Putnam
Massachusetts
Tax Exempt
Income
Fund
ANNUAL REPORT
May 31, 1998
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "With the advent of a consolidated health-care industry beginning
to constrain investment opportunities in that sector, we have redeployed
assets into the education sector and focused on two unique 'natural' AAA
investments: bonds issued by Harvard University and MIT."
-- Leslie J. Burke, manager
Putnam Massachusetts Tax-Exempt Income Trust
* Putnam Massachusetts Tax Exempt Income Fund's class A shares ranked among
the top 20% of all Massachusetts municipal bond funds tracked by Lipper
Analytical Services for both the 3 and 5-year periods ended June 30, 1998,
finishing 8 of the 51 funds tracked for 3 years and 4 of the 26 funds
tracked for 5 years.*
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
14 Portfolio holdings
18 Financial statements
* Past performance is not indicative of future results. Lipper rankings are
based on total return performance, vary over time, and do not reflect the
effects of sales charges. The fund's class A shares ranked 33 of 56 for
1-year performance. Class B shares ranked 47 of 56 for 1-year performance
and 28 of 51 for 3-year performance. Class M shares ranked 38 of 56 for
1-year performance and 20 of 51 for 3-year performance.
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Analyzing risk premiums, yield spreads, call dates, yield curves, credit
ratings, supply-and-demand dynamics, taxable versus tax-exempt yield
relationships, and a host of other factors is all in a day's work for Putnam's
Tax-Exempt Bond Group. The result was another period of competitive
performance for Putnam Massachusetts Tax Exempt Income Fund's fiscal year that
closed on May 31, 1998.
Using her own knowledge of the Massachusetts tax-exempt bond environment and
backed by Putnam's extensive credit analysis capability, Fund Manager Leslie
Burke made the strategic and tactical decisions that provided these positive
results. In the following report, Leslie discusses the fund's performance
during fiscal 1998 and then takes a look at prospects for the tax-exempt
market, especially with regard to Massachusetts, in the months ahead.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 15, 1998
Report from the Fund Manager
Leslie J. Burke
The robust Massachusetts' economy and continued improvements in the
Commonwealth's credit rating contributed to strong returns for Putnam
Massachusetts Tax Exempt Income Fund this year, along with a healthy supply of
desirable state and institutional bond issues and a successful hedging
strategy. For the year ended May 31, 1998, your fund's class A shares returned
8.86% at net asset value (3.74% at public offering price). For complete
performance information, including results for class B and class M shares,
please see page 9.
*MASSACHUSETTS CREDIT RATING CONTINUES TO CLIMB
Although the market has held its trading range since the beginning of 1998 and
the inflow of investment funds from overseas has remained steady, we believe
some shift is likely as we enter the third quarter of 1998. Because the
market's direction is still uncertain, no clear investment theme has emerged,
and we are maintaining a slightly defensive, duration-neutral stance.
Meanwhile, along with that of the rest of the United States, the Massachusetts
economy continues to thrive. Following credit upgrades in October and November
1997, Standard and Poor's raised the Commonwealth's credit rating a third
time, in January 1998, to AA from AA-. The rating on Massachusetts debt had
sunk as low as BBB in 1989 as a result of overspending followed by a severe
economic recession.
With the general perception that the Commonwealth is in excellent overall
fiscal condition, retail demand for its bonds remains vigorous. Strong wealth
indicators, an educated work force, and a 12% unearned income tax rate all
contribute to the desirability of Massachusetts debt over that of many other
states. We took advantage of this situation by selling a portion of the fund's
position in Massachusetts general obligation bonds, which had appreciated to
the point that we considered them fully valued. Profits from this sale were
reinvested in several attractive education issues.
* EDUCATION BONDS: THE NATURAL CHOICE
The most significant change in your fund's portfolio over the past year has
been increased focus on education issues. Although education issues don't
straddle the credit spectrum to the same extent as health-care bonds, the
education sector currently offers more compelling investment opportunities. We
have recently purchased Wentworth Institute of Technology debt as well as that
of Groton School, which because of its reputation, trades higher than
comparable AA issues. We also own some debt of smaller schools at the other
end of the credit spectrum; these are lower-rated bonds whose purchase was
prompted by their attractive yields and coupons.
The stars of the education portion of your fund's portfolio are Harvard
University and Massachusetts Institute of Technology (MIT) bonds, which both
carry natural AAA ratings. This sets them apart from the majority of AAA-rated
bonds, which typically owe their high ratings to insurance designed to offset
whatever degree of risk is inherent in that particular issue. A natural AAA
bond achieves its rating based solely upon the intrinsic credit rating and
reputation of the issuer and requires no enhancement from insurance companies
to ensure credit or reduce risk. In the case of Harvard and MIT, their vast
endowments, together with their worldwide reputations, guarantee their credit
safety. As a consequence, they tend to trade higher than typical insured AAAs.
