677 (1st Mtge. Pioneer Valley Living Ctr.), zero %, 10/1/20+ B/P 2,482
3,905,000 MA State Indl. Fin. Agcy. Tunnel Rev. Bonds (MA Tpk.), 9s, 10/1/20 AAA/P 4,603,019
2,000,000 MA State VRDN, Ser. B, 3.6s, 12/1/97 A-1 2,000,000
3,000,000 MA State Wtr. Poll. Abatement Rev. Bonds (MWRA Loan Program),
Ser. A, 5s, 8/1/15 Aa 2,673,750
MA State Wtr. Resources Auth. Rev. Bonds
7,500,000 Ser. A, 7s, 4/1/18 Aaa 8,231,250
1,000,000 Ser. A, 6 1/2s, 7/15/19 A 1,080,000
2,900,000 Ser. C, MBIA, 5 1/4s, 12/1/15 Aaa 2,675,250
2,500,000 Ser. B, AMBAC, 5s, 3/1/22 Aaa 2,140,625
3,000,000 Ser. B, MBIA, 4 3/4s, 12/1/21 Aaa 2,471,250
Somerville, Hsg. Auth. Rev. Bonds (Clarendon-Hill Mtge.)
2,000,000 GNMA Coll., 7.95s, 11/20/30 AAA 2,130,000
1,500,000 GNMA Coll., 7.85s, 11/20/10 AAA 1,601,250
South Essex, Swr. Dist., G.O. Bond, Ser. A
1,000,000 MBIA, 5 1/8s, 6/15/10 Aaa 955,000
1,925,000 MBIA, 5 1/8s, 6/15/09 Aaa 1,843,188
1,500,000 MBIA, 5s, 6/15/08 Aaa 1,428,750
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 3,371,250
1,350,000 6.4s, 9/15/10 (Shawmut Bank (LOC)) A/P 1,371,938
Worcester, Rev. Bonds (St. Francis Home)
2,000,000 9 3/4s, 7/1/19 BB/P 2,043,320
1,000,000 9.4s, 7/1/08 BB/P 1,011,040
1,755,000 Worcester, City Muni. Purpose G.O. Bonds, Ser. G, MBIA, 5.3s, 7/1/15 Aaa 1,590,469
------------
290,938,571
Puerto Rico (9.3%)
- -------------------------------------------------------------------------------------------------------------------------------
2,000,000 Cmnwlth. of PR (Govt. Dev. Bk.), VRDN, 3.25, 12/1/15 (Credit Suisse (LOC)) A-1 2,000,000
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
4,500,000 Ser. Y, 5 1/2s, 7/1/18 A 4,179,375
5,000,000 Ser. W, 5 1/2s, 7/1/15 A 4,756,250
2,100,000 Ser. X, 5s, 7/1/22 A 1,785,000
PR, Elec. Pwr. Auth. Rev. Bonds, Ser. Z
5,200,000 5 1/2s, 7/1/16 A 4,881,500
5,000,000 5 1/4s, 7/1/21 A 4,437,500
2,600,000 PR, Indl. Med. & Env. Poll. Control Fac. Fin. Auth. Rev. Bonds
(Special Facilities-American Airlines, Inc.) Ser. A, 8 3/4s, 12/1/25 # Baa 2,687,984
1,000,000 PR, Pub. Bldgs. Auth. Gtd. Rev. Bonds, Ser. K, 6 7/8s, 7/1/21 Aaa 1,118,750
4,975,000 U. of PR, Rev. Bonds, Ser. M, MBIA, 5 1/4s, 6/1/25 Aaa 4,533,469
------------
30,379,828
- -------------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $312,230,933) *** $321,318,399
- -------------------------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $326,761,482.
** The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
May 31,1996 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, 1996. 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 on a tax basis is $312,231,040, resulting in gross unrealized appreciation and
depreciation of $14,209,330 and $5,121,971, respectively, or net unrealized appreciation of $9,087,359.
+ Non-income-producing security.
# A portion of these securities were pledged to cover margin requirements for futures contracts at May 31,1996. The
market value of securities segregated with the custodian for transactions on futures contracts is $3,614,984 or 1.1% of
net assets.
