Putnam
Massachusetts
Tax Exempt
Income Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Since we reported that municipal bonds were a 'screaming buy' ('Why You
Should Bond with Munis,' September 1998), they have become even more
attractive. . . . Trouble is, it's long been next to impossible for an
individual investor to figure out how to get a good deal on a muni bond.
. . . How can you avoid getting snared? The simple answer is to buy
via a mutual fund."
-- "Munificent Munis," Money, November 1998
* "We have put a high priority on ensuring that your fund's income stream
remains competitive with other, more volatile funds with longer
maturities, but it is also our goal to minimize fluctuations in the value
of the portfolio."
-- Leslie J. Burke, manager
Putnam Massachusetts Tax Exempt Income Fund
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
12 Portfolio holdings
16 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The rush of foreign investors to the safety of U.S. Treasury bonds in
recent months has driven prices on these securities markedly higher.
Because of the inverse relationship of yields to prices, yields on 30-year
Treasuries have declined to virtually the same level as those on long-term
municipals. This near parity has made Massachusetts tax-exempt bonds
unusually attractive for tax-conscious Bay State investors.
A flurry of new general obligation issues fed into the rising demand
earlier in the fund's fiscal year but then later subsided, mirroring the
trend toward tight supplies in the national tax-exempt bond market. Not
surprisingly, health care remains Putnam Massachusetts Tax Exempt Income
Fund's largest portfolio sector. Fund Manager Leslie Burke also
significantly increased the allocation to college and university bonds
during the period.
In the following report from Leslie, you will find details of these
developments and other aspects of the fund's performance during the six
months ended November 30, 1998. She also offers her views on prospects for
the remainder of fiscal 1999.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 20, 1999
Report from the Fund Manager
Leslie J. Burke
For most of the first six months of Putnam Massachusetts Tax Exempt Income
Fund's current fiscal year, we adopted a strategy designed to maximize the
fund's income while providing what we expected to be a fair amount of
downside protection. We did this by investing much of the portfolio in
long-term municipal bonds while using Treasury futures to bring the
portfolio's maturity back into the neutral range. While our approach was
successful from an income perspective -- which is, after all, the fund's
objective -- this fall's extraordinary rally in the Treasury market had a
negative effect on total return.
As a consequence, although the fund benefited from several other aspects
of our strategy, total return for the six months ended November 30, 1998,
is somewhat disappointing; the fund's class A shares returned 2.84% at net
asset value (-2.05% at public offering price). While this is also
reflected in the fund's one-year ranking by Lipper Analytical Services*
(31 of 57 Massachusetts bond funds tracked for the 12 months ended
December 31, 1998), over longer periods, the fund remains quite
competitive. Its class A shares finished in the top 31% (16 of 52) funds
tracked for 3 years and in the top 20% (6 of 30) funds tracked for 5
years. Furthermore, we believe the current market environment offers an
excellent opportunity for municipal bond investors and are working to take
advantage of it from both an income and a total return perspective. For
complete performance information, see page 9.
* MUNICIPAL BOND PRICES NOW EXCEPTIONALLY ATTRACTIVE
After a turbulent autumn, the municipal bond market has calmed down and
even slightly outperformed the Treasury market. Long-term municipal bond
yields are approximately the same as the 30-year Treasury bond yield --
exhibiting a remarkable level of cheapness relative to Treasuries.
This ratio dropped to 97% during November, but had returned to 100% by
the end of the month. Up until the last few months, the ratio of
municipal bond yields to Treasury yields had been in the 84% to 87%
range.
*Past performance is not indicative of future results. Lipper Analytical
Services, an independent research organization, ranks funds according to
total return performance. Their rankings vary over time and do not reflect
the effects of sales charges. Performances of other share classes will
vary.
We arrived at these unprecedented yield ratios after a string of
international problems set off the stock market volatility and the bond
market rallies. As foreign investors and hedge fund investors panicked
about plummeting stock markets, they began a flight to quality -- selling
investments with virtually any element of risk and rushing to the safety
of U.S. Treasury bonds. This buying drove up the prices of Treasuries
while pushing down their yields. Since foreign investors do not benefit
from the tax advantages of municipal bonds, prices in this market didn't
rise as much as those of Treasuries. For the last few months, municipal
bond yields have been extremely close or equal to Treasury yields, making
municipal bonds an exceptional investment choice for U.S. investors.