[GRAPHIC OMITTED: horizontal bar chart of TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/health care 28.2%
Transportation 15.6%
Education 13.0%
Water and sewerage 9.5%
Housing 4.5%
Footnote reads:
* Based on net assets as of 5/31/98. Holdings will vary over time.
In addition to their other advantages, these Harvard and MIT bonds are
noncallable. Callable bonds have the option of being called away by the issuer
at a certain future date, usually if interest rates are lower than when the
bonds are first issued. To provide the fund with an attractive and durable
level of income, we have sought to reduce its exposure to callable bonds;
adding noncallable bonds -- especially bonds as attractive as these -- makes a
valuable contribution to our risk-management efforts.
* TRANSPORTATION ISSUES ON THE MOVE
When bond market prices fall in the Commonwealth, the Massachusetts Turnpike
issue tends to be among the least expensive because the supply is so
plentiful. Thus, while Massachusetts bonds have traded higher and higher as
the state's credit rating has improved, Massachusetts Turnpike issues have
remained relatively inexpensive, trading as high as 91% of the yield of
comparable Treasuries. We continued to increase the fund's investment in these
bonds as opportunities arose.
We have also been active in Puerto Rico, which conducted an aggressive issuing
program between October 1997 and the first week of May 1998. Island
authorities are using this new debt to finance an Electric Power Authority
update, as well as to build the island's first public transportation system --
a $1.4 billion project. Many of the architects and engineers driving Puerto
Rico's transportation project have also been involved in the Massachusetts Big
Dig project, and some of its administrators are veterans of the administration
of former Massachusetts Governor Michael Dukakis. In addition to their tax
advantages, many of the Puerto Rican bonds are also noncallable.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Massachusetts State Turnpike Authority revenue bonds
Series A, MBIA, 5s, 1/1/37
Massachusetts State Water Resources Authority revenue bonds
Series A, 6 1/2s, 7/15/19
Massachusetts State Health and Educational Facilities Authority
revenue bonds (Mass. General Hospital), Series F, AMBAC, 6 1/4s, 7/1/12
Massachusetts State Health and Educational Facilities Authority
revenue bonds (Rev. Cooley Dickinson Hospital), 7 1/8s, 11/15/18
Puerto Rico Electric Power Authority revenue bonds
MBIA, 5s, 7/1/28
Massachusetts State Health and Educational Facilities Authority
IFB (Boston U.) Series L, MBIA, 8.268s, 10/1/31
Boston, Water and Sewer Commission revenue bonds
Series A, 5 3/4s, 11/1/13
Massachusetts State Industrial Financing Agency revenue bonds
(Merrimack College) 7 1/8s, 7/1/12
Massachusetts State Health and Educational Facilities Authority
revenue bonds (MIT) Series I-1, 5.2s, 1/1/28
Massachusetts Bay Transit Authority revenue bonds (General
Transit Systems) Series B, 5.9s, 6/1/24
Footnote reads:
These holdings represent 26.1% of the fund's net assets as of 5/31/98.
Portfolio holdings will vary over time.
* MUNICIPAL BONDS REMAIN ATTRACTIVE, LONGER-TERM OUTLOOK REMAINS CAUTIOUS
As measured by their ratio to Treasuries, municipal bonds as a class have been
relatively cheap for much of this year, making them attractive investments.
Long-term municipal bonds are currently trading at about 90% of the yield of
comparable Treasuries, up from 87% at the end of 1997. When compared with the
standard historical ratio of approximately 84%, this is obviously a buying
opportunity. The fund is currently fully invested in the municipal bond
market, using Treasury futures to scale back duration to neutral as a hedge
against future volatility. We believe that municipal bond yields will fall
back to 86% to 87% of Treasuries in the not-too-distant future. This belief
reflects two facts: first, June 1 and July 1 are significant coupon payment
dates for bond issuers; and second, bond supply generally dwindles during the
summer months. Thus, bondholders seeking to reinvest their June and July
payments could prompt an increase in demand at a time when supply is low --
driving prices higher and yields correspondingly lower.
The Massachusetts municipal bond market looks quite healthy as it moves into
the traditionally slow summer season. With both the nation's and Massachusetts
economies strong, employment growth continuing, and interest rates stable, the
demand for municipal bonds is expected to remain robust. However, these
favorable conditions may eventually give way to slightly higher inflation, so
we remain cautious in our outlook as we enter fiscal 1999. In our opinion,
this is not a good time to expose the portfolio to bonds with longer
maturities and higher interest-rate risk. We believe that a cautious strategy
emphasizing intermediate maturities, low call risk, and in-depth credit
research will produce the best returns in the months ahead.
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 5/31/98, there is no guarantee the fund will continue to hold
these securities in the future.
Performance summary
This section provides information about your fund's performance,
which should always be considered in light of its investment
strategy. Putnam Massachusetts Tax Exempt Income Fund is designed
for investors seeking a high level of current income free from
federal and state income tax consistent with preservation of
capital.
