N-30D 1 0001.txt PUTNAM MASSACHUSETTS TAX EXEMPT INCOME FUND Putnam Massachusetts Tax Exempt Income Fund ANNUAL REPORT ON PERFORMANCE AND OUTLOOK 5-31-00 [SCALE LOGO OMITTED] From the Trustees [GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III] Dear Shareholder: It is a pleasure to greet you in our new roles as Chairman of the Trustees and President of the Funds. As you know, both of us have been members of the Board of Trustees for a number of years -- years in which Putnam has experienced tremendous growth and transformed itself from a respected U.S. investment management firm to a financial institution with a global presence. As the organization makes its way into the new century, we are certain that the changes that lie ahead will be even more breathtaking in their scope. What will not change is the Trustees' dedication to serving the best interests of our shareholders. We embark upon this new era of Putnam's rich heritage with confidence and we look forward to the opportunity of continuing to help you meet your financial objectives for many years to come. Respectfully yours, /S/ JOHN A. HILL /S/ GEORGE PUTNAM, III John A. Hill George Putnam, III Chairman of the Trustees President of the Funds July 19, 2000 REPORT FROM THE FUND MANAGER Richard P. Wyke Municipal bond performance for the year ended May 31, 2000, may have been somewhat discouraging, but shareholders can take heart in the news that Putnam Massachusetts Tax Exempt Income Fund held up better than many of its peers. Furthermore, experience has taught us that uncertainty provides fertile ground for bargain hunters with conviction and patience. We have endeavored to make the most of the buying opportunities in the recent bond market selloff, positioning your fund for brighter days. Total return for 12 months ended 5/31/00 Class A Class B Class M NAV POP NAV CDSC NAV POP ---------------------------------------------------- -2.20% -6.83% -2.85% -7.47% -2.50% -5.69% ---------------------------------------------------- Past performance is no indication of future results. Performance information for longer periods and explanation of performance calculation methods begin on page 6. * HOPEFUL SIGNS EMERGE DESPITE UNCERTAINTIES Bond markets have weathered some chilly uncertainty over these past several months. A whole host of factors, including strong economic growth, rising interest rates, even the Justice Department's antitrust case against Microsoft, have unnerved investors. It is not hard to understand why bond investors may overlook more favorable trends when they are bombarded with such headlines every day. Despite a difficult year, there is evidence that the bond markets may have overcorrected under the circumstances. Inflation is holding steady at under 3%, and the health of the Massachusetts economy is strong, providing municipalities throughout the commonwealth with higher tax revenues and improving creditworthiness. Furthermore, the Federal Reserve Board's war on inflation merits a vote of confidence for fixed-income securities down the road. [GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS] TOP INDUSTRY SECTORS* Health care 37.6% Transportation 10.4% Water and sewer 6.9% Housing 4.8% Waste management 2.8% Footnote reads: *Based on net assets as of 5/31/00. Holdings will vary over time. For much of the fund's fiscal year, strong economic growth and the risk of higher inflation eroded the value of fixed-income investments, including municipal bonds. The Federal Reserve Board's hawkish, anti-inflation bent is strong medicine, but most analysts agree it is the best prescription. Bonds did experience a temporary reprieve in mid February when the U.S. Treasury announced a buyback program of outstanding debt. This event, combined with rising expectations that the economy would begin to slow down in the second half of the year, sparked a rally in fixed-income markets. * RISING RATES LEAD TO WIDER CREDIT SPREADS New statistics came to light in March, April, and May, however, suggesting that the economy was not cooling down. Consumer spending -- the economy's growth engine for the past two years -- remains robust, and inflationary pressures exist. With investors' upbeat mood effectively squelched, municipal bond prices retreated for the balance of the reporting period. Interest rates at both ends of the yield curve began to climb again in expectation of more aggressive Fed tightening. As the bond markets predicted, the Fed initiated its sixth and largest increase in May, half a percentage point, since it began its crusade in June 1999. We believe, however, that the municipal bond market may slowly be approaching the point at which the news gets better. It may not seem like good news, but a responsible Fed that proactively seeks to contain inflation is good news for bond investors. True, Fed policy and rising interest rates have been the main reason for the choppy municipal bond market this year, but municipal bond yields are really not much higher and bond prices have not gone much lower than they were in October 1999. Rather, it is the short-term Treasury rates and mortgage interest rates that have seen the greatest volatility. [GRAPHIC OMITTED: pie chart CREDIT QUALITY OVERVIEW] CREDIT QUALITY OVERVIEW* AAA/Aaa -- 49.8% AA/Aa -- 6.9% A -- 17.3% BBB/Baa -- 14.2% BB/Ba -- 8.0% B -- 1.6% Other -- 2.2% Footnote reads: *As a percentage of market value as of 5/31/00. 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. Putnam Massachusetts Tax Exempt Income Fund's class A shares were ranked in the top 20% of the tax-exempt income funds tracked by Lipper Analytical Services for the 1-, 5-, and 10-year period ended May 31, 2000. The fund's class A shares ranked 11 out of 57 (19%), 7 out of 48 (15%), and 2 out of 18 (11%) for the 1-,5-, and 10-year periods, respectively.