Putnam
Capital
Appreciation
Fund
ANNUAL REPORT
May 31, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* During the fiscal year ended May 31, 1996, total return for Putnam
Capital Appreciation Fund's class A shares rose 37.6%. For the same
period, the average fund in Lipper Analytical Service's Capital
Appreciation category rose 34.2%.*
* "Through an intensive research and screening process, Putnam Capital
Appreciation Fund seeks companies with exceptional potential that have
not yet attracted too much attention from institutional investors. This
allows the fund to pursue growth from stocks trading at reasonable
prices."
-- Gerald S. Zukowski, lead fund manager
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
12 Portfolio holdings
19 Financial statements
*Lipper Analytical Services Inc. is an independent research organization
and does not take into account the effects of sales charges. For the
one-year period, there were 167 funds in Lipper's Capital Appreciation
category. Performance over longer periods can be found on page 8 of this
report. Performance for other share classes will vary. Past performance
is not indicative of future results.
[GRAPHIC OMITTED: photo of George Putnam]
(copyright) Karsh, Ottawa
From the Chairman
Dear Shareholder:
After 33 months of steady growth and unquestionably fine performance,
Putnam Capital Appreciation Fund shows no sign of losing momentum. While
this is a tribute to the efforts of the management team, the sustained
rise of the stock market since the fund's introduction in August 1993
cannot be overlooked.
Such markets do not last indefinitely without an occasional pause, a
point we are moved to make as the fund enters a new fiscal year when
some market volatility is a reasonable expectation. Seasoned investors
with a long-term perspective should take any such turbulence in stride.
In the report that follows, fund managers Gerald Zukowski and Anthony
Santosus review your fund's performance during fiscal 1996 and comment
on their outlook for fiscal 1997.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
July 17, 1996
Report from the Fund Managers
Gerald S. Zukowski, lead manager
Anthony C. Santosus
Bolstered by a favorable investing environment, stocks from across
Putnam Capital Appreciation Fund's portfolio strengthened over the past
12 months. For the fiscal year ended May 31, 1996, your fund's class A
shares rose sharply, gaining 37.57% at net asset value (NAV) and 29.63%
at public offering price (POP). The results at NAV substantially
outpaced the Standard & Poor's 500(registered trademark) Index, which
rose 28.45% over the same period. Please see page 8 of this report for
performance over longer periods and for class B and class M shares.
The gains over the past year are gratifying. However, it is important
for investors not to develop unrealistic expectations about the market.
While we do not believe that domestic stocks are dangerously overvalued
or subject to a major correction, we do anticipate increased volatility
in the coming months as a clearer picture of the economy develops. Over
the longer term, we remain optimistic about U.S. equity markets,
energized as they are by increasingly efficient, globally competitive,
and innovative companies.
* A QUINTESSENTIALLY POSITIVE ENVIRONMENT FOR STOCKS
Fiscal 1996 presented a positive macroeconomic environment for equities.
Low inflation, moderate economic growth, and declining interest rates
all helped to boost stock prices. Encouraging statistics from corporate
America also fueled the ongoing equity rally. Strong earnings gains in
many industries boosted share prices, as did ambitious share-buyback
programs. As of this writing, however, market conditions are less clear
than they have been all year. Some market watchers fear that the
strengthening domestic economy could lead to a rise in short-term
interest rates this autumn if the Federal Reserve Board detects
inflationary pressures. In turn, this could stifle the equity rally. We
will watch these developments carefully and seek to position the
portfolio accordingly.
Not surprisingly, over the past several months, stocks of financial
services companies performed nicely. The stock market's persistent
strength translated into major gains for brokerages, while stable
interest rates boosted banking shares. Your fund benefited from gains in
both these areas. Portfolio holdings in Merrill Lynch and Morgan Stanley
rose sharply in value over the fiscal year. Among banks, your fund held
shares of Citicorp, NationsBank, and BankAmerica, each of which did
quite well. Your fund also had a substantial stake in Banco de A.
Edwards, a Chilean bank whose shares trade on the New York Stock
Exchange. The bank is quite profitable, earnings are rising, and Chile's
economic outlook appears sound. While these securities, along with
others discussed in this report, were viewed favorably at the end of the
period, all portfolio holdings are subject to review and adjustment in
accordance with the fund's investment strategy and may well vary in the
future.
* RIDING, THEN TRIMMING TECHNOLOGY COMPANIES
Technology companies, both large and small, helped to catalyze the
market rally. Semiconductor manufacturers, networking equipment makers,
and software developers were among the leaders within this dynamic
sector. Your fund's technology holdings include resurgent Microsoft and
Sterling Software, as well as Adaptec Inc., a maker and vendor of
computer data systems for businesses.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS*]
showing:
Insurance and finance 16.4%
Health care 7.4%
Real Estate 7.1%
Computer services
and software 6.3%
Oil and gas 6.1%
*Based on net assets as of 5/31/96. Holdings will vary over time.