TOTAL RETURN FOR PERIODS ENDED 5/31/98
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 8.86% 3.74% 8.27% 3.27% 8.55% 5.05%
- ------------------------------------------------------------------------
5 years 36.07 29.56 31.29 29.29 33.80 29.48
Annual average 6.35 5.32 5.60 5.27 6.00 5.30
- ------------------------------------------------------------------------
Life of fund 97.12 87.82 84.74 84.74 90.73 84.58
Annual average 8.21 7.60 7.40 7.40 7.80 7.39
- ------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/98
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------
1 year 9.39% 1.69%
- ------------------------------------------------------------------------
5 years 38.53 12.90
Annual average 6.74 12.46
- -----------------------------------------------------------------------
Life of fund 96.00 29.62
Annual average 8.16 3.07
- ------------------------------------------------------------------------
Past performance is no assurance of future results. Returns for
class A and class M shares reflect the current maximum initial
sales charges of 4.75% and 3.25%, respectively. Class B share
returns for the 1-, 5-, and 10-year (where available) and
life-of-fund periods reflect the applicable contingent deferred
sales charge (CDSC), which is 5% in the first year, declines to 1%
in the sixth year, and is eliminated thereafter. Returns shown for
class B and class M shares for periods prior to their inception are
derived from the historical performance of class A shares, adjusted
to reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M
shares, the higher operating expenses applicable to such shares.
All returns assume reinvestment of distributions at NAV. Investment
return and principal value will fluctuate so that an investor's
share when redeemed may be worth more or less than their original
cost.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of
a $10,000 investment since
10/23/89
Plot Points
Lehman Bros. Consumer Fund's Class A
Municipal Bond Price Shares
Date Index Index at POP
10/31/89 10,000 10,000 9,529
5/31/90 10,453 10,287 9,926
5/31/91 11,507 10,796 10,929
5/31/92 12,673 11,122 12,236
5/31/93 14,149 11,480 13,803
5/31/94 14,499 11,743 14,067
5/31/95 15,824 12,118 15,255
5/31/96 16,547 12,468 15,989
5/31/97 17,919 12,746 17,294
5/31/98 19,600 12,962 18,782
Past performance is no assurance of future results. At the end of the same
time period, a $10,000 investment in the fund's class B shares would have been
valued at $18,474 and no contingent deferred sales charges would apply; a
$10,000 investment in the fund's class M shares would have been valued at
$19,073 ($18,458 at public offering price). See first page of performance
section for performance calculation method.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/98
Class A Class B Class M
- ------------------------------------------------------------------------
Distributions (number) 12 12 12
- ------------------------------------------------------------------------
Income $0.509579 $0.446533 $0.480988
- ------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------
Total $0.509579 $0.446533 $0.480988
- ------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------
5/31/97 $9.31 $9.77 $9.30 $9.31 $9.62
- ------------------------------------------------------------------------
5/31/98 9.61 10.09 9.61 9.61 9.93
- ------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------
Current dividend rate2 5.26% 5.01% 4.61% 4.96% 4.80%
- ------------------------------------------------------------------------
Taxable equivalent3 9.90 9.43 8.67 9.33 9.03
- ------------------------------------------------------------------------
Current 30-day
SEC yield4 4.80 4.57 4.14 4.50 4.36
- ------------------------------------------------------------------------
Taxable equivalent3 9.03 8.60 7.79 8.47 8.20
- ------------------------------------------------------------------------
1Capital gains, if any, are taxable for federal and, in most
cases, state tax purposes. For some investors, investment income
may also be subject to the federal alternative minimum tax.
Investment income may be subject to state and local taxes.
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.
TOTAL RETURN FOR PERIODS ENDED 6/30/98
(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 7.88% 2.74% 7.19% 2.19% 7.57% 4.12%
- ------------------------------------------------------------------------
5 years 34.19 27.84 29.40 27.42 31.77 27.46
Annual average 6.06 5.03 5.29 4.97 5.67 4.97
- ------------------------------------------------------------------------
Life of fund 97.79 88.46 85.07 85.07 91.13 84.97
Annual average 8.17 7.57 7.35 7.35 7.75 7.34
- ------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment
returns and principal value will fluctuate so that an investor's
shares, when sold, may be worth more or less than their original
cost. See first page of performance section for performance
calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over
time, assuming you held the shares through the entire period and
reinvested all distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1
fee than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus
any liabilities, divided by the number of outstanding shares, not
including any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share
plus the maximum sales charge levied at the time of purchase. POP
performance figures shown here assume the 4.75% maximum sales
charge for class A shares and 3.25% for class M shares.
Contingent deferred sales charge (CDSC) is a charge applied at the
time of the redemption of class B shares and assumes redemption at
the end of the period. Your fund's CDSC declines from a 5% maximum
during the first year to 1% during the sixth year. After the sixth
year, the CDSC no longer applies.
COMPARATIVE BENCHMARKS
Lehman Brothers Municipal Bond Index is an 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. It is not possible to invest directly in an
index.
Consumer Price Index (CPI) is a commonly used measure of inflation;
it does not represent an investment return.