* MASSACHUSETTS BOND SUPPLY SURGES, THEN BEGINS TO DECLINE
As we began the fiscal year, demand for Massachusetts general obligation
bonds (GOs) was relatively strong -- a continued reflection of the state's
healthy economy. There was some spillover effect to other sectors of the
market. Toward the end of the semiannual period, however, there was a
supply surge, as several major issues came to market. We were able to
purchase a number of these, including Massachusetts Higher Education debt
and grant anticipation notes (GANs), which are basically federal
transfers. The supply has since trailed off dramatically and Massachusetts
debt is now starting to appreciate relative to that of other states. This
appreciation may slow temporarily with the rollback of the unearned income
tax in January, but in our opinion, the ongoing demand should continue to
support prices.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Health care 27.1%
Education 15.5%
Water and sewer 9.2%
Transportation 8.7%
Waste management 3.8%
Footnote reads:
*Based on net assets as of 11/30/98. Holdings will vary over time.
Supply/demand trends benefited another area of the portfolio during this
period. We had acquired a substantial amount of Puerto Rico debt during
fiscal 1998, when the supply was plentiful. However, the supply virtually
dried up early in the current fiscal year, and we were able to take
profits on the position -- well in advance of the hurricane that swept the
island this fall.
* COUPON AND SECTOR STRUCTURE HELPS FUND CAPTURE APPRECIATION AS INTEREST
RATES FALL
The municipal market has been generally strengthening since spring, and
with the recent declines in interest rates, we have been focusing a
portion of the portfolio on discount-coupon bonds. Because their coupon
rates are initially less than those of current-coupon bonds, they can be
acquired at a lower dollar price, and because municipal bonds are selling
at such a cheap ratio to Treasuries, there is also a fair amount of
protection against a backup in the bond market. As rates continued to
decline, these discount-coupon bonds appreciated in price, effectively
becoming current-coupon bonds, and started to trade at par, or face value.
At this point, the market assumes the bond is callable and will be called;
the call option overrides the maturity and shortens the life of the bond.
So, as bonds approached par, we would actively swap to lower-coupon bonds
to maintain the portfolio's appreciation potential.
As the fiscal year began, we were concentrating on bonds with 51/4%
coupons; more recently we have worked our way down to 43/4% coupons and
still believe there is potential for further appreciation.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
B -- 1.5%
Ba/BB -- 8.4%
Baa/BBB -- 16.7%
VMIG1 -- 0.3%
A -- 9.7%
Aa -- 10.5%
Aaa/AAA -- 52.9%
Footnote reads:
*As a percentage of market value as of 11/30/98. A bond rated Baa or
higher is considered investment grade. Ratings reflect Moody's and
Standard & Poor's(R) descriptions; percentages may include unrated bonds
considered by Putnam Management to be of comparable quality. Ratings will
vary over time.
We continue to be especially active with college and university bonds,
increasing this portion of the portfolio to 15% at the close of the
semiannual period. Many of the bonds we are using in our coupon swapping
strategy fall in this industry sector, which also happens to be one of the
most liquid areas of the Massachusetts market. Recent acquisitions include
Tufts, Babson, and Boston College bonds. Individual ratings vary but all
are quite high in credit quality; the Babson bonds are also insured. While
these holdings, along with others discussed in this report, were viewed
favorably at the end of the fiscal period, all are subject to review and
adjustment in accordance with the fund's investment strategy and may vary
in the future.
* FUND BENEFITS FROM REFUNDINGS IN HEALTH-CARE SECTOR
Bonds from the health-care and hospital sector still make up the largest
portion of the portfolio. Bonds of long-term care facilities have
performed especially well for the fund; one of our longer-term holdings --
Spring House, in Jamaica Plain -- has made an especially strong
contribution to both income and total return.