In the electronics area, your fund's shares of General Electric
continued to perform well. Indeed, G.E. has long been one of the more
forward-looking companies in its industry, moving to establish strong
overseas market share and constantly developing innovative products.
Furthermore, the company has implemented a massive stock-buyback
program, which acts as a substantial support for share prices. While
G.E. remains the fund's largest holding, we have cut back on the fund's
technology stocks elsewhere, taking profits on strong gains.
Your fund's shares of AMR, the parent company of American Airlines,
appreciated in price. A significant support behind this stock has been
the firm's proprietary Sabre reservation system, an essential tool for
travel agents. Indeed, Sabre could be a valuable property on its own;
there have been some indications that it could be spun off as its own
company, issuing its own shares. Should such an event occur -- and there
is no guarantee that it will -- it could boost AMR's stock price.
* GAINS SPAN A VARIETY OF SECTORS
Other strong performers within the portfolio came from a variety of
sectors. Within retail, we saw substantial appreciation from shares of
Duckwall-Alco Stores -- a company mentioned in the semiannual report.
Duckwall-Alco, operating a chain of general merchandise stores, is
strongly positioned in small towns not targeted by other national
chains. We have also been pleased with the performance of several
higher-end lodging owners in the portfolio, including the conglomerate
ITT Corp., owner of Sheraton hotels.
Finally, we are optimistic about prospects for the titanium industry.
Indeed, titanium is finding new uses but is an important material for
aircraft. We believe the current pickup in plane orders -- Boeing is
ramping up production -- could bolster titanium usage in the coming
years.
[GRAPHIC OMMITTED: TOP 10 HOLDINGS]
showing:
Top 10 Holdings
General Electric Co.
Conglomerate
Philip Morris Co.
Tobacco
RMI Titanium Co.
Metals and mining
PepsiCo, Inc.
Soft drinks
American Express Co.
Financial services
Banco de A. Edwards ADR (Chile)
Banking
Columbia/HCA Healthcare Corp.
Medical services
Mapco, Inc.
Coal and gas
Sterling Software
Software developer
Echlin, Inc.
Automotive parts
*These holdings represent 19.3% of the fund's net assets as of 5/31/96.
Portfolio holdings will vary over time.
* OUTLOOK: ASSESSING THE ECONOMY, INTEREST RATES
We believe two key issues will have a substantial impact on stock
performance in the near term: investors' perceptions of stock valuations
and the direction of the economy. Clearly we will be scrutinizing these
developments and will position the fund's portfolio accordingly.
Whatever the near term brings, however, it is important for investors to
maintain a long-term perspective on performance.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 5/31/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Capital Appreciation Fund is designed for investors
seeking capital appreciation primarily through investments in equities
chosen for their growth potential.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 5/31/96
Class A Class B Class M
(inception date) (8/5/93) (11/2/94) (1/22/96)
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 37.57% 29.63% 36.62% 31.62% -- --
- -----------------------------------------------------------------------
Life of class 102.90 91.25 52.39 48.39 17.70% 13.60%
Annual average 28.52 25.85 30.56 28.38 -- --
- -----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/96
Standard & Poor's Consumer
500 Index Price Index
- -----------------------------------------------------------------------
1 year 28.45% 2.89%
- -----------------------------------------------------------------------
Life of class A 60.53 8.45
Annual average 18.28 2.92
- -----------------------------------------------------------------------
Life of class B 47.02 4.75
Annual average 27.62 2.98
- -----------------------------------------------------------------------
Life of class M 5.77 1.42
- -----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Class A Class B Class M
NAV POP NAV CDSC NAV POP
- -----------------------------------------------------------------------
1 year 33.16% 25.47% 32.16% 27.16% -- --
- -----------------------------------------------------------------------
Life of class 101.54 89.96 51.17 47.17 16.84% 12.76%
Annual average 27.34 24.76 28.27 26.21 -- --
- -----------------------------------------------------------------------
Performance data represent past results, and are not indicative of
future performance. They do not take into account any adjustment for
taxes payable on reinvested distributions and reflect an expense
limitation previously in effect for class A and class B shares. Without
the limitation, results would have been lower. Investment returns and
net asset value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. POP assumes 5.75%
maximum sales charge for class A shares and 3.50% for class M shares.
CDSC for class B shares assumes 5% maximum contingent deferred sales
charge.