* *Past performance is no guarantee of future results. Lipper is an industry research firm whose rankings are based on total return performance, vary over time, and do not reflect the effects of sales charges. Performance of other share classes will vary. With the increase in interest rates has come a dramatic widening of credit spreads between lower-yielding higher-quality municipal bonds and higher-yielding lower-quality municipal bonds. This spread was most pronounced in January and March, and when possible, we took advantage of the more affordable prices in the lower end of the credit spectrum. Normally a BBB-rated bond yields about one half percentage point more than a AAA-rated bond, but now we are seeing a three-quarter point difference between the two bonds, an extremely attractive yield difference that in our view, compensates investors for the slightly higher risk inherent in a BBB-rated bond. * BIG DIG, HARVARD PILGRIM STIR UP MUNI MARKET The widening of credit spreads in the health-care sector has been most dramatic for the Massachusetts municipal bond market. Since passage of the Balanced Budget Act in 1996 and its mandate for lower Medicare reimbursements, the health-care industry has experienced massive restructuring and cost-cutting programs. Citing large losses, Harvard Pilgrim Health Care was forced to pull out of neighboring states where it had expanded in the early 1990s. When Harvard Pilgrim announced it had become insolvent, the fate of several Massachusetts hospitals awaiting payment for patient services came into question. We are closely monitoring the impact of this event on hospital investments in the fund but do not believe any holdings are at risk of significant credit deterioration at this time. However, these bonds are likely to remain under some pressure until the outlook for the sector as a whole improves. "Now is a particularly good time to look at [municipals] since muni debt is paying as much as 30-year Treasuries -- and it's tax-exempt." -- SmartMoney.com, April 20, 2000 Massachusetts general obligation (GO) bonds also came under pressure when budget overruns with the Big Dig construction project in Boston came to light, calling into question the state's creditworthiness. However, after a thorough review by the U.S. Department of Transportation, the project will proceed with the state providing additional funding from higher tolls and surplus tax revenues. Consequently, Massachusetts should not sustain any credit deterioration, especially given the currently strong economy. While these holdings, along with others discussed in this report, were viewed favorably at the end of the period, all are subject to review and adjustment in accordance with the fund's investment strategy and may vary in the future. * SIGNS OF SLOWING ECONOMY CALL FOR PATIENCE It is difficult to know exactly when the economy will begin to slow and interest rates will begin to fall, but we do know that the signs are there: as of the end of the period, 30-year mortgage interest rates were close to 9%, corporate bond rates were also approaching 9%, and the lure of common stocks, particularly in the technology and telecommunications sector, was fading. These three indicators have historically correlated with a weakening economy, a slowdown in consumer spending, and lower interest rates. Since the Fed's monetary policy acts with a lag, we continue to believe that inflation pressures remain tame and the Fed's rate increases will eventually take hold and slow the economy. The markets are likely to be unstable over the near term and we may see another rate increase, but once reports show that economic growth is slowing, bond markets, including the municipal bond market, should perform better. 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 5/31/00, 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 Massachusetts state income taxes, consistent with capital preservation. TOTAL RETURN FOR PERIODS ENDED 5/31/00 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 -2.20% -6.83% -2.85% -7.47% -2.50% -5.69% ------------------------------------------------------------------------------ 5 years 24.99 19.05 20.96 19.06 23.12 19.12 Annual average 4.56 3.55 3.88 3.55 4.25 3.56 ------------------------------------------------------------------------------ 10 years 92.09 83.08 78.27 78.27 85.20 79.18 Annual average 6.75 6.23 5.95 5.95 6.36 6.01 ------------------------------------------------------------------------------ Life of fund 100.11 90.67 84.84 84.84 92.44 86.24 Annual average 6.76 6.28 5.97 5.97 6.37 6.04 ------------------------------------------------------------------------------ COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 05/31/00 Lehman Brothers Municipal Consumer Bond Index price index ---------------------------------------------------------------------------- 1 year -0.86% 3.07% ---------------------------------------------------------------------------- 5 years 28.55 12.55 Annual average 5.15 2.39 ---------------------------------------------------------------------------- 10 years 94.58 32.59 Annual average 6.88 2.86 ---------------------------------------------------------------------------- Life of fund 103.39 36.39 Annual average 6.94 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. [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 5/31/90 Lehman Brothers Fund's class A Municipal Bond Consumer price Date shares at POP Index index 5/31/90 9,529 10,000 10,000 5/31/91 10,492 11,008 10,495 5/31/92 11,747 12,089 10,813 5/31/93 13,252 13,535 11,161 5/31/94 13,506 13,869 11,416 5/31/95 14,647 15,137 11,780 5/31/96 15,351 15,828 12,121 5/31/97 16,605 17,141 12,392 5/31/98 18,069 18,750 12,601 5/31/99 18,720 19,627 12,864 5/31/00 $18,308 $19,458 $13,259 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 $17,827 and no contingent deferred sales charges would apply; a $10,000 investment in the fund's class M shares would have been valued at $18,520 ($17,918 at public offering price).