Another major long-term care holding, the Loomis House, in South Hadley,
was a candidate for prerefunding as we ended the semiannual period. In a
prerefunding, new bonds are issued to pay off the original bond issue at
the first call date or maturity, and proceeds from the issue are invested
in an escrow fund made up of U.S. Treasury securities. Because of the
safety of principal represented by the Treasuries, the original bonds are
considered more creditworthy and an upgrade generally follows -- along
with higher bond prices.
We had long expected that bonds issued to support Massachusetts Eye & Ear
Infirmary would be refunded, and during this semiannual period, our
expectations were fulfilled. One of the country's premier facilities in
its field, Mass. Eye & Ear had been an underachiever for some time as it
adjusted to cost pressures and cutbacks. The bonds we hold carry a 73/8%
coupon and their rating is now Baa -- a fortuitous combination that is
pretty hard to find in any market.
* SLOWING SUPPLY, STRONG ECONOMY SHOULD SUPPORT BOND PRICES
It is reassuring to note that we have a Federal Reserve Board that is
prepared to step in to stabilize the markets when a crisis occurs. As of
November 30, the Fed had cut interest rates three times, totaling 75 basis
points and sending a positive message to Wall Street and the rest of the
world. Looking ahead, we anticipate a slowing, but still strong economy
supported by the Fed and consumers' willingness to spend.
As we began the second half of fiscal 1999, the supply of Massachusetts
bonds was limited and supported by increasing demand. This, along with the
healthy economy in the Commonwealth, bodes well for your fund's
performance over the rest of the fiscal year. While we continue to believe
it is in shareholders' best interests to minimize the fund's sensitivity
to interest-rate changes, our current portfolio holdings and strategy
should prove advantageous in a climate of slow, steady economic growth.
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 11/30/98, 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 11/30/98
Class A Class B Class M
(inception date) (10/23/89) (7/15/93) (5/12/95)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months 2.84% -2.05% 2.40% -2.60% 2.58% -0.73%
- ------------------------------------------------------------------------------
1 year 6.31 1.22 5.62 0.62 5.88 2.45
- ------------------------------------------------------------------------------
5 years 34.17 27.85 29.75 27.77 31.84 27.52
Annual average 6.05 5.04 5.35 5.02 5.68 4.98
- ------------------------------------------------------------------------------
Life of fund 103.12 93.54 89.49 89.49 96.02 89.70
Annual average 8.10 7.53 7.28 7.28 7.68 7.29
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/98
Lehman Bros.
Municipal Consumer
Bond Index Price Index
- ------------------------------------------------------------------------------
6 months 3.84% 0.74%
- ------------------------------------------------------------------------------
1 year 7.77 1.55
- ------------------------------------------------------------------------------
5 years 37.81 12.48
Annual average 6.63 2.38
- ------------------------------------------------------------------------------
Life of fund 103.52 30.57
Annual average 8.14 2.98
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. Returns for class A and class M
shares reflect the current maximum initial sales charges of 4.75% and
3.25% respectively. Class B share returns for the 1-, 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 shares when redeemed
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) 6 6 6
- ------------------------------------------------------------------------------
Income $0.249895 $0.218034 $0.235239
- ------------------------------------------------------------------------------
Capital gains1 -- -- --
- ------------------------------------------------------------------------------
Total $0.249895 $0.218034 $0.235239
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/98 $9.61 $10.09 $9.61 $9.61 $9.93
- ------------------------------------------------------------------------------
11/30/98 9.63 10.11 9.62 9.62 9.94
- ------------------------------------------------------------------------------
Current return (end of period)
- ------------------------------------------------------------------------------
Current dividend rate2 5.17% 4.92% 4.52% 4.87% 4.72%
- ------------------------------------------------------------------------------
Taxable equivalent3 9.72 9.26 8.50 9.17 8.87
- ------------------------------------------------------------------------------
Current 30-day SEC yield4 4.10 3.91 3.41 3.82 3.70
- ------------------------------------------------------------------------------
Taxable equivalent3 7.71 7.36 6.42 7.19 6.96
- ------------------------------------------------------------------------------
1 Capital gains, if any, are taxable for federal and, in most cases, state
tax purposes. For some investors, investment income may also be subject to
the federal alternative minimum tax. Investment income may be subject to
state and local taxes.