The rates shown on IFB's, which are securities paying interest rates that vary inversely to changes in the market interest
rates, and VRDN's are the current interest rates at May 31, 1996, which are subject to change based on the terms
of the security.
The fund had the following industry group concentrations greater than 10% of net assets at May 31, 1996:
Hospitals/Health Care 36.3%
Education 16.9
Transportation 12.2
Water & Sewer 11.7
The fund had the following insurance concentrations greater than 10% of net assets at May 31, 1996:
MBIA 12.5%
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31,1996
Unrealized
Aggregate Face Expiration Appreciation/
Total Value Value Date (Depreciation)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond Futures (Long) $8,645,000 $8,799,706 Jun 96 $(154,706)
U.S. Treasury Bond Futures (Short) 17,420,063 17,456,875 Sep 96 36,812
---------
$(117,894)
- -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1996
<S> <C>
Assets
- ----------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $312,230,933) (Note 1) $321,318,399
- ----------------------------------------------------------------------------------------------------------------
Cash 309,108
- ----------------------------------------------------------------------------------------------------------------
Interest receivable 6,385,073
- ----------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 527,727
- ----------------------------------------------------------------------------------------------------------------
Total assets 328,540,307
Liabilities
- ----------------------------------------------------------------------------------------------------------------
Payable for variation margin 40,688
- ----------------------------------------------------------------------------------------------------------------
Distributions payable to shareholders 815,175
- ----------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 265,972
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 461,228
- ----------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 191
- ----------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,321
- ----------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 134,463
- ----------------------------------------------------------------------------------------------------------------
Other accrued expenses 59,787
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 1,778,825
- ----------------------------------------------------------------------------------------------------------------
Net assets $326,761,482
Represented by
- ----------------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $325,212,746
- ----------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 93,750
- ----------------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (7,514,586)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 8,969,572
- ----------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $326,761,482
Computation of net asset value and offering price
- ----------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares ($259,934,080 divided by 28,531,442 shares) $9.11
- ----------------------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.11)* $9.56
- ----------------------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares ($65,537,645 divided by 7,199,958 shares)+ $9.10
- ----------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares ($1,289,757 divided by 141,683 shares) $9.10
- ----------------------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.10)** $9.41
- ----------------------------------------------------------------------------------------------------------------
* On single retail sales of less than $25,000. On sales of $25,000 or more and on group
sales the offering price is reduced.
** On single retail sales of less than $50,000. On sales of $50,000 or more and on group
sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable contingent
deferred sales charge.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31, 1996
<S> <C>
Tax exempt interest income $20,853,311
- ---------------------------------------------------------------------------------------------------------
Expenses:
- ---------------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,885,492
- ---------------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 350,820
- ---------------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,534
- ---------------------------------------------------------------------------------------------------------
Administrative services (Note 2) 8,170
- ---------------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 515,338
- ---------------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 479,943
- ---------------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 2,855
- ---------------------------------------------------------------------------------------------------------
Reports to shareholders 21,629
- ---------------------------------------------------------------------------------------------------------
Registration fees 15,568
- ---------------------------------------------------------------------------------------------------------
Auditing 30,678
- ---------------------------------------------------------------------------------------------------------
Legal 11,925
- ---------------------------------------------------------------------------------------------------------
Postage 25,005
- ---------------------------------------------------------------------------------------------------------
Other 5,202
- ---------------------------------------------------------------------------------------------------------
Total expenses 3,365,159
- ---------------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (358,214)
- ---------------------------------------------------------------------------------------------------------
Net expenses 3,006,945
- ---------------------------------------------------------------------------------------------------------
Net investment income 17,846,366
- ---------------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,013,672
- ---------------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Notes 1 and 3) (1,139,872)
- ---------------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures contracts during the year (4,662,141)
- ---------------------------------------------------------------------------------------------------------
Net loss on investments (3,788,341)
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $14,058,025
- ---------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
