Putnam
Massachusetts
Tax Exempt
Income Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-99
[LOGO: BOSTON * LONDON * TOKYO]
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
Because of their limited attractiveness to non-U.S. investors, municipal
bonds did not experience the turbulence endured by taxable bonds,
especially U.S. Treasury issues, in the wake of global investors' flight
to quality last fall. For U.S. investors, however, municipals have
provided unusually handsome current income both in real terms, thanks to
low inflation, and relative to after-tax returns on taxable securities,
especially for higher-bracket taxpayers.
Putnam Massachusetts Tax Exempt Income Fund's management has been focusing
on generating maximum current income without undue risk to principal,
primarily through careful selection of portfolio holdings and strategies
aimed at risk reduction. Management is also cautiously seeking out bonds
with longer maturities and is currently focusing on noncallable bonds,
both moves designed to lock in attractive current returns.
I am pleased to announce the appointment of David E. Hamlin as the new
manager of your fund. Before joining Putnam in 1998 as a senior portfolio
manager, he was with Vanguard Group, Provident Institutional Management
Corp., and Provident Bank. He has 17 years of investment experience.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
July 21, 1999
Report from the Fund Manager
David E. Hamlin
If you own investments, the best of all possible worlds is one in which
supply is low and demand is high. This is precisely the point at which
Putnam Massachusetts Tax Exempt Income Fund found itself on May 31, 1999,
the end of its 1999 fiscal year. The current environment is in sharp
contrast to market conditions last year at this time. In the spring of
1998, interest rates were heading toward new lows and institutions were
scrambling to complete their financing before rates went up again. As
fiscal 1999 drew to a close, interest rates had backed up somewhat, and
year-to-date supply of new Massachusetts issues was down by almost 15%
compared to 1998 levels. Meanwhile demand, which remained steady
throughout much of 1999, was poised for a seasonal uptick in June and
July, when coupons are payable and investors look for opportunities to
reinvest their dividends. While the fund had not yet fully benefited from
these favorable conditions as of the end of May 1999, it continues to
deliver attractive levels of tax-free income.
Total return for 12 months ended 5/31/99
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------
3.60% -1.34% 2.81% -2.10% 3.29% -0.04%
- ---------------------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 7.
* FUND BENEFITS FROM STRONG MASSACHUSETTS ECONOMY
At least part of the recent strength of the Massachusetts economy reflects
national trends. Consumers in general are confident. The Federal Reserve
Board successfully calmed the markets during last fall's financial crisis
and the equity markets -- though turbulent -- continue to advance.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Hospitals/
health care 35.9%
Education 19.0%
Transportation 13.5%
Water and
sewerage 10.7%
Utilities 3.9%
Footnote reads:
*Based on net assets as of 5/31/99. Holdings will vary over time.
Investors in Massachusetts municipal bonds also benefit from the strength
of the Commonwealth itself. Massachusetts enjoys essentially full
employment, especially in the service market, and job creation remains
strong. The financial services sector, which is a major local employer, is
robust. Education, health care, and research continue to flourish, and
construction jobs abound. The Big Dig alone is employing a huge number of
people and a new federal courthouse was just completed on the waterfront.
Local projects in the offing include a new stadium for the New England
Patriots and a new or rebuilt version of Fenway Park.
* EMPHASIS ON INCOME AND CAREFUL CREDIT SELECTION
Your fund's current emphasis is on high-coupon, premium bonds. Since we do
not hold strong views on the current direction of the market, we have
focused on some unique opportunities in the high-yield sector, drawing on
Putnam's extensive credit research to identify the most promising
candidates.
Lasell Village bonds are a good example of the kind of opportunity we
seek. The issues in the portfolio have a 6 3/8 coupon, which is high for
today's market. The high rate these bonds pay is intended to compensate
investors for added risk because the village is a relatively new concept
in retirement communities. Situated in the campus of Lasell College in
Newton, the community has a mandatory educational component, similar to
centers at Oberlin College and at Dartmouth. Retirees will live in a
campus setting and spend much of their time attending classes and taking
part in college life. The initial response to communities of this type has
been extremely positive and we believe this particular development --
located in a residential community 15 minutes from Boston -- offers
exceptional promise.
[GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW]
CREDIT QUALITY OVERVIEW*
AA/Aa -- 12.4%
A -- 8.4%
BBB/Baa -- 16.6%
BB/Ba -- 8.0%
VMIG1 -- 1.6%
B -- 0.8%
AAA/Aaa -- 52.2%
Footnote reads:
* As a percentage of market value as of 5/31/99. A bond rated BBB/Baa or
higher is considered investment grade. Percentages may include unrated
bonds considered by Putnam Management to be of comparable quality. Ratings
will vary over time.