2 Income portion of most recent distribution, annualized and divided by
NAV or POP at end of period.
3 Assumes maximum 46.85% combined federal and state tax rate. Results for
investors subject to lower tax rates would not be as advantageous.
4 Based only on investment income, calculated using SEC guidelines.
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(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
- ------------------------------------------------------------------------------
6 months 2.97% -1.94% 2.63% -2.37% 2.81% -0.51%
- ------------------------------------------------------------------------------
1 year 5.33 0.33 4.54 -0.46 4.91 1.53
- ------------------------------------------------------------------------------
5 years 32.22 25.98 27.98 25.99 29.87 25.61
Annual average 5.74 4.73 5.06 4.73 5.37 4.67
- ------------------------------------------------------------------------------
Life of fund 104.04 94.41 90.24 90.24 96.85 90.51
Annual average 8.07 7.50 7.25 7.25 7.65 7.27
- ------------------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost.
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.
<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1998 (Unaudited)
Key to Abbreviations
AMBAC -- AMBAC Indemnity Corporation
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
MBIA -- Municipal Bond Investors Assurance Corporation
U.S. Govt. Coll. -- U.S. Government Collateralized
VRDN -- Variable Rate Demand Notes
MUNICIPAL BONDS AND NOTES (98.6%) (a)
PRINCIPAL AMOUNT RATINGS(RAT) VALUE
<S> <C> <C> <C>
Massachusetts (92.1%)
- --------------------------------------------------------------------------------------------------------------------------
$ 4,915,000 Agawam, Res. Recvy. Rev. Bonds
(Springfield Res. Recvy.), 8 1/2s, 12/1/08 BBB- $ 5,054,930
1,270,000 Boston, Nursing Home Rev. Bonds
(St. Joseph Nursing Care Ctr. Inc.), 10s, 1/1/20 BB- 1,366,355
4,000,000 Boston, Indl. Dev. Fin. Auth. Rev. Bonds
(Springhouse, Inc.), 6s, 7/1/28 BB/P 4,030,000
7,000,000 Boston, Indl. Dev. Fin. Auth. Swr. Fac. Rev. Bonds
(Harbor Elec. Energy Co.), 7 3/8s, 5/15/15 Baa1 7,542,500
7,935,000 Boston, Wtr. & Swr. Commn. Rev. Bonds, Ser. A,
5 3/4s, 11/1/13 A1 8,718,581
5,000,000 City of Quincy, IFB (Quincy Hosp.), FSA,
6.42s, 1/15/11 Aaa 5,431,250
Lowell G.O. Bonds
1,250,000 8.4s, 1/15/09 Baa1 1,392,188
2,455,000 8.3s, 2/15/05 Aaa 2,768,013
MA Bay Trans. Auth. Rev. Bonds
3,550,000 Ser. B, 6.2s, 3/1/16 Aa3 4,162,375
4,800,000 Ser. C, 6.1s, 3/1/23 Aa3 5,232,000
7,500,000 (Gen. Trans. Syst.), Ser. B, 5.9s, 3/1/24 Aa3 8,306,250
4,000,000 Ser. A, 5 1/2s, 3/1/12 Aa3 4,385,000
MA Hlth. & Edl. Fac. Auth. Rev. Bonds
3,000,000 (Jordan Hosp.), Ser. D, 5 3/8s, 10/1/28 BBB+ 2,958,750
10,000,000 (MA Inst. of Tech.), Ser. I-1, 5.2s, 1/1/28 (SEG) Aaa 10,362,500
2,000,000 MA Hsg. Fin. Agcy. Rev. Bonds (Residential Dev.),
FNMA Coll., Ser. E, 6 1/4s, 11/15/12 Aaa 2,160,000
1,650,000 MA Indl. Fin. Agcy. Rev. Bonds (Wentworth Inst.