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/00 Class A Class B Class M ------------------------------------------------------------------------------ Distributions (number) 12 12 12 ------------------------------------------------------------------------------ Income $0.4990 $0.4397 $0.4716 ------------------------------------------------------------------------------ Capital gains1 -- -- -- ------------------------------------------------------------------------------ Total $0.4990 $0.4397 $0.4716 ------------------------------------------------------------------------------ Share value: NAV POP NAV NAV POP ------------------------------------------------------------------------------ 5/31/99 $9.45 $9.92 $9.44 $9.45 $9.77 ------------------------------------------------------------------------------ 5/31/00 8.74 9.18 8.73 8.74 9.03 ------------------------------------------------------------------------------ Current return (end of period) ------------------------------------------------------------------------------- Current dividend rate2 5.63% 5.37% 4.98% 5.33% 5.16% ------------------------------------------------------------------------------- Taxable equivalent3 9.91 9.44 8.75 9.37 9.07 ------------------------------------------------------------------------------- Current 30-day SEC yield4 5.31 5.05 4.66 5.01 4.85 ------------------------------------------------------------------------------- Taxable equivalent3 9.34 8.88 8.19 8.81 8.53 ------------------------------------------------------------------------------- 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 43.13% 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 6/30/00 (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 1.64% -3.17% 1.00% -3.82% 1.46% -1.83% ---------------------------------------------------------------------- 5 years 29.34 23.22 25.21 23.24 27.43 23.35 Annual average 5.28 4.26 4.60 4.27 4.97 4.29 ---------------------------------------------------------------------- 10 years 94.82 85.47 80.97 80.97 88.02 81.95 Annual average 6.90 6.37 6.11 6.11 6.52 6.17 ---------------------------------------------------------------------- Life of fund 104.92 95.25 89.24 89.24 97.04 90.69 Annual average 6.94 6.46 6.15 6.15 6.55 6.22 ---------------------------------------------------------------------- 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 performance calculation method. TERMS AND DEFINITIONS Total return shows how the value of the fund's shares changed over time, assuming you held the shares through the entire period and reinvested all distributions in the fund. Class A shares are generally subject to an initial sales charge. Class B shares may be subject to a sales charge upon redemption. Class M shares have a lower initial sales charge and a higher 12b-1 fee than class A shares and no sales charge on redemption. Net asset value (NAV) is the value of all your fund's assets, minus any liabilities, divided by the number of outstanding shares, not including any initial or contingent deferred sales charge. Public offering price (POP) is the price of a mutual fund share plus the maximum sales charge levied at the time of purchase. POP performance figures shown here assume the 4.75% maximum sales charge for class A shares and 3.25% for class M shares. Contingent deferred sales charge (CDSC) is a charge applied at the time of the redemption of class B shares and assumes redemption at the end of the period. Your fund's CDSC declines from a 5% maximum during the first year to 1% during the sixth year. After the sixth year, the CDSC no longer applies. COMPARATIVE BENCHMARKS Lehman Brothers Municipal Bond Index is an unmanaged list of long-term fixed-rate investment-grade tax-exempt bonds representative of the municipal bond market. The index does not take into account brokerage commissions or other costs, may include bonds different from those in the fund, and may pose different risks than the fund. It is not possible to invest directly in an index. Consumer price index (CPI) is a commonly used measure of inflation; it does not represent an investment return. 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 are determined. All investment and noninvestment 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 sources 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-end funds, a separate table is provided for each share class. REPORT OF INDEPENDENT ACCOUNTANTS For the fiscal year ended May 31, 2000 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, 2000 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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, 2000 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts July 7, 2000