----------------------------
1996 1995
----------------------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Increase in net assets
- --------------------------------------------------------------------------------------------------
Operations:
- --------------------------------------------------------------------------------------------------
Net investment income $17,846,366 $16,618,595
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 873,800 (7,682,592)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (4,662,141) 13,419,888
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 14,058,025 22,355,891
- --------------------------------------------------------------------------------------------------
Distributions to shareholders
- --------------------------------------------------------------------------------------------------
From net investment income:
- --------------------------------------------------------------------------------------------------
Class A (14,858,958) (14,766,465)
- --------------------------------------------------------------------------------------------------
Class B (2,875,759) (1,834,523)
- --------------------------------------------------------------------------------------------------
Class M (32,748) (73)
- --------------------------------------------------------------------------------------------------
In excess of realized gain on investments:
- --------------------------------------------------------------------------------------------------
Class A -- (449,070)
- --------------------------------------------------------------------------------------------------
Class B -- (65,122)
- --------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 31,644,533 26,049,687
- --------------------------------------------------------------------------------------------------
Total increase in net assets 27,935,093 31,290,325
- --------------------------------------------------------------------------------------------------
Net assets
- --------------------------------------------------------------------------------------------------
Beginning of year 298,826,389 267,536,064
- --------------------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $93,750 and distributions in excess of net investment
income of $98,234, respectively). $326,761,482 $298,826,389
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the period For the period
May 12, 1995 July 15, 1993
(commencement (commencement
Year ended of operations) of operations)
May 31 to May 31 Year ended May 31 to May 31
--------------------------------------------------------------------------
1996 1995 1996 1995 1994
--------------------------------------------------------------------------
Class M Class B
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.21 $9.10 $9.20 $9.05 $9.71
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income .51 .02 (c) .48 .49 .41
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (.11) .12 (.11) .17 (.51)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations .40 .14 .37 .66 (.10)
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net investment income (.51) (.03) (.47) (.49) (.41)
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- -- -- (.15)
- ---------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain -- -- -- (.02) --
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions (.51) (.03) (.47) (.51) (.56)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.10 $9.21 $9.10 $9.20 $9.05
- ---------------------------------------------------------------------------------------------------------------------------
Total investment return at net asset value (%)(a) 4.37 1.53 (d) 4.12 7.64 (1.15)(d)
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $1,290 $22 $65,538 $47,573 $23,017
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%) (b) 1.24 .06 (d) 1.60 1.53 1.41 (d)
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%) 5.58 .30 (d) 5.13 5.46 4.32 (d)
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.57 47.53 34.57 47.53 36.20
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial highlights (Continued)
(For a share outstanding throughout the period)
Year ended May 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------
Class A
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $9.21 $9.05 $9.55 $9.02 $8.70
- ---------------------------------------------------------------------------------------------------------------------
Investment operations
- ---------------------------------------------------------------------------------------------------------------------
Net investment income .54 .55 .55 .59 .61 (e)
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (.10) .18 (.35) .54 .39
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations .44 .73 .20 1.13 1.00
- ---------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------
From net investment income (.54) (.55) (.55) (.59) (.61)
- ---------------------------------------------------------------------------------------------------------------------
From net realized gain on investments -- -- (.15) (.01) (.07)
- ---------------------------------------------------------------------------------------------------------------------
In excess of net realized gain -- (.02) -- -- --
Total distributions (.54) (.57) (.70) (.60) (.68)
- ---------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.11 $9.21 $9.05 $9.55 $9.02
- ---------------------------------------------------------------------------------------------------------------------
Total investment return at net asset
value (%)(a) 4.81 8.45 1.92 12.80 11.96
- ---------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) $259,934 $251,232 $244,519 $215,611 $149,011
- ---------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (b) .95 .89 .96 .97 .88 (e)
- ---------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average
net assets (%) 5.80 6.11 5.69 6.24 6.82 (e)
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 34.57 47.53 36.20 53.18 94.95 (f)
- ---------------------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment and does
not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31,
1996 includes amounts paid through expense offset arrangements.
Prior period ratios exclude these amounts. (See Note 2)
(c) Per share net investment income has been determined on the basis of
of the weighted average number of shares outstanding during the
period.
(d) Not annualized.
(e) Reflects an expense limitation in effect during the period. As a result
of such limitation, expenses for the year ended May 31, 1992
reflect a per share reduction of $0.01.