"Your fund's current emphasis is on high coupon, premium bonds. Since we do
not hold strong views on the current direction of the market, we have focused
on some unique opportunities among the high-yielding sector, drawing on
Putnam's extensive credit research to identify the most promising candidates."
- -- David Hamlin, manager, Putnam Massachusetts Tax Exempt Income Fund
Lasell Village, along with other high-yield holdings in the portfolio,
illustrates the importance of Putnam's exhaustive research effort. By
sifting through all the details of a project, from the approval process to
construction and face-to-face meetings with developers, the project's
board, and potential clients, we believe we are able to identify issues
that may combine high current income, relative price stability, and the
potential for long-term appreciation. While we viewed these holdings
favorably during the period, along with others discussed in this report,
everything in the portfolio is subject to ongoing review and may vary in
the future in accordance with the fund's investment strategy.
A closer look at municipal credit ratings
Rating agencies such as Moody's Investors Service and Standard & Poor's
Corp. assign ratings to municipal issuers based on an in-depth analysis of the
issuer's financial condition and management, economic and debt characteristics,
and the specific revenue sources securing the bond. The highest ratings are Aaa
(Moody's) and AAA (Standard & Poor's). Bonds rated in the Baa/BBB category or
higher (A and Aa/AA) are considered to be investment grade. Securities in the
Ba/BB group and below are considered to be below investment grade or high
yield. If you look at "The fund's portfolio" in the back of this report, you
will see ratings next to each issuer's name. The quality pie chart on page 3
summarizes this listing to give you a general sense of the portfolio's quality.
Sometimes smaller bonds are not rated because the cost of obtaining a rating is
not justifiable. Unrated bonds can still offer attractive investment
opportunities and may end up in your fund's portfolio; in such a case, Putnam's
analysts perform their own ratings and the bonds are identified in the
portfolio listing by a /P rating.
"Massachusetts offers a plenitude of opportunities for municipal investors.
Thirty single-state funds devote their efforts to this market, which is one of
the country's largest . . . [Putnam Massachusetts Tax Exempt Income Fund] has
distinguished itself from the pack by its willingness to delve into
lower-quality credits."
- -- Morningstar Mutual Funds, April 21, 1999
* COMMONWEALTH OFFERS MANY UNIQUE OPPORTUNITIES
We continue to be active in the education sector, which is a major part of
the Massachusetts economy and a large segment of the local municipal bond
market. We recently purchased bonds issued by Eastern Nazarene College,
which occupies a small but viable niche in the continuing education
market. It offers programs that allow people to earn secondary degrees as
well as management training with an even split between vocational and
professional education.
We also invested in bonds issued by Massachusetts State Development
Finance Authority Boston (Boston Biomed), which is another instance of the
unique opportunities that exist in Massachusetts. Mass. Biomed is a major
center for independent research that performs sophisticated analysis on
cellular structure for disease prevention. Funding for research projects
comes from the National Institutes of Health as well as from government
grants, and the projects attract both dollars and brainpower from all over
the country.
Partners Health Care is another offering in which your fund participated
recently. Partners is a nonprofit organization that includes Massachusetts
General and Brigham & Women's hospitals and is one of the largest
health-care systems in the state.
* PREREFUNDING IMPROVES TOTAL RETURN
On the total return side, your fund benefited from an advanced refunding
of the Rehabilitation Hospital of the Cape and Islands, a project of the
Massachusetts Health and Educational Facilities Authority. Our involvement
in this project originated during the construction phase in 1994. It was
sponsored by the Spaulding Rehabilitation Hospital, which is the largest
operator of rehabilitation centers in the country, and we believed that
this sponsorship would contribute to the project's success. What's more,
its Cape Cod location -- home to many retirees -- offers a large market
for rehabilitation services.
The combination of a thriving facility and a lower interest-rate
environment led to the prerefunding of these bonds, a process in which the
issuer sells new bonds at lower rates of interest and buys high-quality
securities (typically U.S. Treasury bonds) that are pledged to pay off the
older high-yielding debt. Because of the safety associated with Treasury
securities, a prerefunding immediately improves the credit quality of the
older bonds, which, in turn, may help boost their market price. Meanwhile,
the bonds your fund bought with a 77/8% coupon will continue to pay this
high rate until their call date in 2004. All the risk attendant on the
initial offering has been removed because the project is now up and
running and cash flows are strong, making this a short-term, high-quality
position for your fund. New buyers, of course, have a significantly lower
interest rate.