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") at May
31, 1998, 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, 1998
by correspondence with the custodian and the application of alternative
auditing procedures where investments purchased were not yet received by the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 15, 1998
Portfolio of investments owned
May 31, 1998
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
FNMA Coll. -- Federal National Mortgage Association Collateralized
FRB -- Floating Rate Bonds
FSA -- Financial Security Assurance
GNMA Coll. -- Government National Mortgage Association Collateralized
G.O. Bonds -- General Obligation Bonds
IFB -- Inverse Floating Rate Bonds
MBIA -- Municipal Bond Investors Assurance Corporation
VRDN -- Variable Rate Demand Notes
<TABLE>
<CAPTION>
MUNICIPAL BONDS AND NOTES (98.9%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
Massachusetts (87.2%)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
$ 5,220,000 Agawam, Res. Recvy. Rev. Bonds (Springfield
Res. Recvy.), 8 1/2s, 12/1/08 BBB- $ 5,368,352
7,000,000 Boston, Indl. Dev. Fin. Auth. Swr. Fac. Rev. Bonds
(Harbor Elec. Energy Co.), 7 3/8s, 5/15/15 BB-/P 7,586,250
1,270,000 Boston, Nursing Home Rev. Bonds (St. Joseph
Nursing Care Ctr. Inc.), 10s, 1/1/20 Baa1 1,376,363
7,935,000 Boston, Wtr. & Swr. Commn. Rev. Bonds,
Ser. A, 5 3/4s, 11/1/13 A1 8,678,906
5,000,000 City of Quincy, IFB (Quincy Hosp.), FSA,
6.42s, 1/15/11 Aaa 5,331,250
Lowell G.O. Bonds
1,250,000 8.4s, 1/15/09 Baa1 1,406,250
2,455,000 8.3s, 2/15/05 Aaa 2,789,494
MA Bay Trans. Auth. Rev. Bonds
3,550,000 Ser. B, 6.2s, 3/1/16 AA3 4,073,625
4,800,000 Ser. C, 6.1s, 3/1/23 AA3 5,202,000
7,500,000 (Gen. Trans. Syst.), Ser. B, 5.9s, 6/1/24 AA3 8,240,625
4,000,000 Ser. A, 5 1/2s, 3/1/12 AA3 4,300,000
5,000,000 (Gen. Trans. Syst.), Ser. C, 5s, 3/1/24 AA3 4,881,250
1,000,000 MA State Cons. Loan G.O. Bonds, Ser. A,
7 5/8s, 6/1/08 AAA 1,118,750
MA State G.O. Bonds
5,075,000 AMBAC, 8.85s, 11/1/14 AAA/P 6,889,313
5,000,000 Ser. B, AMBAC, 6 1/4s, 7/1/20 Aaa 5,418,750
3,870,000 Ser. A, 6s, 11/1/11 (SEG) Aa3 4,387,613
MA State Hlth. & Edl. Fac. Auth. IFB
2,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.284s, 8/15/21 Aaa 2,355,000
7,500,000 (Boston U.), Ser. L, MBIA, 8.268s, 10/1/31 Aaa 8,859,375
6,000,000 (Beth Israel-Deaconess Hosp.), AMBAC,
9.289s, 7/1/25 Aaa 6,795,000
7,900,000 (New England Medical Ctr.), MBIA, 6.480s,
7/1/18 Aaa 8,186,375
MA State Hlth. & Edl. Fac. Auth. Rev. Bonds
2,000,000 (1st Mtge. Fairview Extended Care), Ser. A,
10 1/4s, 1/1/21 AAA/P 2,352,500
5,465,000 (Goddard Memorial Hosp.), Ser. B, 9s, 7/1/15 Baa3 6,052,481
2,000,000 (Nichols College), Ser. B, 8 1/2s, 10/1/16 BBB- 2,255,000
2,500,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 Baa3 2,762,500
4,250,000 (Suffolk U.), Ser. A, 8 1/8s, 7/1/20 Baa2 4,659,063
2,150,000 (Valley Regl. Hlth. Syst.), Ser. B, 8s, 7/1/18 Aaa 2,362,313
3,300,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba2 3,372,303
6,010,000 (Rehab. Hosp. Cape & Islands), Ser. A,
7 7/8s, 8/15/24 BB/P 6,753,738
3,000,000 (Stonehill College), Ser. D, AMBAC,
7.7s, 7/1/20 Aaa 3,277,500
2,220,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Baa3 2,361,525
8,805,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s,
11/15/18 AAA/P 10,092,731
1,900,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s,
11/15/22 AAA 2,158,875
1,550,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 Aaa 1,726,313
3,880,000 (Metro West Hlth. Inc.), Ser. C, 6 1/2s, 11/15/18 Aaa 4,321,350
5,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 Aaa 5,918,750
9,850,000 (MA Gen. Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/12 Aaa 11,179,750
7,250,000 (Newton-Wellesley Hosp.), Ser. E, MBIA,
6s, 7/1/25 Aaa 7,739,375
3,000,000 (Jordan Hosp.), Ser. D, 5 3/8s, 10/1/28 BBB+ 2,943,750
4,250,000 (Boston College), Ser. K, 5 3/8s, 6/1/14 A1 4,425,313
8,000,000 (MA Inst. of Tech.), Ser. I-1, 5.2s, 1/1/28 Aaa 8,330,000
MA State Hsg. Fin. Agcy. Rev. Bonds (Residential
Dev.), FNMA Coll.