(f) Portfolio turnover excludes the impact of assets received by the fund,
then known as Putnam Massachusetts Tax Exempt Income Fund II,
from the acquisition of Putnam Massachusetts Tax Exempt Income Fund.
</TABLE>
Notes to financial statements
May 31, 1996
Note 1
Significant accounting policies
Putnam Massachusetts Tax Exempt Income Fund, formerly Putnam
Massachusetts Tax Exempt Income Fund II (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 Managment"), 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. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares,
which convert to class A shares after approximately eight years, do not
pay a front-end sales charge, but pay a higher ongoing distribution fee
than class A shares, and are subject to a contingent deferred sales
charge, if those shares are redeemed within six years of purchase. Class
M shares are sold with a maximum front-end sales charge of 3.25% and pay
an ongoing distribution fee that is 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 preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
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. Short-
term tax-exempt investments having remaining maturities of 60 days or
less are stated at amortized cost.
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.
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.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. Exchange traded options
are valued at the last sale price, or if no sales are reported, the last
bid price for purchased options and the last ask price for written
options. Options traded over-the-counter are valued using prices
supplied by dealers.
D) 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 on securities held and for excise tax on income and capital
gains. At May 31, 1996, the fund had a capital loss carryover of
aproximately $6,327,000 available to offset future capital gains, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------- --------------
$3,880,000 May 31, 2003
2,447,000 May 31, 2004
E) Distributions to shareholders Income dividends are recorded daily by
the fund and are distributed monthly. Capital gain distributions if any,
are recorded on the ex-dividend date and paid at least annually. The
amount and character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ
from generally accepted accounting principles.
These differences include treatment of original issue discount, market
discount and realized and unrealized gains and losses on certain futures
contracts. 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, 1996, the fund reclassified $113,083 to increase
undistributed net investment income and $72,818 to decrease paid
in-capital, with an increase to accumulated net realized loss of
$40,265. The calculation of net investment income per share in the
financial highlights table excludes these adjustments.
F) 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. Discounts on zero coupon bonds and original
issue discount bonds are accreted according to the effective yield
method.
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: 0.60% of the
first $500 million of average net assets, 0.50% of the next $500
million, 0.45% of the next $500 million, and 0.40% of any amount over
$1.5 billion, subject, under current law, to reduction in any year by
the amount of certain brokerage commissions and fees (less expenses)
received by affiliates of Putnam Management on the fund's portfolio
transactions.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The 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 wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended May 31, 1996, fund expenses were reduced by $358,214
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $770 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "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 Plan.
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 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. 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, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $82,951 and $865 from the sale
of class A and class M shares, respectively and $165,517 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended May 31, 1996, Putnam Mutual Funds Corp.,
acting as underwriter received $1,562 on class A redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $161,471,309 and
$128,766,426, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At May 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 7,159,447 $66,222,517
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 903,123 8,342,312
- ----------------------------------------------------
8,062,570 74,564,829
Shares
repurchased (6,805,725) (63,049,343)
- ----------------------------------------------------
Net increase 1,256,845 $11,515,486
- ----------------------------------------------------
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, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 3,039,068 $28,149,353
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 187,468 1,731,060
- ----------------------------------------------------
3,226,536 29,880,413
Shares
repurchased (1,196,103) (11,056,843)
- ----------------------------------------------------
Net increase 2,030,433 $18,823,570
- ----------------------------------------------------
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
- ----------------------------------------------------
Year ended
May 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 145,572 $1,362,998
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,806 16,751
- ----------------------------------------------------
147,378 1,379,749
Shares
repurchased (8,040) (74,272)
- ----------------------------------------------------
Net increase 139,338 $1,305,477
- ----------------------------------------------------
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
- ----------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.81% 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 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
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
Ronald J. Jackson
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
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Gary N. Coburn
Vice President
James E. Erickson
Vice President
Richard P. Wyke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
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. For more information, or to request a prospectus,
call toll free: 1-800-225-1581.
Shares of mutual funds are not deposits or obligations 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
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
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Bulk Rate
U.S. Postage
PAID
Putnam
Investments
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25862-845/236/258 7/96