* OUTLOOK IS CAUTIOUSLY POSITIVE FOR CAREFULLY SELECTED HIGH-YIELD MUNIS
Currently the consumer price index is moving toward an annualized core
inflation rate of approximately 2%. While 2% is up from essentially zero
in 1998, it is still half the 4% range that has come to be regarded as
average. What's more, some prices are continuing to fall, counter to the
overall trend. Even if inflation stays around 2% through the next 6 to 12
months, a yield of 5% or 6% will still constitute an attractive return,
especially once the psychology of an advancing stock market begins to
shift. A steady income stream with relatively low price volatility
continues to look attractive, particularly if it is also free from
federal, state, and local income taxes.
We consider that your fund has performed well relative to other,
comparable funds, primarily because of our focus on the higher-yield
sectors and our overall cautious stance toward interest rates during the
year. While no one can predict when interest rates will peak, we believe
this is a good time to begin incrementally lengthening maturities in your
fund, locking in today's rates. However, we will move cautiously,
continuing to emphasize low call risk and in-depth research because we
believe this strategy will provide the best long-term returns.
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 5/31/99, 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 high current income
free from federal and state income taxes, consistent with capital preservation.
TOTAL RETURN FOR PERIODS ENDED 5/31/99
Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (5/12/95)
NAV POP NAV CDSC NAV POP
- ---------------------------------------------------------------------------
1 year 3.60% -1.34% 2.81% -2.10% 3.29% -0.04%
- ---------------------------------------------------------------------------
5 years 38.60 32.03 34.01 32.01 36.21 31.73
Annual average 6.75 5.71 6.03 5.71 6.38 5.67
- ---------------------------------------------------------------------------
Life of fund 104.61 94.96 90.26 90.26 97.36 91.01
Annual average 7.74 7.20 6.93 6.93 7.34 6.97
- ---------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/99
Lehman Bros. Municipal Consumer
Bond Index price index
- ---------------------------------------------------------------------------
1 year 4.67% 2.09%
- ---------------------------------------------------------------------------
5 years 41.51 12.68
Annual average 7.19 2.42
- ---------------------------------------------------------------------------
Life of fund 105.16 32.32
Annual average 7.79 2.97
- ---------------------------------------------------------------------------
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.
[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
Fund's class A Lehman Bros. Municipal Consumer price
Date shares at POP Bond Index index
10/23/89 9,529 10,000 10,000
5/31/90 9,926 10,453 10,287
5/31/91 10,929 11,506 10,796
5/31/92 12,236 12,636 11,123
5/31/93 13,803 14,148 11,481
5/31/94 14,068 14,497 11,744
5/31/95 15,074 15,822 12,118
5/31/96 15,990 16,545 12,468
5/31/97 17,295 17,918 12,747
5/31/98 18,821 19,600 12,962
5/31/99 $19,496 $20,516 $13,232
Footnote reads:
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 $19,026 and no contingent deferred sales charges would
apply; a $10,000 investment in the fund's class M shares would have been
valued at $19,736 ($19,101 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/99
Class A Class B Class M
- -----------------------------------------------------------------------------
Distributions (number) 12 12 12
- -----------------------------------------------------------------------------
Income $0.500772 $0.437520 $0.471745
- -----------------------------------------------------------------------------
Capital gains1 -- -- --
- -----------------------------------------------------------------------------
Total $0.500772 $0.437520 $0.471745
- -----------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------------
5/31/98 $9.61 $10.09 $9.61 $9.61 $9.93
- -----------------------------------------------------------------------------
5/31/99 9.45 9.92 9.44 9.45 9.77
- -----------------------------------------------------------------------------
Current return (end of period)
- -----------------------------------------------------------------------------
Current dividend rate2 5.02% 4.78% 4.40% 4.73% 4.58%
- -----------------------------------------------------------------------------
Taxable equivalent3 8.83 8.41 7.74 8.33 8.06
- -----------------------------------------------------------------------------
Current 30-day SEC yield4 3.89 3.70 3.23 3.57 3.45
- -----------------------------------------------------------------------------
Taxable equivalent3 6.85 6.51 5.69 6.28 6.07
- -----------------------------------------------------------------------------
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 43.19% 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 6/30/99 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (10/23/89) (7/15/93) (5/12/95)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------------
1 year 1.53% -3.31% 0.89% -3.93% 1.24% -2.04%
- -----------------------------------------------------------------------------
5 years 36.83 30.30 32.34 30.34 34.47 30.12
Annual average 6.47 5.44 5.76 5.44 6.10 5.41
- -----------------------------------------------------------------------------
Life of fund 101.19 91.70 87.02 87.02 93.83 87.59
Annual average 7.49 6.95 6.68 6.68 7.08 6.71
- -----------------------------------------------------------------------------
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. See first
page of performance section for peformance 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. Securities in the fund
do not match those in the indexes and performance of the fund will differ.