6,000,000 Ser. C, 6.9s, 11/15/21 Aaa 6,375,000
2,000,000 Ser. E, 6 1/4s, 11/15/12 Aaa 2,162,500
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
6,500,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 7,369,375
3,410,000 Ser. A, 9s, 7/1/15 BB-/P 3,853,300
MA State Indl. Fin. Agcy. Rev. Bonds
1,950,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB-/P 2,064,563
6,000,000 (Orchard Cove Inc.), 9s, 5/1/22 AAA/P 7,185,000
3,815,000 (MA Tpk.), 9s, 10/1/20 AAA/P 4,301,413
1,765,000 (Morton Hosp. & Med. Ctr.), Ser. A, 8 3/4s,
7/1/11 Aaa 1,879,496
2,500,000 (Leominster Hosp.), Ser. A, 8 5/8s, 8/1/09 AAA/P 2,681,250
3,600,000 (Cape Cod Hlth. Syst. Issue), 8 1/2s, 11/15/20 Aaa 4,045,500
3,000,000 (1st Mtge. Stone Institution & Newton),
7.9s, 1/1/24 B/P 3,266,250
5,140,000 (1st Mtge. Loomis & Village), 7 5/8s, 7/1/25 BBB- 5,833,900
7,650,000 (Merrimack College), 7 1/8s, 7/1/12 AAA 8,644,500
3,000,000 (1st Mtge. Pioneer Valley Living Ctr.),
7s, 10/1/20 B/P 3,006,870
3,500,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB-/P 3,784,375
1,165,000 (Clark U.), Ser. E, 7s, 7/1/12 A3 1,264,025
2,605,000 (Clark U.), Ser. F, 7s, 7/1/11 A3 2,836,194
3,000,000 (1st. mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB-/P 3,258,750
6 3/4s, 12/1/25 BBB/P 6,374,375
6,000,000 (1st Mtge. Berkshire Retirement Home),
Ser. A, 6 5/8s, 7/1/16 BBB 6,390,000
2,000,000 (1st Mtge. Brookhaven), Ser. B, 6.6s, 1/1/17 BBB-/P 2,052,500
1,350,000 (Worcester Visiting Nurse Assoc.), 6.4s, 9/15/10 A-/P 1,459,688
3,385,000 (Park. School), 5.9s, 9/1/26 A3 3,541,556
1,650,000 (Wentworth Inst. of Tech.), 5 3/4s, 10/1/28 Baa1 1,676,813
5,000,000 (Groton School), Ser. A, 5s, 3/1/28 Aa2 4,850,000
1,985,677 (1st Mtge. Pioneer Valley Living Ctr.),
zero %, 10/1/20 B/P 2,482
19,500,000 MA State Tpk. Auth. Rev. Bonds, Ser. A, MBIA,
5s, 1/1/37 Aaa 18,890,625
MA State Wtr. Resources Auth. Rev. Bonds
7,500,000 Ser. A, 7s, 4/1/18 Aaa 8,043,750
10,000,000 Ser. A, 6 1/2s, 7/15/19 A1 11,975,000
2,900,000 Ser. C, MBIA, 5 1/4s, 12/1/15 Aaa 3,045,000
Somerville, Hsg. Auth. Rev. Bonds
(Clarendon-Hill Mtge.) GNMA Coll.
2,000,000 7.95s, 11/20/30 Aaa 2,115,000
1,390,000 7.85s, 11/20/10 Aaa 1,471,663
3,050,000 Worcester Mtge. Rev. Bonds (Briarwood Issue),
9 1/4s, 12/1/22 BB-/P 3,374,063
Worcester Rev. Bonds (St. Francis Home)
2,000,000 9 3/4s, 7/1/19 BB-/P 2,006,740
1,000,000 9.4s, 7/1/08 BB-/P 1,003,100
--------------
350,374,287
Puerto Rico (11.7%)
- -------------------------------------------------------------------------------------------------------------
Cmnwlth. of PR, G.O. Bonds
1,700,000 6 1/2s, 7/1/13 A 1,982,625
4,000,000 5 1/2s, 7/1/10 A 4,305,000
2,300,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA,
3.20s, 12/1/15 VMIG 2,300,000
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/14 Aaa 1,165,000
2,925,000 Ser. Z, MBIA, 6 1/4s, 7/1/13 Aaa 3,403,969
5,000,000 Ser. W, MBIA, 5 1/2s, 7/1/15 Aaa 5,406,250
4,000,000 Cmnwlth. of PR, Hwy. Trans. Auth. FRB, AMBAC,
2 1/2s, 7/1/28 VMIG1 4,000,000
PR Elec. Pwr. Auth. Rev. Bonds
5,000,000 Ser. BB, MBIA, 6 1/4s, 7/1/10 Aaa 5,787,500
9,985,000 MBIA, 5s, 7/1/28 Aaa 9,847,706
2,600,000 PR Indl. Med. & Env. Poll. Control Fac. Fin. Auth.