THE FUND'S PORTFOLIO May 31, 2000 KEY TO ABBREVIATIONS AMBAC -- AMBAC Indemnity Corporation FGIC -- Financial Guaranty Insurance Company FNMA Coll. -- Federal National Mortgage Association Collateralized FRB -- Floating Rate Bonds FSA -- Financial Security Assurance GNMA Coll. -- Government National Mortgage Association Collateralized G.O. Bonds -- General Obligation Bonds IFB -- Inverse Floating Rate Bonds MBIA -- Municipal Bond Investors Assurance Corporation U.S. Govt. Coll. -- U.S. Government Collateralized VRDN -- Variable Rate Demand Notes MUNICIPAL BONDS AND NOTES (98.5%) (a) PRINCIPAL AMOUNT RATING (RAT) VALUE Massachusetts (91.6%) ------------------------------------------------------------------------------------------------------------------- $4,000,000 Boston, Indl. Dev. Fin. Auth. Rev. Bonds (Springhouse, Inc.), 6s, 7/1/28 BB- $ 3,190,000 7,000,000 Boston, Indl. Dev. Fin. Auth. Swr. Fac. Rev. Bonds (Harbor Elec. Energy Co.), 7 3/8s, 5/15/15 Baa1 7,221,060 7,935,000 Boston, Wtr. & Swr. Commn. Rev. Bonds, Ser. A, 5 3/4s, 11/1/13 A2 8,004,431 5,000,000 City of Quincy, IFB (Quincy Hosp.), FSA, 5.92s, 1/15/11 Aaa 4,743,750 5,185,000 Holden, G.O. Bonds, FGIC, 5 1/2s, 3/1/20 AAA 4,906,306 Lowell G.O. Bonds 1,250,000 8.4s, 1/15/09 Aaa 1,298,950 2,455,000 8.3s, 2/15/05 Aaa 2,585,729 MA Bay Trans. Auth. Rev. Bonds 3,550,000 Ser. B, 6.2s, 3/1/16 A1 3,723,063 2,400,000 Ser. C, 6.1s, 3/1/23 A1 2,490,000 7,500,000 (Gen. Trans. Syst.), Ser. B, 5.9s, 3/1/24 A1 7,828,125 4,000,000 Ser. A, 5 1/2s, 3/1/12 A1 3,995,000 MA State G.O. Bonds 5,075,000 AMBAC, 8.85s, 11/1/14 (acquired 5/11/98, cost $6,660,938) (RES) Aa3 6,001,188 1,935,000 Ser. 25, 8.22s, 11/1/11 (acquired 8/13/98, cost $2,401,142) (RES) Aa3 2,099,475 5,000,000 Ser. B, AMBAC, 6 1/4s, 7/1/20 Aaa 5,250,000 4,150,000 Ser. C, 5 1/4s, 8/1/15 Aa3 3,885,438 MA State Dev. Fin. Agcy. Rev. Bonds 3,420,000 (Lasell Village PJ), Ser. A, 6 3/8s, 12/1/25 BB- 2,979,675 1,300,000 (Worcester Redev. Auth. Issue), 6s, 6/1/24 AA 1,288,625 1,750,000 (Boston Biomedical Research), 5 3/4s, 2/1/29 Baa3 1,483,125 2,000,000 (Eastern Nazarine College), 5 5/8s, 4/1/29 BBB- 1,707,500 MA State Hlth. & Edl. Fac. Auth. IFB 2,000,000 (St. Elizabeth Hosp.), Ser. E, FSA, 8.32s, 8/12/21 Aaa3 2,132,500 6,000,000 (Boston U.), Ser. L, MBIA, 8.787s, 10/1/31 Aaa 5,505,000 MA State Hlth. & Edl. Fac. Auth. IFB 7,500,000 (Beth Israel-Deaconess Hosp.), AMBAC, 7.255s, 7/1/25 Aaa 7,903,125 7,900,000 (New England Medical Ctr.), MBIA, 6.43s, 7/1/18 Aaa 6,764,375 MA State Hlth. & Edl. Fac. Auth. Rev. Bonds 5,030,000 (Goddard Memorial Hos.), Ser. B, 9s, 7/1/15 Baa3 5,139,704 2,000,000 (Nichols College), Ser. B, 8 1/2s, 10/1/16 BB-/P 2,125,000 5,810,000 (Rehab. Hosp. Cape & Islands), Ser. A, 7 7/8s, 8/15/24 AAA/P 6,470,888 6,220,000 (MA Eye & Ear Infirmary), Ser. A, 7 3/8s, 7/1/11 Ba1 6,503,383 8,405,000 (Rev. Cooley Dickinson Hosp.), 7 1/8s, 11/15/18 AAA/P 9,014,363 1,900,000 (Sisters Providence Hlth. Syst), Ser. A, 6 5/8s, 11/15/22 Aaa 2,016,375 1,550,000 (Worcester Polytech Inst.), Ser. E, 6 5/8s, 9/1/17 A2 1,633,313 3,880,000 (Metro West Hlth. Inc.), Ser. C, 6 1/2s, 11/15/18 Aaa 4,088,550 5,000,000 (Harvard U.), Ser. N, 6 1/4s, 4/1/20 Aaa 5,300,000 9,850,000 (MA Gen. Hosp.), Ser. F, AMBAC, 6 1/4s, 7/1/12 Aaa 10,441,000 1,000,000 (Learning Ctr. For Deaf Children), Ser. C, 6 1/8s, 7/1/29 BB 900,000 7,250,000 (Newton-Wellesley Hosp.), Ser. E, MBIA, 6s, 7/1/25 Aaa 7,059,688 4,500,000 (Caritas Christian Oblig. Group), Ser. A, 5 5/8s, 7/1/20 Baa2 3,555,000 3,665,000 (Williams College Issue), Ser. G, 5 1/2s, 7/1/14 AA+ 3,610,025 2,250,000 (Cap Cod Hlthcare), Ser. B, 5.45s, 11/15/23 BBB+ 1,749,375 3,000,000 (Jordan Hosp.), Ser. D, 5 3/8s, 10/1/28 BBB+ 2,253,750 4,250,000 (Boston College), Ser. K, 5 3/8s, 6/1/14 A1 4,138,438 3,000,000 (Partners Healthcare Sys.), Ser. B, 5 1/4s, 7/1/11 A1 2,767,500 10,000,000 (MA Inst. of Tech.), Ser. I-1, 5.2s, 1/1/28 (SEG) Aaa 8,887,500 10,915,000 (Boston College), Ser. L, 4 3/4s, 6/1/31 Aa3 8,718,356 MA State Hsg. Fin. Agcy. Rev. Bonds 6,000,000 (Residential Dev.), Ser. C, FNMA Coll., 6.9s, 11/15/21 Aaa 6,262,500 2,000,000 (Residential Dev.), Ser. E, FNMA Coll., 6 1/4s, 11/15/12 Aaa 2,055,000 2,000,000 Ser. E, AMBAC, 5.9s, 7/1/25 Aaa 1,900,000 5,000,000 Ser. C, AMBAC, 5 5/8s, 7/1/40 AAA 4,462,500 MA State Indl. Fin. Agcy. Res. Recvy. Rev. Bonds (Southeastern MA) 6,500,000 Ser. B, 9 1/4s, 7/1/15 BB-/P 6,901,505 3,410,000 Ser. A, 9s, 7/1/15 BB-/P 3,615,623 MA State Indl. Fin. Agcy. Rev. Bonds 6,000,000 (Orchard Cove Inc.), U. S. Govt. Coll., 9s, 5/1/22 AAA/P 6,585,000 3,705,000 (MA Tpk.), 9s, 10/1/20 AAA/P 3,822,782 3,000,000 (1st Mtge. Stone Institution & Newton), 7.9s, 1/1/24 BBB 3,030,000 5,140,000 (1st Mtge. Loomis & Village), 7 5/8s, 7/1/25 B 5,776,075 7,055,000 (Merrimack College), 7 1/8s, 7/1/12 AAA 7,487,119 3,500,000 (1st Mtge. Brookhaven), Ser. A, 7s, 1/1/15 BBB 3,521,875 1,165,000 (Clark U.), Ser. E, 7s, 7/1/12 A3 1,212,194 2,605,000 (Clark U.), Ser. F, 7s, 7/1/11 A3 2,713,576 3,000,000 (1st. Mtge. Brookhaven), Ser. A, 7s, 1/1/09 BBB 3,078,750 5,875,000 (American Hingham, Wtr. Treatment), 6 3/4s, 12/1/25 BBB 5,970,469 MA State Indl. Fin. Agcy. Rev. Bonds 6,000,000 (1st Mtge. Berkshire Retirement Home), Ser. A, 6 5/8s, 7/1/16 BBB 5,827,500 2,000,000 (1st Mtge. Brookhaven), Ser. B, 6.6s, 1/1/17 BBB 1,930,000 1,255,000 (Worcester Visiting Nurse Assoc.), 6.4s, 9/15/10 A- 1,244,015 3,385,000 (Park School), 5.9s, 9/1/26 A3 3,164,975 1,650,000 (Wentworth Inst. of Tech.), 5 3/4s, 10/1/28 Baa1 1,503,563 2,000,000 (Babson College), Ser. A, MBIA, 4 3/4s, 10/1/28 Aaa 1,607,500 12,250,000 (Tufts U.), Ser. H, MBIA, 4 3/4s, 2/15/28 Aaa 9,922,500 MA State Tpk. Auth. Rev. Bonds 5,000,000 (Metropolitan Hwy. Syst.), Ser. A, 5 1/4s, 1/1/29 Aaa 4,375,000 20,100,000 Ser. A, MBIA, 5s, 1/1/37 Aaa 16,683,000 2,400,000 MA State Tpk. Auth. Hwy. Syst. Rev. Bonds, Ser. A, AMBAC, 5s, 1/1/39 Aaa 1,983,000 7,000,000 MA State Wtr. Pollution Abatement Rev. Bonds (Pool Program), Ser. 5, 5 3/8s, 8/1/27 Aaa 6,300,000 5,000,000 MA State Wtr. Resources Auth. , FRB, 6.21s, 8/1/39 (acquired 3/9/00, cost $4,652,700) (RES) A1 4,475,000 MA State Wtr. Resources Auth. Rev. Bonds 10,000,000 Ser. A, 6 1/2s, 7/15/19 A2 10,637,500 2,900,000 Ser. C, MBIA, 5 1/4s, 12/1/15 A3 2,773,125 Somerville, Hsg. Auth. Rev. Bonds (Clarendon-Hill Mtge.) 2,000,000 GNMA Coll., 7.95s, 11/20/30 AAA 2,055,220 1,250,000 GNMA Coll., 7.85s, 11/20/10 AAA 1,284,888 1,000,000 Westford, G.O. Bonds, FGIC, 5 1/4s, 4/1/20 Aaa 921,250 2,985,000 Worcester Mtge. Rev. Bonds (Briarwood Issue), 9 1/4s, 12/1/22 BB- 3,212,606 ---------------- 341,654,258 Puerto Rico (6.9%) ------------------------------------------------------------------------------------------------------------------- Cmnwlth. of PR, G.O. Bonds 1,700,000 FSA, 6 1/2s, 7/1/13 AAA 1,876,375 4,000,000 5 1/2s, 7/1/10 Baa1 4,035,000 8,100,000 Cmnwlth. of PR, Govt. Dev. Bank VRDN, MBIA, 3.4s, 12/1/15 VMIG1 8,100,000 Cmnwlth. of PR, Hwy. & Trans. Auth. Rev. Bonds 2,925,000 Ser. Y, MBIA, 6 1/4s, 7/1/13 Aaa 3,148,031 5,000,000 Ser. W, MBIA, 5 1/2s, 7/1/15 Aaa 5,012,500 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 A3 2,574,000 1,000,000 PR Pub. Bldg. Auth. Rev. Bonds, Ser. K, 6 7/8s, 7/1/21 Aaa 1,055,000 ---------------- 25,800,906 ------------------------------------------------------------------------------------------------------------------- Total Investments (cost $377,510,458) (b) $ 367,455,164 ------------------------------------------------------------------------------------------------------------------- (a) Percentages indicated are based on net assets of $373,078,392. (RAT) The Moody's or Standard & Poor's ratings indicated are believed to be the most recent ratings available at May 31, 2000 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, 2000. 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 $377,510,458, resulting in gross unrealized appreciation and depreciation of $8,961,886 and $19,017,180, respectively, or net unrealized depreciation of $10,055,294. (RES) Restricted, excluding 144A securities, as to public resale. The total market value of restricted securities held at May 31, 2000 was $12,575,663 or 3.4% 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, 2000. The rates shown on Floating Rate Bonds (FRB) are the current interest rates at May 31, 2000, which are subject to change based on the security. 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, 2000. The fund had the following industry group concentrations greater than 10% at May 31, 2000 (as a percentage of net assets): Health care 37.6% Transportation 10.4 The fund had the following insurance concentrations greater than 10% at May 31, 2000 (as a percentage of net assets): MBIA 17.8% AMBAC 10.2 ------------------------------------------------------------------------ Futures Contracts Outstanding at May 31, 2000 Aggregate Face Expiration Unrealized Total Value Value Date Depreciation ------------------------------------------------------------------------ Muni Bond Index (Short) $1,395,000 $1,388,487 Sep-00 $(6,513) ------------------------------------------------------------------------ The accompanying notes are an integral part of these financial statements.