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.
A guide to the financial statements
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values as of
the last day of the reporting period. Holdings are organized by asset type
and industry sector, country, or state to show areas of concentration and
diversification.
Statement of assets and liabilities shows how the fund's net assets and share
price is determined. All investment and non-investment assets are added
together. Any unpaid expenses and other liabilities are subtracted from this
total. The result is divided by the number of shares to determine the net
asset value per share, which is calculated separately for each class of
shares. (For funds with preferred shares, the amount subtracted from total
assets includes the net assets allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss for the
reporting period. This is determined by adding up all the fund's earnings --
from dividends and interest income -- and subtracting its operating expenses.
This statement also lists any net gain or loss the fund realized on the sales
of its holdings and -- for holdings that remain in the portfolio -- any change
in unrealized gains or losses over the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number of the
fund's shares. It lists distributions and their sources (net investment
income or realized capital gains) over the current reporting period and the
most recent fiscal year-end. The distributions listed here may not match the
amounts listed in the Statement of Operations because the distributions are
determined on a tax basis and may be paid in a different period from the one
in which they were earned.
Financial highlights provide an overview of the fund's investment results,
per-share distributions, expense ratios, net investment income ratios and
portfolio turnover in one summary table, reflecting the five most recent
reporting periods. In a semiannual report, the highlight table also includes
the current reporting period. For open-ended funds, a separate table is
provided for each share class.
Report of independent accountants
For the fiscal year ended May 31, 1999
To the Trustees and Shareholders of
Putnam Massachusetts Tax Exempt Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio (except for bond ratings), and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial
position of Putnam Massachusetts Tax Exempt Income Fund (the "fund") at
May 31, 1999, 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,
1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 14, 1999
<TABLE>
<CAPTION>
The fund's portfolio
May 31, 1999
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 (98.9%) (a)
PRINCIPAL AMOUNT RATING(RAT) VALUE
<S> <C> <C> <C>
Guam (0.6%)
- --------------------------------------------------------------------------------------------------------------------------
$ 2,500,000 Guam, Pwr. Auth. Rev. Bonds, Ser. A, 5 1/8s, 10/1/29 BBB $ 2,406,250
Massachusetts (90.7%)
- --------------------------------------------------------------------------------------------------------------------------
4,915,000 Agawam, Res. Recvy. Rev. Bonds (Springfield
Res. Recvy.), 8 1/2s, 12/1/08 BBB- 5,004,011
4,000,000 Boston, Indl. Dev. Fin. Auth. Rev. Bonds
(Springhouse, Inc.), 6s, 7/1/28 BB-/P 3,990,000
7,000,000 Boston, Indl. Dev. Fin. Auth. Swr. Fac. Rev. Bonds
(Harbor Elec. Energy Co.), 7 3/8s, 5/15/15 Baa1 7,437,500
1,255,000 Boston, Nursing Home Rev. Bonds (St. Joseph
Nursing Care Ctr. Inc.), 10s, 1/1/20 AAA/P 1,339,386
7,935,000 Boston, Wtr. & Swr. Commn. Rev. Bonds, Ser. A,
5 3/4s, 11/1/13 A1 8,520,206
5,000,000 City of Quincy, IFB (Quincy Hosp.), FSA,
6.67s, 1/15/11 Aaa 5,256,250