Rev. Bonds (Special Facilities-American Airlines),
Ser. A, 6.45s, 12/1/25 Baa2 2,840,500
PR Pub. Bldg. Auth. Rev. Bonds
1,000,000 Ser. K, 6 7/8s, 7/1/21 Aaa 1,120,000
5,000,000 (Govt. Fac.), Ser. B, AMBAC, 5s, 7/1/27 Aaa 4,943,750
--------------
47,102,300
- -------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $370,772,630) (b) $ 397,476,587
- -------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $401,898,763.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available
at May 31, 1998 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, 1998. Securities rated by Putnam are indicated by "/P" and are not publicly rated. Ratings
are not covered by the Report of independent accountants.
(b) The aggregate identified cost on a tax basis is $370,772,704, resulting in gross unrealized appreciation
and depreciation of $28,190,381 and $1,486,498, respectively, or net unrealized appreciation of
$26,703,883.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at May 31, 1998.
The rate shown on IFBs, which are securities paying interest rates that vary inversely to changes in the
market interest rates, VRDNs and FRBs are the current interest rates at May 31, 1998.
The fund had the following industry group concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
Hospital/health care 28.2%
Transportation 15.6
Education 13.0
The fund had the following insurance concentrations greater than 10% at May 31, 1998
(as a percentage of net assets):
MBIA 18.6%
AMBAC 10.6
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1998
Unrealized
Total Aggregate Face Expiration Appreciation/
Market Value Value Date (Depreciation)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Municipal Index (Long) $ 9,552,813 $ 9,349,708 Jun-98 $ 203,105
U.S. Treasury Bond (Short) 35,785,312 35,375,781 Jun-98 (409,531)
- -------------------------------------------------------------------------------------------
$(206,426)
- -------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1998
<S> <C>
Assets
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $370,772,630) (Note 1) $397,476,587
- ---------------------------------------------------------------------------------------------------
Cash 1,367,836
- ---------------------------------------------------------------------------------------------------
Interest and other receivables 7,182,349
- ---------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 882,756
- ---------------------------------------------------------------------------------------------------
Receivable for securities sold 70,000
- ---------------------------------------------------------------------------------------------------
Total assets 406,979,528
Liabilities
- ---------------------------------------------------------------------------------------------------
Payable for variation margin 59,063
- ---------------------------------------------------------------------------------------------------
Distributions payable to shareholders 774,159
- ---------------------------------------------------------------------------------------------------
Payable for securities purchased 2,929,341
- ---------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 414,493
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 601,165
- ---------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 68,727
- ---------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 8,596
- ---------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,059
- ---------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 174,576
- ---------------------------------------------------------------------------------------------------
Other accrued expenses 49,586
- ---------------------------------------------------------------------------------------------------
Total liabilities 5,080,765
- ---------------------------------------------------------------------------------------------------
Net assets $401,898,763
Represented by
- ---------------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $380,836,043
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 242,032
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (5,676,843)
- ---------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 26,497,531
- ---------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $401,898,763
Computation of net asset value and offering price
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($293,978,333 divided by 30,578,103 shares) $9.61
- ---------------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.61)* $10.09
- ---------------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($105,350,541 divided by 10,967,593 shares)+ $9.61
- ---------------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($2,569,889 divided by 267,492 shares) $9.61
- ---------------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.61)** $9.63
- ---------------------------------------------------------------------------------------------------
* 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, 1998
<S> <C>
Tax exempt interest income: $24,211,955
- --------------------------------------------------------------------------------------------------
Expenses:
- --------------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,323,681
- --------------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 466,788
- --------------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,374
- --------------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,454
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 576,515
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 820,600
- --------------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 12,694
- --------------------------------------------------------------------------------------------------
Reports to shareholders 14,638
- --------------------------------------------------------------------------------------------------
Registration fees 2,837
- --------------------------------------------------------------------------------------------------
Auditing 37,537
- --------------------------------------------------------------------------------------------------
Legal 25,121
- --------------------------------------------------------------------------------------------------
Postage 15,915
- --------------------------------------------------------------------------------------------------
Other 14,062
- --------------------------------------------------------------------------------------------------
Total expenses 4,328,216
- --------------------------------------------------------------------------------------------------
Expense reduction (Note 2) (117,667)
- --------------------------------------------------------------------------------------------------
Net expenses 4,210,549
- --------------------------------------------------------------------------------------------------
Net investment income 20,001,406
- --------------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 2,777,033
- --------------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,734,381)
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and futures contracts during the year 10,810,187
- --------------------------------------------------------------------------------------------------
Net gain on investments 11,852,839
- --------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $31,854,245
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
--------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ----------------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------------
Net investment income $ 20,001,406 $ 19,183,131
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,042,652 874,982