STATEMENT OF ASSETS AND LIABILITIES May 31, 2000 Assets ------------------------------------------------------------------------------------------- Investments in securities, at value (identified cost $377,510,458) (Note 1) $367,455,164 ------------------------------------------------------------------------------------------- Cash 1,024,055 ------------------------------------------------------------------------------------------- Interest and other receivables 7,161,388 ------------------------------------------------------------------------------------------- Receivable for shares of the fund sold 210,476 ------------------------------------------------------------------------------------------- Total assets 375,851,083 Liabilities ------------------------------------------------------------------------------------------- Payable for variation margin 12,656 ------------------------------------------------------------------------------------------- Distributions payable to shareholders 760,595 ------------------------------------------------------------------------------------------- Payable for shares of the fund repurchased 1,267,873 ------------------------------------------------------------------------------------------- Payable for compensation of Manager (Note 2) 474,151 ------------------------------------------------------------------------------------------- Payable for investor servicing and custodian fees (Note 2) 27,632 ------------------------------------------------------------------------------------------- Payable for compensation of Trustees (Note 2) 12,715 ------------------------------------------------------------------------------------------- Payable for administrative services (Note 2) 1,000 ------------------------------------------------------------------------------------------- Payable for distribution fees (Note 2) 166,937 ------------------------------------------------------------------------------------------- Other accrued expenses 49,132 ------------------------------------------------------------------------------------------- Total liabilities 2,772,691 ------------------------------------------------------------------------------------------- Net assets $373,078,392 Represented by ------------------------------------------------------------------------------------------- Paid-in capital (Notes 1 and 4) $391,279,113 ------------------------------------------------------------------------------------------- Distributions in excess of net investment income (Note 1) (246,148) ------------------------------------------------------------------------------------------- Accumulated net realized loss on investments (Note 1) (7,892,766) ------------------------------------------------------------------------------------------- Net unrealized depreciation of investments (10,061,807) ------------------------------------------------------------------------------------------- Total -- Representing net assets applicable to capital shares outstanding $373,078,392 Computation of net asset value and offering price ------------------------------------------------------------------------------------------- Net asset value and redemption price per class A share ($259,478,749 divided by 29,687,518 shares) $8.74 ------------------------------------------------------------------------------------------- Offering price per class A share (100/95.25 of $8.74)* $9.18 ------------------------------------------------------------------------------------------- Net asset value and offering price per class B share ($109,425,693 divided by 12,530,548 shares)+ $8.73 ------------------------------------------------------------------------------------------- Net asset value and redemption price per class M share ($4,173,950 divided by 477,694 shares) $8.74 ------------------------------------------------------------------------------------------- Offering price per class M share (100/96.75 of $8.74)** $9.03 ------------------------------------------------------------------------------------------- * 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.
STATEMENT OF OPERATIONS Year ended May 31, 2000 Tax exempt interest income: $ 25,106,407 ------------------------------------------------------------------------------------------- Expenses: ------------------------------------------------------------------------------------------- Compensation of Manager (Note 2) 2,013,175 ------------------------------------------------------------------------------------------- Investor servicing and custodian fees (Note 2) 385,923 ------------------------------------------------------------------------------------------- Compensation of Trustees (Note 2) 13,183 ------------------------------------------------------------------------------------------- Administrative services (Note 2) 5,558 ------------------------------------------------------------------------------------------- Distribution fees -- Class A (Note 2) 548,731 ------------------------------------------------------------------------------------------- Distribution fees -- Class B (Note 2) 993,109 ------------------------------------------------------------------------------------------- Distribution fees -- Class M (Note 2) 24,849 ------------------------------------------------------------------------------------------- Reports to shareholders 13,027 ------------------------------------------------------------------------------------------- Auditing 40,214 ------------------------------------------------------------------------------------------- Legal 7,059 ------------------------------------------------------------------------------------------- Postage 20,749 ------------------------------------------------------------------------------------------- Other 41,644 ------------------------------------------------------------------------------------------- Total expenses 4,107,221 ------------------------------------------------------------------------------------------- Expense reduction (Note 2) (205,913) ------------------------------------------------------------------------------------------- Net expenses 3,901,308 ------------------------------------------------------------------------------------------- Net investment income 21,205,099 ------------------------------------------------------------------------------------------- Net realized loss on investments (Notes 1 and 3) (920,391) ------------------------------------------------------------------------------------------- Net realized loss on futures contracts (Note 1) (115,443) ------------------------------------------------------------------------------------------- Net unrealized depreciation of investments and futures contracts during the year (30,724,712) ------------------------------------------------------------------------------------------- Net loss on investments (31,760,546) ------------------------------------------------------------------------------------------- Net decrease in net assets resulting from operations $(10,555,447) ------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN NET ASSETS Year ended May 31 ------------------------------ 2000 1999 -------------------------------------------------------------------------------------------------- Increase (decrease) in net assets -------------------------------------------------------------------------------------------------- Operations: -------------------------------------------------------------------------------------------------- Net investment income $ 21,205,099 $ 20,666,067 -------------------------------------------------------------------------------------------------- Net realized loss on investments (1,035,834) (1,175,225) -------------------------------------------------------------------------------------------------- Net unrealized depreciation of investments (30,724,712) (5,834,626) -------------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations (10,555,447) 13,656,216 -------------------------------------------------------------------------------------------------- Distributions to shareholders: -------------------------------------------------------------------------------------------------- From net investment income Class A (15,245,154) (15,623,127) -------------------------------------------------------------------------------------------------- Class B (5,724,606) (5,275,795) -------------------------------------------------------------------------------------------------- Class M (266,663) (164,850) -------------------------------------------------------------------------------------------------- Increase (decrease) from capital share transactions (Note 4) (21,375,109) 31,754,164 -------------------------------------------------------------------------------------------------- Total increase (decrease) in net assets (53,166,979) 24,346,608 Net assets -------------------------------------------------------------------------------------------------- Beginning of year 426,245,371 401,898,763 -------------------------------------------------------------------------------------------------- End of year (including distributions in excess of net investment income of $246,148 and $182,400, respectively) $373,078,392 $426,245,371 -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) CLASS A ------------------------------------------------------------------------------------------------ Per-share operating performance Year ended May 31 ------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------ Net asset value, beginning of period $9.45 $9.61 $9.31 $9.11 $9.21 ------------------------------------------------------------------------------------------------ Investment operations ------------------------------------------------------------------------------------------------ Net investment income .50 .49 .51 .52 .54 ------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (.71) (.15) .30 .21 (.10) ------------------------------------------------------------------------------------------------ Total from investment operations (.21) .34 .81 .73 .44 ------------------------------------------------------------------------------------------------ Less distributions: ------------------------------------------------------------------------------------------------ From net investment income (.50) (.50) (.51) (.53) (.54) ------------------------------------------------------------------------------------------------ Total distributions (.50) (.50) (.51) (.53) (.54) ------------------------------------------------------------------------------------------------ Net asset value, end of period $8.74 $9.45 $9.61 $9.31 $9.11 ------------------------------------------------------------------------------------------------ Ratios and supplemental data ------------------------------------------------------------------------------------------------ Total return at net asset value (%)(a) (2.20) 3.60 8.86 8.17 4.81 ------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $259,479 $298,243 $293,978 $280,402 $259,934 ------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) .84 .97 .95 .96 .95 ------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 5.55 5.11 5.33 5.67 5.80 ------------------------------------------------------------------------------------------------ Portfolio turnover (%) 15.17 9.42 31.13 19.12 34.57 ------------------------------------------------------------------------------------------------ (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets includes amounts paid through expense offset arrangements. (Note 2).
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) CLASS B ------------------------------------------------------------------------------------------------ Per-share operating performance Year ended May 31 ------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------ Net asset value, beginning of period $9.44 $9.61 $9.30 $9.10 $9.20 ------------------------------------------------------------------------------------------------ Investment operations ------------------------------------------------------------------------------------------------ Net investment income .44 .43 .45 .46 .48 ------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (.71) (.16) .30 .21 (.11) ------------------------------------------------------------------------------------------------ Total from investment operations (.27) .27 .75 .67 .37 ------------------------------------------------------------------------------------------------ Less distributions: ------------------------------------------------------------------------------------------------ From net investment income (.44) (.44) (.44) (.47) (.47) ------------------------------------------------------------------------------------------------ Total distributions (.44) (.44) (.44) (.47) (.47) ------------------------------------------------------------------------------------------------ Net asset value, end of period $8.73 $9.44 $9.61 $9.30 $9.10 ------------------------------------------------------------------------------------------------ Ratios and supplemental data ------------------------------------------------------------------------------------------------ Total return at net asset value (%)(a) (2.85) 2.81 8.27 7.47 4.12 ------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $109,426 $122,654 $105,351 $85,192 $65,538 ------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.49 1.62 1.60 1.61 1.60 ------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 4.90 4.47 4.67 4.99 5.13 ------------------------------------------------------------------------------------------------ Portfolio turnover (%) 15.17 9.42 31.13 19.12 34.57 ------------------------------------------------------------------------------------------------ (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets includes amounts paid through expense offset arrangements. (Note 2).
FINANCIAL HIGHLIGHTS (For a share outstanding throughout the period) CLASS M ------------------------------------------------------------------------------------------------ Per-share operating performance Year ended May 31 ------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------ Net asset value, beginning of period $9.45 $9.61 $9.31 $9.10 $9.21 ------------------------------------------------------------------------------------------------ Investment operations ------------------------------------------------------------------------------------------------ Net investment income .47 .46 .48 .50 .51 ------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments (.71) (.15) .30 .21 (.11) ------------------------------------------------------------------------------------------------ Total from investment operations (.24) .31 .78 .71 .40 ------------------------------------------------------------------------------------------------ Less distributions: ------------------------------------------------------------------------------------------------ From net investment income (.47) (.47) (.48) (.50) (.51) ------------------------------------------------------------------------------------------------ Total distributions (.47) (.47) (.48) (.50) (.51) ------------------------------------------------------------------------------------------------ Net asset value, end of period $8.74 $9.45 $9.61 $9.31 $9.10 ------------------------------------------------------------------------------------------------ Ratios and supplemental data ------------------------------------------------------------------------------------------------ Total return at net asset value (%)(a) (2.50) 3.29 8.55 7.96 4.37 ------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) $4,174 $5,349 $2,570 $2,839 $1,290 ------------------------------------------------------------------------------------------------ Ratio of expenses to average net assets (%)(b) 1.14 1.27 1.25 1.26 1.24 ------------------------------------------------------------------------------------------------ Ratio of net investment income to average net assets (%) 5.25 4.81 5.05 5.30 5.58 ------------------------------------------------------------------------------------------------ Portfolio turnover (%) 15.17 9.42 31.13 19.12 34.57 ------------------------------------------------------------------------------------------------ (a) Total return assumes dividend reinvestment and does not reflect the effect of sales charges. (b) The ratio of expenses to average net assets includes amounts paid through expense offset arrangements. (Note 2).