Lowell G.O. Bonds
1,250,000 8.4s, 1/15/09 Baa1 1,360,938
2,455,000 8.3s, 2/15/05 Aaa 2,709,706
MA Bay Trans. Auth. Rev. Bonds
3,550,000 Ser. B, 6.2s, 3/1/16 Aa3 4,026,268
4,800,000 Ser. C, 6.1s, 3/1/23 Aa3 5,160,000
7,500,000 (Gen. Trans. Syst.), Ser. B, 5.9s, 3/1/24 Aa3 8,184,375
4,000,000 Ser. A, 5 1/2s, 3/1/12 Aa3 4,234,880
3,000,000 MA State Antic. Notes, Ser. B, 5 1/8s, 6/15/15 Aa3 3,033,750
1,000,000 MA State Cons. Loan G.O. Bonds, Ser. A,
7 5/8s, 6/1/08 Aaa 1,093,750
MA State Dev. Fin. Agcy. Rev. Bonds
3,420,000 (Lasell Village PJ), Ser. A, 6 3/8s, 12/1/25 BB-/P 3,321,675
1,750,000 (Boston Biomedical Research), 5 3/4s, 2/1/29 BBB- 1,706,250
2,000,000 (Eastern Nazarine College), 5 5/8s, 4/1/29 BBB- 1,942,500
MA State G.O. Bonds
5,075,000 AMBAC, 8.85s, 11/1/14 (acquired 5/11/98,
cost $6,660,937) (RES) AAA/P 6,851,250
1,935,000 Ser. 25, 8.22s, 11/1/11 (acquired 8/13/98,
cost $2,401,141) (RES) Aa3 2,392,144
5,000,000 Ser. B, AMBAC, 6 1/4s, 7/1/20 Aaa 5,506,250
5,000,000 Ser. C, 5 1/4s, 8/1/15 AA- 5,100,000
MA State Hlth. & Edl. Fac. Auth. IFB
2,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 9.86s, 8/12/21 Aaa 2,290,000
7,500,000 (Beth Israel-Deaconess Hosp.), AMBAC,
9.70s, 7/1/25 Aaa 8,596,875
6,000,000 (Boston U.), Ser. L, MBIA, 8.725s, 10/1/31 Aaa 6,795,000
7,900,000 (New England Medical Ctr.), MBIA, 6.83s, 7/1/18 Aaa 8,117,250
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 2,255,000
5,265,000 (Goddard Memorial Hos.), Ser. B, 9s, 7/1/15 Baa3 5,610,437
2,000,000 (Nichols College), Ser. B, 8 1/2s, 10/1/16 BBB- 2,245,000
2,500,000 (Waltham-Weston Hosp. & Med. Ctr.), Ser. B,
8 3/8s, 7/1/15 Baa3 2,680,575
4,250,000 (Suffolk U.), Ser. A, 8 1/8s, 7/1/20 Baa2 4,525,315
2,150,000 (Valley Regl. Hlth. Syst.), Ser. B, 8s, 7/1/18 Aaa 2,299,232
5,810,000 (Rehab. Hosp. Cape & Islands), Ser. A,
7 7/8s, 8/15/24 BB/P 6,899,375
3,000,000 (Stonehill College), Ser. D, AMBAC, 7.7s, 7/1/20 AAA 3,198,780
2,220,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Baa3 2,417,025
8,610,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s, 11/15/18 AAA/P 9,718,538
1,900,000 (Sisters Providence Hlth. Syst), Ser. A,
6 5/8s, 11/15/22 Aaa 2,132,750
1,550,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 Aaa 1,706,938
3,880,000 (Metro West Hlth. Inc.), Ser. C, 6 1/2s, 11/15/18 Aaa 4,277,700
5,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 Aaa 5,762,500
9,850,000 (MA Gen. Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/12 Aaa 11,167,433
7,250,000 (Newton-Wellesley Hosp.), Ser. E, MBIA,
6s, 7/1/25 Aaa 7,820,938
4,500,000 (Caritas Christian Oblig. Group), Ser. A,
5 5/8s, 7/1/20 Baa2 4,381,875
2,250,000 (Cape Cod Hlthcare), Ser. B, 5.45s, 11/15/23 BBB+ 2,185,313
3,000,000 (Jordan Hosp.), Ser. D, 5 3/8s, 10/1/28 BBB+ 2,853,750
4,250,000 (Boston College), Ser. K, 5 3/8s, 6/1/14 AA- 4,441,250
3,000,000 (Partners Healthcare Sys.), Ser. B, 5 1/4s, 7/1/11 AA- 3,071,250
10,000,000 (MA Inst. of Tech.), Ser. I-1, 5.2s, 1/1/28 (SEG) Aaa 10,050,000
10,915,000 (Boston College), Ser. L, 4 3/4s, 6/1/31 AA- 9,946,294
MA State Hsg. Fin. Agcy. Rev. Bonds
(Residential Dev.), FNMA Coll.
6,000,000 Ser. C, 6.9s, 11/15/21 Aaa 6,487,500
2,000,000 Ser. E, 6 1/4s, 11/15/12 Aaa 2,142,500
MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds
(Southeastern MA)
6,500,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 7,158,125
3,410,000 Ser. A, 9s, 7/1/15 BB-/P 3,746,737
MA State Indl. Fin. Agcy. Rev. Bonds
1,900,000 (Odd Fellows Home of MA), 9.6s, 1/1/15 BB-/P 1,970,851
6,000,000 (Orchard Cove Inc.), U. S. Govt. Coll., 9s, 5/1/22 AAA/P 6,975,000
3,765,000 (MA Tpk.), 9s, 10/1/20 AAA/P 4,094,437
1,765,000 (Morton Hosp. & Med. Ctr.), Ser. A, U.S. Govt.