of Tech.), 5 3/4s, 10/1/28 Baa1 1,703,625
3,000,000 MA State Antic. Notes, Ser. B, 5 1/8s, 6/15/15 Aa3 3,048,750
1,000,000 MA State Cons. Loan G.O. Bonds, Ser. A,
7 5/8s, 6/1/08 Aaa 1,115,000
MA State G.O. Bonds
5,075,000 AMBAC, 8.85s, 11/1/14 (acquired 5/11/98,
cost $6,660,938) (RES) AAA/P 7,181,125
1,935,000 Ser. 25, 8.22s, 11/1/11 (acquired 8/13/98,
cost $2,401,142) (RES) Aa3 2,527,594
5,000,000 Ser. B, AMBAC, 6 1/4s, 7/1/20 Aaa 5,450,000
5,000,000 Ser. C, 5 1/4s, 8/1/15 Aa3 5,218,750
MA State Hlth. & Edl. Fac. Auth. IFB
2,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 10.17s, 8/12/21 Aaa 2,342,500
6,000,000 (Beth Israel-Deaconess Hosp.), AMBAC,
9.289s, 7/1/25 Aaa 6,907,500
7,500,000 (Boston U.), MBIA, 8.46s, 10/1/31 Aaa 8,821,875
7,900,000 (New England Medical Ctr.), MBIA, 7.08s, 7/1/18 Aaa 8,235,750
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 2,320,000
5,265,000 (Goddard Memorial Hosp.), Ser. B, 9s, 7/1/15 Baa3 5,732,269
2,000,000 (Nichols College), Ser. B, 8 1/2s, 10/1/16 BBB- 2,230,000
2,500,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 Baa3 2,734,375
4,250,000 (Suffolk U.), Ser. A, 8 1/8s, 7/1/20 Baa2 4,611,250
2,150,000 (Valley Regl. Hlth. Syst.), Ser. B, 8s, 7/1/18 Aaa 2,340,813
3,300,000 (Norwood Hosp.), Ser. E, 8s, 7/1/12 Ba2 3,372,270
6,010,000 (Rehab. Hosp. Cape & Islands), Ser. A,
7 7/8s, 8/15/24 BB/P 6,776,275
3,000,000 (Stonehill College), Ser. D, AMBAC, 7.7s, 7/1/20 AAA 3,255,000
2,220,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Baa3 2,461,425
8,610,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s, 11/15/18 AAA/P 9,901,500
1,900,000 (Sisters Providence Hlth. Syst), Ser. A,
6 5/8s, 11/15/22 Aaa 2,173,125
1,550,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 Aaa 1,734,062
3,880,000 (Metro West Hlth. Inc.), Ser. C, 6 1/2s, 11/15/18 Aaa 4,340,750
5,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 Aaa 5,925,000
9,850,000 (MA Gen. Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/12 Aaa 11,462,938
7,250,000 (Newton-Wellesley Hosp.), Ser. E, MBIA,
6s, 7/1/25 Aaa 7,857,188
2,250,000 (Cap Cod Hlthcare), Ser. B, 5.45s, 11/15/23 BBB+ 2,255,625
4,250,000 (Boston College), Ser. K, 5 3/8s, 6/1/14 A1 4,563,438
10,915,000 (Boston College), Ser. L, 4 3/4s, 6/1/31 Aa3 10,301,031
6,000,000 MA State Hsg. Fin. Agcy. Rev. Bonds (Residential
Dev.),(FNMA Coll.), Ser. C, 6.9s, 11/15/21 Aaa 6,555,000
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
6,500,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 7,263,750
3,410,000 Ser. A, 9s, 7/1/15 BB-/P 3,802,150
MA State Indl. Fin. Agcy. Rev. Bonds
1,950,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB- 2,040,870
6,000,000 (Orchard Cove Inc.), 9s, 5/1/22 AAA/P 7,155,000
3,765,000 (MA Tpk.), 9s, 10/1/20 AAA/P 4,197,975
1,765,000 (Morton Hosp. & Med. Ctr.), Ser. A, U.S. Govt.