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 10,810,187 6,717,772
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 31,854,245 26,775,885
- ----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ----------------------------------------------------------------------------------------------------------------------
From net investment income
Class A (15,261,832) (15,338,843)
- ----------------------------------------------------------------------------------------------------------------------
Class B (4,463,933) (3,806,282)
- ----------------------------------------------------------------------------------------------------------------------
Class M (127,246) (145,040)
- ----------------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 21,464,363 34,185,964
- ----------------------------------------------------------------------------------------------------------------------
Total increase in net assets 33,465,597 41,671,684
Net assets
- ----------------------------------------------------------------------------------------------------------------------
Beginning of year 368,433,166 326,761,482
- ----------------------------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $242,032 and $28,496, respectively) $401,898,763 $368,433,166
- ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.31 $9.11 $9.21 $9.05 $9.55
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .51 .52 .54 .55 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .30 .21 (.10) .18 (.35)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .81 .73 .44 .73 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.51) (.53) (.54) (.55) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.51) (.53) (.54) (.57) (.70)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.61 $9.31 $9.11 $9.21 $9.05
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.86 8.17 4.81 8.45 1.92
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $293,978 $280,402 $259,934 $251,232 $244,519
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .95 .96 .95 .89 .96
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.33 5.67 5.80 6.11 5.69
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 31.13 19.12 34.57 47.53 36.20
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share July 15, 1993+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.30 $9.10 $9.20 $9.05 $9.71
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .45 .46 .48 .49 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .30 .21 (.11) .17 (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .75 .67 .37 .66 (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.47) (.47) (.49) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.47) (.47) (.51) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.61 $9.30 $9.10 $9.20 $9.05
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.27 7.47 4.12 7.64 (1.15)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $105,351 $85,192 $65,538 $47,573 $23,017
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.60 1.61 1.60 1.53 1.41*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.67 4.99 5.13 5.46 4.32*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 31.13 19.12 34.57 47.53 36.20
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
For the period
Per-share May 12, 1995+
operating performance Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $9.31 $9.10 $9.21 $9.10
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .48 .50 .51 .02(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .30 .21 (.11) .12
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .78 .71 .40 .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.48) (.50) (.51) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.48) (.50) (.51) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.61 $9.31 $9.10 $9.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 8.55 7.96 4.37 1.53*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,570 $2,839 $1,290 $22
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.25 1.26 1.24 .06*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.05 5.30 5.58 .30*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 31.13 19.12 34.57 47.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(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 and thereafter, includes
amounts paid through expense offset arrangements. Prior period ratios exclude these amounts (Note 2).
(c) Per share net investment income has been determined on the basis of the weighted average number of
shares outstanding during the period.
</TABLE>
Notes to financial statements
May 31, 1998
Note 1
Significant accounting policies
Putnam Massachusetts Tax Exempt Income Fund (the "fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The fund seeks as high a level of current
income exempt from federal income tax and Massachusetts personal income tax as
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. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares, which convert
to class A shares within approximately six to 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 which approximates market 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.
C) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund owns
or expects to purchase. The fund may also write options on securities it owns
or in which it may invest to increase its current returns.
The potential risk to the fund is that the change in value of futures and
options contracts may not correspond to the change in value of the hedged
instruments. In addition, losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparty to the contract is unable to perform. When
the contract is closed, the fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Realized gains and losses on purchased
options are included in realized gains and losses on investment securities.
Futures contracts are valued at the quoted daily settlement prices established
by the exchange on which they trade. Exchange traded options are valued at the
last sale price, or if no sales are reported, the last bid price for purchased
options and the last ask price for written options. Options traded
over-the-counter are valued using prices supplied by dealers.
D) Federal taxes It is the policy of the fund to distribute all of its income
within the prescribed time and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies. It is also
the intention of the fund to distribute an amount sufficient to avoid
imposition of any excise tax under Section 4982 of the Internal Revenue Code
of 1986, as amended. Therefore, no provision has been made for federal taxes
on income, capital gains or unrealized appreciation on securities held nor for
excise tax on income and capital gains. At May 31, 1998, the fund had a
capital loss carryover of approximately $3,140,000 available to offset future
capital gains, if any. The amount of the carryover and the expiration dates
are:
Loss Carryover Expiration
- -------------------- --------------
$1,126,000 May 31, 2003
2,014,000 May 31, 2004
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 temporary and permanent
differences of unrealized gains and losses on certain futures contracts,
market discount, and straddle loss deferrals. Reclassifications are made to
the fund's capital accounts to reflect income and gains available for
distribution (or available capital loss carryovers) under income tax
regulations. For the year ended May 31, 1998 the fund reclassified $65,141 to
increase undistributed net investment income with an increase to accumulated
net realized loss on investments of $65,141. The calculation of net investment
income per share in the financial highlights table excludes these adjustments.