Coll., 8 3/4s, 7/1/11 Aaa 1,805,613
2,500,000 (Leominster Hosp.), Ser. A, 8 5/8s, 8/1/09 AAA/P 2,570,900
3,600,000 (Cape Cod Hlth. Syst. Issue), 8 1/2s, 11/15/20 Aaa 3,924,000
3,000,000 (1st Mtge. Stone Institution & Newton),
7.9s, 1/1/24 B/P 3,232,500
5,140,000 (1st Mtge. Loomis & Village), 7 5/8s, 7/1/25 AAA/P 6,129,450
7,330,000 (Merrimack College), 7 1/8s, 7/1/12 AAA 8,154,625
3,500,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB-/P 3,780,000
1,165,000 (Clark U.), Ser. E, 7s, 7/1/12 A- 1,240,725
2,605,000 (Clark U.), Ser. F, 7s, 7/1/11 A- 2,816,656
3,000,000 (1st. mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB-/P 3,266,250
5,875,000 (American Hingham, Wtr. Treatment),
6 3/4s, 12/1/25 BBB/P 6,337,656
6,000,000 (1st Mtge. Berkshire Retirement Home), Ser. A,
6 5/8s, 7/1/16 BBB 6,412,500
2,000,000 (1st Mtge. Brookhaven), Ser. B, 6.6s, 1/1/17 BBB-/P 2,020,060
1,350,000 (Worcester Visiting Nurse Assoc.), 6.4s, 9/15/10 A-/P 1,439,438
3,385,000 (Park. School), 5.9s, 9/1/26 A3 3,503,475
1,650,000 (Wentworth Inst. of Tech.), 5 3/4s, 10/1/28 Baa1 1,668,563
2,000,000 (Babson College), Ser. A, MBIA, 4 3/4s, 10/1/28 AAA 1,830,000
12,250,000 (Tufts U.), Ser. H, MBIA, 4 3/4s, 2/15/28 AAA 11,208,750
17,499,976 MA State Tpk. Auth. Rev. Bonds, Ser. A, MBIA,
5s, 1/1/37 Aaa 16,340,625
MA State Wtr. Resources Auth. Rev. Bonds
7,500,000 Ser. A, 7s, 4/1/18 Aaa 7,874,700
10,000,000 Ser. A, 6 1/2s, 7/15/19 A1 11,579,800
2,900,000 Ser. C, MBIA, 5 1/4s, 12/1/15 Aaa 3,003,994
9,200,000 Ser. A, FSA, 4 3/4s, 8/1/37 Aaa 8,303,000
Somerville, Hsg. Auth. Rev. Bonds
(Clarendon-Hill Mtge.) GNMA Coll.
2,000,000 7.95s, 11/20/30 AAA 2,077,140
1,325,000 7.85s, 11/20/10 AAA 1,376,914
3,020,000 Worcester Mtge. Rev. Bonds (Briarwood Issue),
9 1/4s, 12/1/22 BB-/P 3,435,250
Worcester Rev. Bonds (St. Francis Home)
2,000,000 9 3/4s, 7/1/19 BB-/P 2,006,500
1,000,000 9.4s, 7/1/08 BB-/P 1,002,990
--------------
386,534,706
Puerto Rico (7.6%)
- --------------------------------------------------------------------------------------------------------------------------
Cmnwlth. of PR, G.O. Bonds
1,700,000 6 1/2s, 7/1/13 A 1,989,000
4,000,000 5 1/2s, 7/1/10 A 4,285,000
3,800,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA,
3s, 12/1/15 VMIG1 3,800,000
Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds
1,000,000 Ser. Y, MBIA, 6 1/4s, 7/1/14 Aaa 1,158,750
2,925,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 Aaa 3,356,438
5,000,000 Ser. W, MBIA, 5 1/2s, 7/1/15 Aaa 5,343,750
Cmnwlth. of PR, Hwy. & Trans. Auth. VRDN
1,200,000 AMBAC, 3s, 7/1/28 VMIG1 1,200,000
1,830,000 Ser. X, AMBAC, 3s, 7/1/99 VMIG1 1,830,000
5,000,000 PR Elec. Pwr. Auth. Rev. Bonds, Ser. BB, MBIA,
6 1/4s, 7/1/10 AAA 5,706,250
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 Aa3 2,804,750
1,000,000 PR Pub. Bldg. Auth. Rev. Bonds, Ser. K, 6 7/8s, 7/1/21 Aaa 1,103,750
--------------
32,577,688
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $400,888,458) (b) $ 421,518,644
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $426,245,371.
(RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at
May 31, 1999 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, 1999.
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 $400,888,394, resulting in gross unrealized appreciation and
depreciation of $23,941,756 and $3,311,506, respectively, or net unrealized appreciation of $20,630,250.
(RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held
at May 31, 1999 was $9,243,394 or 2.2% of net assets.
(SEG) A portion of this security was pledged and segregated with the custodian to cover margin requirements for futures
contracts at May 31, 1999.
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 May 31, 1999.
The fund had the following industry group concentration greater than 10% at May 31, 1999 (as a percentage of net
assets):
Hospital/health care 35.9%
Education 19.0
Transportation 13.5
Water and sewerage 10.7
The fund had the following insurance concentration greater than 10% at May 31, 1999 (as a percentage of net
assets):
MBIA 17.5%
- -------------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 1999
Total Aggregate Face Expiration Unrealized
Market Value Value Date Appreciation
- -------------------------------------------------------------------------------
Municipal Index (Short) $2,927,250 $2,959,969 Jun-99 $32,719
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31, 1999
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $400,888,458) (Note 1) $421,518,644
- -----------------------------------------------------------------------------------------------
Cash 8,575
- -----------------------------------------------------------------------------------------------
Interest and other receivables 7,957,153
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,291,972
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 204,681
- -----------------------------------------------------------------------------------------------
Total assets 430,981,025
Liabilities
- -----------------------------------------------------------------------------------------------
Payable for variation margin 8,250
- -----------------------------------------------------------------------------------------------
Distributions payable to shareholders 820,166
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 2,427,239
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 516,111
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 648,753
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 47,788
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 10,232
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,621
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 193,886
- -----------------------------------------------------------------------------------------------
Other accrued expenses 61,608
- -----------------------------------------------------------------------------------------------
Total liabilities 4,735,654
- -----------------------------------------------------------------------------------------------
Net assets $426,245,371
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $412,616,934
- -----------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (182,400)
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (6,852,068)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 20,662,905
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $426,245,371
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($298,242,918 divided by 31,558,298 shares) $9.45
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/95.25 of $9.45)* $9.92
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($122,653,912 divided by 12,990,409 shares)+ $9.44
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($5,348,541 divided by 566,194 shares) $9.45
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $9.45)** $9.77
- -----------------------------------------------------------------------------------------------
* 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, 1999
<S> <C>
Tax exempt interest income: $25,429,610
- -----------------------------------------------------------------------------------------------
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 2,514,877
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 542,146
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 10,679
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 6,882
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 599,924
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 984,302
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 17,159
- -----------------------------------------------------------------------------------------------
Reports to shareholders 36,593
- -----------------------------------------------------------------------------------------------
Registration fees 8,173
- -----------------------------------------------------------------------------------------------
Auditing 32,853
- -----------------------------------------------------------------------------------------------
Legal 10,917
- -----------------------------------------------------------------------------------------------
Postage 27,862
- -----------------------------------------------------------------------------------------------
Other 42,113
- -----------------------------------------------------------------------------------------------
Total expenses 4,834,480
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (70,937)
- -----------------------------------------------------------------------------------------------
Net expenses 4,763,543
- -----------------------------------------------------------------------------------------------
Net investment income 20,666,067
- -----------------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 300,754
- -----------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,475,979)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures contracts during the year (5,834,626)
- -----------------------------------------------------------------------------------------------
Net loss on investments (7,009,851)
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $13,656,216
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 20,666,067 $ 20,001,406
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,175,225) 1,042,652
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (5,834,626) 10,810,187
- ---------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 13,656,216 31,854,245
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A (15,623,127) (15,261,832)
- ---------------------------------------------------------------------------------------------------------------
Class B (5,275,795) (4,463,933)
- ---------------------------------------------------------------------------------------------------------------
Class M (164,850) (127,246)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 31,754,164 21,464,363
- ---------------------------------------------------------------------------------------------------------------
Total increase in net assets 24,346,608 33,465,597
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of year 401,898,763 368,433,166
- ---------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of
net investment income and undistributed
net investment income of $182,400 and
$242,032, respectively) $426,245,371 $401,898,763
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.61 $9.31 $9.11 $9.21 $9.05
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .49 .51 .52 .54 .55
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.15) .30 .21 (.10) .18
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .34 .81 .73 .44 .73
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.50) (.51) (.53) (.54) (.55)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.50) (.51) (.53) (.54) (.57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.45 $9.61 $9.31 $9.11 $9.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.60 8.86 8.17 4.81 8.45
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $298,243 $293,978 $280,402 $259,934 $251,232
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .97 .95 .96 .95 .89
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 5.11 5.33 5.67 5.80 6.11
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.42 31.13 19.12 34.57 47.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.61 $9.30 $9.10 $9.20 $9.05
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .43 .45 .46 .48 .49
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.16) .30 .21 (.11) .17
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .27 .75 .67 .37 .66
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.44) (.44) (.47) (.47) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.44) (.44) (.47) (.47) (.51)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.44 $9.61 $9.30 $9.10 $9.20
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 2.81 8.27 7.47 4.12 7.64
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $122,654 $105,351 $85,192 $65,538 $47,573
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.62 1.60 1.61 1.60 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.47 4.67 4.99 5.13 5.46
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.42 31.13 19.12 34.57 47.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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
- ------------------------------------------------------------------------------------------------------------------------------------
1999 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 .46 .48 .50 .51 .02(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (.15) .30 .21 (.11) .12
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations .31 .78 .71 .40 .14
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income (.47) (.48) (.50) (.51) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of net
realized gain -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (.47) (.48) (.50) (.51) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $9.45 $9.61 $9.31 $9.10 $9.21
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 3.29 8.55 7.96 4.37 1.53*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $5,349 $2,570 $2,839 $1,290 $22
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.27 1.25 1.26 1.24 .06*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) 4.81 5.05 5.30 5.58 .30*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 9.42 31.13 19.12 34.57 47.53
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total 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, 1999
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"), a wholly-owned subsidiary of Putnam Investments, Inc.,
believes is consistent with preservation of capital by investing primarily
in a portfolio of Massachusetts tax-exempt securities.