Coll., 8 3/4s, 7/1/11 Aaa 1,844,725
2,500,000 (Leominster Hosp.), Ser. A, 8 5/8s, 8/1/09 AAA/P 2,640,225
3,600,000 (Cape Cod Hlth. Syst. Issue), 8 1/2s, 11/15/20 Aaa 4,009,500
3,000,000 (1st Mtge. Stone Institution & Newton),
7.9s, 1/1/24 B/P 3,281,250
5,140,000 (1st Mtge. Loomis & Village), 7 5/8s, 7/1/25 BBB- 5,827,475
7,330,000 (Merrimack College), 7 1/8s, 7/1/12 AAA 8,292,063
3,000,000 (1st Mtge. Pioneer Valley Living Ctr.), 7s, 10/1/20 B/P 3,017,940
3,500,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB-/P 3,788,750
1,165,000 (Clark U.), Ser. E, 7s, 7/1/12 A3 1,258,200
2,605,000 (Clark U.), Ser. F, 7s, 7/1/11 A3 2,865,500
3,000,000 (1st. mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB-/P 3,270,000
5,875,000 (American Hingham, Wtr. Treatment),
6 3/4s, 12/1/25 BBB/P 6,469,844
6,000,000 (1st Mtge. Berkshire Retirement Home), Ser. A,
6 5/8s, 7/1/16 BBB 6,420,000
2,000,000 (1st Mtge. Brookhaven), Ser. B, 6.6s, 1/1/17 BBB-/P 2,036,440
1,350,000 (Worcester Visiting Nurse Assoc.), 6.4s, 9/15/10 A-/P 1,454,625
3,385,000 (Park. School), 5.9s, 9/1/26 A3 3,571,175
2,000,000 (Babson College), Ser. A, MBIA, 4 3/4s, 10/1/28 AAA 1,915,000
12,250,000 (Tufts U.), Ser. H, MBIA, 4 3/4s, 2/15/28 AAA 11,729,375
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 19,110,000
MA State Wtr. Resources Auth. Rev. Bonds
7,500,000 Ser. A, 7s, 4/1/18 Aaa 8,006,250
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 3,081,250
9,200,000 Ser. A, FSA, 4 3/4s, 8/1/37 Aaa 8,717,000
Somerville, Hsg. Auth. Rev. Bonds
(Clarendon-Hill Mtge.)
2,000,000 GNMA Coll., 7.95s, 11/20/30 AAA 2,095,000
1,360,000 GNMA Coll., 7.85s, 11/20/10 AAA 1,426,300
3,020,000 Worcester Mtge. Rev. Bonds (Briarwood Issue),
9 1/4s, 12/1/22 BB-/P 3,488,100
Worcester Rev. Bonds (St. Francis Home)
2,000,000 9 3/4s, 7/1/19 BB-/P 2,006,700
1,000,000 9.4s, 7/1/08 BB-/P 1,003,090
--------------
388,389,499
Puerto Rico (6.5%)
- --------------------------------------------------------------------------------------------------------------------------
1,700,000 Cmnwlth. of PR, G.O. Bonds, 6 1/2s, 7/1/13 A 2,027,250
1,200,000 Cmnwlth. of PR, Hwy. Trans. Auth. VRDN, AMBAC,
2 1/2s, 7/1/28 VMIG1 1,200,000
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/14 Aaa 1,183,750
2,925,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 Aaa 3,462,466
5,000,000 Ser. W, MBIA, 5 1/2s, 7/1/15 Aaa 5,493,750
4,000,000 Cmnwlth. of PR, G.O. Bonds, 5 1/2s, 7/1/10 A 4,375,000
5,000,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. BB, MBIA,
6 1/4s, 7/1/10 AAA 5,906,250
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 Baa1 2,850,250
1,000,000 PR Pub. Bldg. Auth. Rev. Bonds, Ser. K, 6 7/8s, 7/1/21 Aaa 1,120,000
--------------
27,618,716
- --------------------------------------------------------------------------------------------------------------------------
Total Municipal Bonds and Notes
(cost $387,164,174) $ 416,008,215
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $421,733,339.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
November 30, 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 November 30, 1998, Securities
rated by Putnam are indicated by "/P" and are not publicly rated.