NOTES TO FINANCIAL STATEMENTS May 31, 2000 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 Putnam Investment Management, Inc. ("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 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 higher than class A but lower than class B 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 of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. 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. Restricted securities are stated at fair value following procedures approved by the Trustees. Such valuations and procedures are reviewed periodically by the Trustees. 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). Gains or losses on securities sold are determined on the identified cost basis. 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, 2000, the fund had a capital loss carryover of approximately $5,898,000 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 596,000 May 31, 2007 2,162,000 May 31, 2008 E) Distributions to shareholders Income dividends are recorded daily by the fund and 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. These differences include temporary and permanent differences of post October loss deferrals, dividends payable, unrealized gains and losses on certain futures contracts, market discount and current year straddles. 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, 2000, the fund reclassified $32,424 to increase distributions in excess of net investment income and $37,288 to increase paid-in-capital, with an increase to accumulated net realized loss of $4,864. The calculation of net investment income per share in the financial highlights table excludes these adjustments. F) Amortization of bond premium and accretion of bond discount Any premium resulting from the purchase of securities in excess of maturity value is amortized on a yield-to-maturity basis. Discounts on zero coupon bonds and original issue discount bonds are accreted according to the yield-to-maturity basis. The premium in excess of the call price, if any, is amortized to the call date; thereafter, the remaining excess premium is amortized to maturity. 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, 2000, 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 upon the lesser of (i) an annual rate of 0.50% of the average net asset value of the fund or (ii) 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. Prior to July 1, 1999, the management fee was based on (ii) 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, 2000, fund expenses were reduced by $205,913 under expense offset arrangements with PFTC and brokerage service arrangements. 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 $583 has been allocated to the fund, and an additional fee for each Trustees meeting attended. 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 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 a 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 Retail Management, Inc., 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 Retail Management Inc. 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, 2000, Putnam Retail Management, Inc. acting as underwriter received net commissions of $50,524 and $1,156 from the sale of class A and class M shares, respectively, and $319,763 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, 2000, Putnam Retail Management, Inc., acting as underwriter received $2,691 on class A redemptions. Note 3 Purchases and sales of securities During the year ended May 31, 2000, cost of purchases and proceeds from sales of investment securities other than short-term investments aggregated $58,429,861 and $81,866,529, respectively. There were no purchases or sales of U.S. government obligations. Note 4 Capital shares At May 31, 2000, there was an unlimited number of shares of beneficial interest authorized. Transactions in capital shares were as follows: Year ended May 31, 2000 --------------------------------------------------------------------------- Class A Shares Amount --------------------------------------------------------------------------- Shares sold 4,596,184 $ 41,068,854 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 942,621 8,429,557 --------------------------------------------------------------------------- 5,538,805 49,498,411 Shares repurchased (7,409,585) (66,211,334) --------------------------------------------------------------------------- Net decrease (1,870,780) $(16,712,923) --------------------------------------------------------------------------- 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, 2000 --------------------------------------------------------------------------- Class B Shares Amount --------------------------------------------------------------------------- Shares sold 2,262,650 $20,346,821 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 372,562 3,328,320 --------------------------------------------------------------------------- 2,635,212 23,675,141 Shares repurchased (3,095,073) (27,566,890) --------------------------------------------------------------------------- Net decrease (459,861) $(3,891,749) --------------------------------------------------------------------------- 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, 2000 --------------------------------------------------------------------------- Class M Shares Amount --------------------------------------------------------------------------- Shares sold 640,087 $5,912,990 --------------------------------------------------------------------------- Shares issued in connection with reinvestment of distributions 13,114 117,306 --------------------------------------------------------------------------- 653,201 6,030,296 Shares repurchased (741,701) (6,800,733) --------------------------------------------------------------------------- Net decrease (88,500) $ (770,437) --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- FEDERAL TAX INFORMATION (Unaudited) The fund has designated 100% 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 2001 will show the tax status of all distributions paid to your account in calendar 2000. THE PUTNAM FAMILY OF FUNDS The following is a complete list of Putnam's open-end mutual funds. 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. GROWTH FUNDS Asia Pacific Growth Fund Capital Appreciation Fund Capital Opportunities Fund Europe Growth Fund Global Equity Fund Global Growth Fund Global Natural Resources Fund Growth Opportunities Fund Health Sciences Trust International Growth Fund International New Opportunities Fund Investors Fund New Century Growth Fund New Opportunities Fund OTC & Emerging Growth Fund Research Fund Tax Smart Equity Fund Vista Fund Voyager Fund Voyager Fund II GROWTH AND INCOME FUNDS Balanced Retirement Fund Classic Equity 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 International Growth and Income Fund New Value Fund Small Cap Value Fund Utilities Growth and Income Fund INCOME FUNDS American Government Income Fund Diversified Income Trust Global Governmental Income Trust High Yield Advantage Fund [DBL. DAGGER] 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 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 ASSET ALLOCATION 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 Growth and Income Fund II [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 not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the funds seek to preserve your investment at $1.00 per share, it is possible to lose money by investing in the fund. Check your account balances and current performance at www.putnaminv.com. FUND INFORMATION WEB SITE www.putnaminv.com INVESTMENT MANAGER Putnam Investment Management, Inc. One Post Office Square Boston, MA 02109 MARKETING SERVICES Putnam Retail Management, Inc. One Post Office Square Boston, MA 02109 CUSTODIAN Putnam Fiduciary Trust Company LEGAL COUNSEL Ropes & Gray INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP TRUSTEES John A. Hill, 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, III 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 Richard P. Wyke Vice President and Fund Manager Richard A. Monaghan Vice President Richard G. Leibovitch Vice President John R. Verani Vice President 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 62256 AN047 845/236/258 7/00