The fund offers class A, class B and class M shares. Class A shares are
sold with a maximum front-end sales charge of 4.75%. Class B shares, which
convert to class A shares after approximately eight years, do not pay a
front-end sales charge, but pay a higher ongoing distribution fee than
class A shares, and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class M shares are
sold with a maximum front-end sales charge of 3.25% and pay an ongoing
distribution fee that is lower than class B shares and higher than class A
shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with generally
accepted accounting principles and requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities. Actual results could differ from those estimates.
A) Security valuation Tax-exempt bonds and notes are stated on the basis
of valuations provided by a pricing service, approved by the Trustees,
which uses information with respect to transactions in bonds, quotations
from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. Short-term
tax-exempt investments having remaining maturities of 60 days or less are
stated at amortized cost 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,
1999, the fund had a capital loss carryover of approximately $3,728,000
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
588,000 May 31, 2007
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 post-October loss deferrals, dividends payable,
unrealized gains and losses on certain futures contracts and current year
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, 1999, the fund reclassified $26,727 to increase
distributions in excess of net investment income and $26,727 to increase
paid-in- capital. 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 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 year ended May
31, 1999, 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. On June 4, 1999, the Trustees approved a management fee
schedule to become effective July 1, 1999, based upon the lesser of (i) an
annual rate of 0.50% of the average net asset value of the fund or (ii)
the initial tiers mentioned above.
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, 1999, fund expenses were reduced by $70,937
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 $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 up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees have approved payment by the fund 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, 1999, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $49,656 and $2,029 from the sale
of class A and class M shares, respectively and $213,777 in contingent
deferred sales charges from redemptions of class B shares. A deferred
sales charge of up to 1% is assessed on certain redemptions of class A
shares. For the year ended May 31, 1999, Putnam Mutual Funds Corp., acting
as underwriter received $291 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1999, purchases and sales of investment
securities other than short-term investments aggregated $68,262,820 and
$38,605,953, 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, 1999, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 1999
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,428,064 $42,583,002
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 897,278 8,622,349
- -----------------------------------------------------------------------------
5,325,342 51,205,351
Shares
repurchased (4,345,147) (41,754,222)
- -----------------------------------------------------------------------------
Net increase 980,195 $ 9,451,129
- -----------------------------------------------------------------------------
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, 1999
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 3,303,119 $31,731,900
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 330,361 3,172,011
- -----------------------------------------------------------------------------
3,633,480 34,903,911
Shares
repurchased (1,610,664) (15,460,661)
- -----------------------------------------------------------------------------
Net increase 2,022,816 $19,443,250
- -----------------------------------------------------------------------------
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, 1999
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,188,317 $ 11,361,770
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 12,069 115,843
- -----------------------------------------------------------------------------
1,200,386 11,477,613
Shares
repurchased (901,684) (8,617,828)
- -----------------------------------------------------------------------------
Net increase 298,702 $ 2,859,785
- -----------------------------------------------------------------------------
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)
- -----------------------------------------------------------------------------
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 2000 will show the tax status of all
distributions paid to your account in calendar 1999.
Fund information
WEB SITE
www.putnaminv.com
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
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
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
David E. Hamlin
Vice President and Fund Manager
Richard A. Monaghan
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' Web site: 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
- ---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN047-53218 845/236/258 7/99