(b) The aggregate identified cost on a tax basis is $387,164,248, resulting in gross unrealized appreciation and
depreciation of $29,896,549 and $1,052,582, respectively, or net unrealized appreciation of $28,843,967.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities
held at November 30, 1998 was $9,708,719 or 2.3% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for
futures contracts at November 30, 1998.
The rates shown on IFB, 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 November 30, 1998.
The fund had the following industry group concentrations greater than 10% at November 30, 1998 (as a
percentage of net assets):
Health care 27.1%
Education 15.5
The fund had the following insurance concentrations greater than 10% at November 30, 1998 (as a percentage of
net assets):
MBIA 18.2%
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at November 30, 1998 (Unaudited)
Unrealized
Total Aggregate Face Expiration Appreciation/
Market Value Value Date (Depreciation)
- -------------------------------------------------------------------------------
U.S. Treasury Bond
20 Yr. (Short) $2,591,875 $ 2,588,037 Mar-99 $ (3,838)
Municipal Bond
Index (Short) 2,774,063 2,769,119 Mar-99 (4,944)
Municipal Bond
Index (Short) 11,002,782 11,043,400 Dec-98 40,618
U.S. Treasury
Bond (Short) 14,412,657 14,021,755 Dec-98 (390,902)
- -------------------------------------------------------------------------------
$(359,066)
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $387,164,174) (Note 1) $416,008,215
- -----------------------------------------------------------------------------------------------
Cash 484,186
- -----------------------------------------------------------------------------------------------
Interest and other receivables 7,765,014
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,198,241
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 335,000
- -----------------------------------------------------------------------------------------------
Total assets 426,790,656
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 233,875
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 744,657
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 3,051,848
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 120,638
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 623,206
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 52,977
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 10,023
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,066
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 183,325
- -----------------------------------------------------------------------------------------------
Other accrued expenses 35,702
- -----------------------------------------------------------------------------------------------
Total liabilities 5,057,317
- -----------------------------------------------------------------------------------------------
Net assets $421,733,339
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $400,002,924
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (164,004)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (6,590,556)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 28,484,975
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $421,733,339
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($301,763,490 divided by 31,337,739 shares) $9.63
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.63)* $10.11
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($116,576,111 divided by 12,114,350 shares)+ $9.62
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($3,393,738 divided by 352,600 shares) $9.62
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.62)** $9.94
- -----------------------------------------------------------------------------------------------
* 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
Six months ended November 30, 1998 (Unaudited)
<S> <C>
Tax exempt interest income: $12,229,847
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,237,285
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 231,638
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 5,683
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 3,187
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 298,210
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 473,444
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 7,217
- -----------------------------------------------------------------------------------------------
Reports to shareholders 13,206
- -----------------------------------------------------------------------------------------------
Auditing 15,914
- -----------------------------------------------------------------------------------------------
Legal 2,377
- -----------------------------------------------------------------------------------------------
Postage 18,177
- -----------------------------------------------------------------------------------------------
Other 60,739
- -----------------------------------------------------------------------------------------------
Total expenses 2,367,077
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (33,800)
- -----------------------------------------------------------------------------------------------
Net expenses 2,333,277
- -----------------------------------------------------------------------------------------------
Net investment income 9,896,570
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 928,931
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,842,644)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
futures contracts during the period 1,987,444
- -----------------------------------------------------------------------------------------------
Net gain on investments 1,073,731
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $10,970,301
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
1998* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 9,896,570 $ 20,001,406
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (913,713) 1,042,652
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,987,444 10,810,187
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 10,970,301 31,854,245
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
- ---------------------------------------------------------------------------------------------------------------
Class A (7,713,944) (15,261,832)
- ---------------------------------------------------------------------------------------------------------------
Class B (2,518,288) (4,463,933)
- ---------------------------------------------------------------------------------------------------------------
Class M (70,374) (127,246)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 19,166,881 21,464,363
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 19,834,576 33,465,597
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 401,898,763 368,433,166
- ---------------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of
net investment income and undistributed
net investment income of $164,004 and
$242,032, respectively) $421,733,339 $401,898,763
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended
Per-share November 30
operating performance (Unaudited) Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.61 $9.31 $9.11 $9.21 $9.05 $9.55
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .24 .51 .52 .54 .55 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .03 .30 .21 (.10) .18 (.35)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .27 .81 .73 .44 .73 .20
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.25) (.51) (.53) (.54) (.55) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.25) (.51) (.53) (.54) (.57) (.70)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.63 $9.61 $9.31 $9.11 $9.21 $9.05
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.84* 8.86 8.17 4.81 8.45 1.92
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $301,763 $293,978 $280,402 $259,934 $251,232 $244,519
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .49* .95 .96 .95 .89 .96
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.50* 5.33 5.67 5.80 6.11 5.69
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 7.49* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share November 30 July 15, 1993+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.61 $9.30 $9.10 $9.20 $9.05 $9.71
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .21 .45 .46 .48 .49 .41
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .02 .30 .21 (.11) .17 (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .23 .75 .67 .37 .66 (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.22) (.44) (.47) (.47) (.49) (.41)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- -- (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.22) (.44) (.47) (.47) (.51) (.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.62 $9.61 $9.30 $9.10 $9.20 $9.05
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.40* 8.27 7.47 4.12 7.64 (1.15)*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $116,576 $105,351 $85,192 $65,538 $47,573 $23,017
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .82* 1.60 1.61 1.60 1.53 1.41*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.16* 4.67 4.99 5.13 5.46 4.32*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 7.49* 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
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share November 30 May 12, 1995+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.61 $9.31 $9.10 $9.21 $9.10
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .22 .48 .50 .51 .02(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments .03 .30 .21 (.11) .12
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .25 .78 .71 .40 .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.24) (.48) (.50) (.51) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.24) (.48) (.50) (.51) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.62 $9.61 $9.31 $9.10 $9.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) 2.58* 8.55 7.96 4.37 1.53*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,394 $2,570 $2,839 $1,290 $22
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .64* 1.25 1.26 1.24 .06*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 2.33* 5.05 5.30 5.58 .30*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 7.49* 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
November 30, 1998 (Unaudited)
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 ("Putnam
Management"), the fund's Manager, 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 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. 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.
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 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. This 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 six months
ended November 30, 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 six months ended November 30, 1998, fund expenses were reduced by
$33,800 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.
Each Trustee of the fund receives an annual Trustee fee, of which $450 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 a distribution plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The purpose of the Plan 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 Plan provides for payment by
the fund to Putnam Mutual Funds Corp. at an annual rate of up to 0.35%,
1.00%, and 1.00% of the fund's average net assets attributable to class A,
class B, and class M shares, respectively. The Trustees currently limit
payment 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 six months ended November 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $29,306 and $599 from
the sale of class A and class M shares, respectively and $82,276 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 six months ended November
30, 1998, Putnam Mutual Funds Corp., acting as underwriter received $200
on class A redemptions.
Note 3
Purchase and sales of securities
During the six months ended November 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$51,225,345 and $30,112,454, 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 November 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 2,232,538 $21,497,247
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 439,285 4,228,429
- -----------------------------------------------------------------------------
2,671,823 25,725,676
Shares
repurchased (1,912,187) (18,414,907)
- -----------------------------------------------------------------------------
Net increase 759,636 $ 7,310,769
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,641,878 $15,800,989
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 160,815 1,546,695
- -----------------------------------------------------------------------------
1,802,693 17,347,684
Shares
repurchased (655,936) (6,314,366)
- -----------------------------------------------------------------------------
Net increase 1,146,757 $11,033,318
- -----------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 97,879 $945,382
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 5,003 48,135
- -----------------------------------------------------------------------------
102,882 993,517
Shares
repurchased (17,774) (170,723)
- -----------------------------------------------------------------------------
Net increase 85,108 $822,794
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
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
High Quality Bond Fund [DAGGER]
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Rund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic 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
[DAGGER] 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
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
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
Brett C. Browchuk
Vice President
Stephen Oristaglio
Vice President
Jerome J. Jacobs
Vice President
Leslie J. Burke
Vice President and Fund Manager
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
www.putnaminv.com
- ---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
- ---------------------
SA047-48653 845/236/258 1/99