F) Amortization of bond premium and accretion of bond discount Any premium
resulting from the purchase of securities in excess of maturity value is
amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and
original issue discount bonds are accreted according to the yield-to-maturity
basis.
G) Line of credit The fund has entered into a committed line of credit with
certain banks. The line of credit agreement includes restrictions that the
fund maintain an asset coverage ratio of at least 300% and borrowings must not
exceed prospectus limitations. For the year ended May 31, 1998, the fund had
no borrowings against the line of credit.
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, 0.40% of the next $5 billion, 0.375% of the next $5 billion, 0.355%
of the next $5 billion, 0.34% of the next $5 billion, and 0.33% thereafter.
The fund reimburses Putnam Management an allocated amount for the compensation
and related expenses of certain officers of the fund and their staff who
provide administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam Fiduciary
Trust Company (PFTC), a subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the year ended May 31, 1998, fund expenses were reduced by $117,667 under
expense offset arangements 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.
Each Trustee of the fund receives an annual Trustee fee, of which $440 has
been allocated to the fund, 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 has adopted a Trustee Fee Deferral Plan (the "Deferral Plan") which
allows the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund and are
invested in certain Putnam funds until distribution in accordance with the
Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension plan
(the "Pension Plan") covering all Trustees of the fund who have served as
Trustee for at least five years. Benefits under the Pension Plan are equal to
50% of the Trustee's average total retainer and meeting fees for the three
years preceding retirement. Pension expense for the fund is included in
Compensation of trustees in the Statement of operations. Accrued pension
liability is included in Payable for compensation of Trustees in the Statement
of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B, and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam 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 of up to 0.35%, 1.00%, and 1.00% of the average net
assets attributable to class A, class B, and class M shares, respectively. The
Trustees currently limit payments by the fund to 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, 1998, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $81,698 and $685 from the sale of
class A and class M shares, respectively and $199,915 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 that were
purchases without an initial sales charge as part of an investment of $1
million or more. For the year ended May 31, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received $9,139 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1998, purchases and sales of investment
securities other than short-term investments aggregated $139,646,330 and
$118,001,707, 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, 1998, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1998
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 5,088,492 $48,546,833
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 873,674 8,354,893
- ------------------------------------------------------------
5,962,166 56,901,726
Shares
repurchased (5,491,082) (52,351,447)
- ------------------------------------------------------------
Net increase 471,084 $ 4,550,279
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class A Shares Amount
- ------------------------------------------------------------
Shares sold 8,155,750 $75,375,346
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 907,303 8,396,075
- ------------------------------------------------------------
9,063,053 83,771,421
Shares
repurchased (7,487,476) (69,171,078)
- ------------------------------------------------------------
Net increase 1,575,577 $14,600,343
- ------------------------------------------------------------
Year ended
May 31, 1998
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 2,983,560 $28,444,358
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 284,284 2,717,263
- ------------------------------------------------------------
3,267,844 31,161,621
Shares
repurchased (1,456,444) (13,895,820)
- ------------------------------------------------------------
Net increase 1,811,400 $17,265,801
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class B Shares Amount
- ------------------------------------------------------------
Shares sold 2,973,186 $27,502,900
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 249,991 2,312,165
- ------------------------------------------------------------
3,223,177 29,815,065
Shares
repurchased (1,266,942) (11,717,045)
- ------------------------------------------------------------
Net increase 1,956,235 $18,098,020
- ------------------------------------------------------------
Year ended
May 31, 1998
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 106,396 $1,012,124
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 9,116 87,040
- ------------------------------------------------------------
115,512 1,099,164
Shares
repurchased (153,096) (1,450,881)
- ------------------------------------------------------------
Net decrease (37,584) $(351,717)
- ------------------------------------------------------------
Year ended
May 31, 1997
- ------------------------------------------------------------
Class M Shares Amount
- ------------------------------------------------------------
Shares sold 322,143 $2,954,455
- ------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 11,245 104,193
- ------------------------------------------------------------
333,388 3,058,648
Shares
repurchased (169,995) (1,571,047)
- ------------------------------------------------------------
Net increase 163,393 $1,487,601
- ------------------------------------------------------------
Federal tax information
(Unaudited)
The fund has designated 99.72% 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 1999 will show the tax
status of all distributions paid to your account in calendar 1998.
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Strategic Income Fund *
High Quality Bond Fund +
Global Governmental Income Trust
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Money Market Fund **
Intermediate U.S. Government
Income Fund
Preferred Income Fund
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota, New
Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds--three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER]Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor
guaranteed by the U.S. government. These funds are managed to maintain a
price of $1.00 per share, although there is no assurance that this price
will be maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you
invest or send money.
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
PricewaterhouseCoopers LLP
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
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
Ian C. Ferguson
Vice President
William J. Curtin
Vice President
Jerome J. Jacobs
Vice President
Blake E. Anderson
Vice President
Leslie J. Burke
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
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. You can also learn more
at Putnam Investments' website: http://www.putnaminv.com.
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 the principal amount
invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- --------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- --------------------
AN047-43770 845/236/258 7/98