[GRAPHIC OF WORM CHART OMITTED: GROWTH OF A $10,000
INVESTMENT] chart reads:
Cumulative total return of a $10,0000 investment
since 8/5/93
Fund's Class S & P Consumer
A Shares 500 Price
Date/year at POP Index Index
---------- ---------- ------ -------
8/5/93 9,425 10,000 10,000
8/31/93 9,591 10,344 10,028
9/30/93 9,967 10,312 10,048
10/31/93 10,387 10,512 10,090
11/30/93 10,552 10,377 10,097
12/31/93 11,476 10,551 10,097
1/31/94 12,058 10,894 10,125
2/28/94 12,405 10,566 10,159
3/31/94 11,711 10,154 10,194
4/30/94 11,868 10,271 10,208
5/31/94 12,025 10,398 10,215
6/30/94 11,487 10,198 10,249
7/31/94 11,857 10,519 10,277
8/31/94 12,383 10,914 10,319
9/30/94 12,472 10,696 10,346
10/31/94 12,517 10,919 10,353
11/30/94 11,913 10,488 10,367
12/31/94 12,164 10,694 10,367
1/31/95 12,266 10,954 10,409
2/29/95 12,868 11,349 10,450
3/31/95 13,254 11,732 10,485
4/30/95 13,527 12,060 10,519
5/31/95 13,902 12,498 10,540
6/30/95 14,265 12,848 10,561
7/31/95 14,981 13,257 10,561
8/31/95 15,276 13,252 10,589
9/30/95 15,583 13,866 10,609
10/31/95 15,299 13,797 10,644
11/30/95 15,992 14,364 10,637
12/31/95 16,361 14,698 10,630
1/31/96 16,771 15,178 10,693
2/29/96 17,227 15,283 10,727
3/31/96 17,614 15,486 10,783
4/30/96 18,317 15,694 10,824
5/31/96 $19,125 $16,053 $10,845
Past performance is no assurance of future results. A $10,000 investment
in the fund's class B shares at inception on 11/2/94 would have been
valued at $15,239 on 5/31/96 ($14,839 with a redemption at the end of
the period). A $10,000 investment in the fund's class M shares at
inception on 1/22/96 would have been valued at $11,770 on 5/31/96
($11,360 at public offering price).
PRICE AND DISTRIBUTION INFORMATION
12 months ended 5/31/96
Class A Class B Class M
- -----------------------------------------------------------------------
Distributions (number) 1 1 --
- -----------------------------------------------------------------------
Income $0.130 $0.052 --
- -----------------------------------------------------------------------
Capital gains
- -----------------------------------------------------------------------
Long-term 0.003 0.003 --
- -----------------------------------------------------------------------
Short-term 0.290 0.290 --
- -----------------------------------------------------------------------
Total $0.423 $0.345 --
- -----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- -----------------------------------------------------------------------
5/31/95 $12.24 $12.99 $12.19 -- --
- -----------------------------------------------------------------------
1/22/96 -- -- -- $13.84 $14.34
(Inception of class
M shares)
- -----------------------------------------------------------------------
5/31/96 16.33 17.33 16.24 16.29 16.88
- -----------------------------------------------------------------------
Performance data represent past results, and is not indicative of future
performance. Investment returns and principal value will fluctuate so
that an investor's shares, when sold, may be worth more or less than
their original cost.
TERMS AND DEFINITIONS
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the maximum 5.75% sales charge for class A
shares, and 3.50% 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
Standard & Poor's 500 Index is an unmanaged list of common stocks that
is frequently used as a general measure of stock market performance. The
index assumes reinvestment of all distributions and does not take into
account brokerage commissions or other costs. The fund's portfolio
contains securities that do not match those in the index 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.
Report of independent accountants
For the Fiscal Year Ended May 31, 1996
To the Trustees and Shareholders of
Putnam Capital Appreciation Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Capital Appreciation Fund, including the portfolio of investments
owned, as of May 31, 1996, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the fund's management.
Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of May 31, 1996, by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Capital Appreciation Fund as of May 31,
1996, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended and
the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 11, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
May 31 ,1996
COMMON STOCKS (93%) *
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Automotive (2.3%)
- ----------------------------------------------------------------------------------------------------------------
43,000 Bonded Motors Inc. + $354,750
145,000 Echlin, Inc. 4,984,375
42,000 Ford Motor Co. 1,533,000
15,000 General Motors Corp. 826,875
------------
7,699,000
Basic Industrial Products (2.0%)
- ----------------------------------------------------------------------------------------------------------------
60,000 Deere (John) & Co. 2,497,500
30,000 Millipore Corp. 1,316,250
114,000 Owens-Illinois, Inc. + 1,852,500
60,000 Shorewood Packaging Corp. + 990,000
------------
6,656,250
Building and Construction (1.4%)
- ----------------------------------------------------------------------------------------------------------------
111,800 Congoleum Corp. Class A + 1,215,825
150,000 For tress Group, Inc. + 1,350,000
96,000 Southern Energy Homes, Inc. + 2,028,000
------------
4,593,825
Business Equipment and Services (2.2%)
- ----------------------------------------------------------------------------------------------------------------
35,000 Adaptec, Inc. + 2,095,625
33,000 Pittston Services Group 998,250
31,000 Western Digital Corp. + 806,000
21,000 Xerox Corp. 3,304,875
------------
7,204,750
Chemicals (1.2%)
- ----------------------------------------------------------------------------------------------------------------
40,000 Applied Extrusion Technologies, Inc. + 545,000
100,000 Carbide/Graphite Group, Inc. + 1,950,000
97,600 Ethyl Corp. 1,012,600
65,700 Unidigital Inc. + 554,336
------------
4,061,936
Computer Services and Software (6.3%)
- ----------------------------------------------------------------------------------------------------------------
34,200 Ansoft Corp.+ 282,150
7,000 Cabletron Systems, Inc. + 509,250
25,000 Cerion Technologies Inc. + 362,500
57,500 Computer Associates Intl., Inc. 4,183,125
167,600 Decisionone Holdings Corp. + 4,860,400
30,000 IBM Corp. 3,202,500
5,300 Microsoft Corp. + 629,375
21,000 National Computer Systems Inc. 509,250
18,000 Parametric Technology Corp. + 823,500
64,200 Sterling Software, Inc. + 5,168,100
40,000 Ultradata Corp. + 340,000
-----------
20,870,150
Conglomerates (0.5%)
- ----------------------------------------------------------------------------------------------------------------
26,000 ITT Corp. + 1,599,000
Consumer Durable Goods (0.2%)
- ----------------------------------------------------------------------------------------------------------------
23,000 Brunswick Corp. 514,625
Consumer Non Durables (4.7%)
- ----------------------------------------------------------------------------------------------------------------
48,000 Donnkenny, Inc. + 912,000
55,000 Norton McNaughton, Inc. + 570,625
60,000 OroAmerica, Inc. + 292,500
91,000 Philip Morris Co., Inc. 9,043,125
77,000 Revlon, Inc. Class A + 2,415,875
50,000 Tupperware Corp. + 2,287,500
------------
15,521,625
Consumer Related (1.1%)
- ----------------------------------------------------------------------------------------------------------------
100,800 Adidas AG 144A (Germany) 3,729,600
Consumer Services (0.9%)
- ----------------------------------------------------------------------------------------------------------------
5,000 Service Corp. 279,375
66,200 Norwood Promotional Products + 1,373,650
30,000 PIA Merchandising Services + 487,500
23,000 Young Broadcasting Corp. Class A + 862,500
------------
3,003,025
Electronics and Electrical Equipment (3.5%)
- ----------------------------------------------------------------------------------------------------------------
112,000 General Electric Co. 9,268,000
70,000 Golden Systems, Inc. + 26,250
130,000 JPM Co. + 1,137,500
50,000 Saes Getters SPA-SPONS ADR (Italy) + 950,000
------------
11,381,750
Entertainment (0.6%)
- ----------------------------------------------------------------------------------------------------------------
35,700 Aztar Corp. + 410,550
27,282 Disney (Walt) Productions, Inc. 1,657,382
------------
2,067,932
Environmental Control (1.4%)
- ----------------------------------------------------------------------------------------------------------------
37,100 Allied Waste Industries, Inc. + 375,638
230,000 Philip Environmental Inc. + 2,012,500
16,000 Superior Services, Inc. + 272,000
53,500 WMX Technologies, Inc. 1,885,875
------------
4,546,013
Food and Beverages (3.4%)
- ----------------------------------------------------------------------------------------------------------------
56,000 Denamerica Corp. + 301,000
75,000 IBP, Inc. 2,053,125
175,000 PepsiCo, Inc. 5,818,750
95,000 Sara Lee Corp. 3,170,625
------------
11,343,500
Health Care (7.4%)
- ----------------------------------------------------------------------------------------------------------------
40,000 Beckman Instruments, Inc. 1,455,000
100,000 Columbia/HCA Healthcare Corp. 5,387,500
143,000 Community Care of America, Inc. + 1,760,688
240,500 Complete Management Inc. + 2,886,000
124,500 Epitope, Inc. + 2,567,813
75,000 Foundation Health Corp. + 2,981,250
150,000 ICN Pharmaceuticals, Inc. 3,975,000
45,000 Living Centers of America, Inc. + 1,698,750
95,000 Rightchoice Managed Care, Inc. Class A + 1,626,875
------------
24,338,876
Insurance and Finance (16.4%)
- ----------------------------------------------------------------------------------------------------------------
120,000 American Express Co. 5,490,000
273,000 Banco de A. Edwards ADR (Chile) 5,391,750
53,200 Bank of Boston Corp. 2,653,350
34,000 BankAmerica Corp. 2,558,500
61,000 Bankers Life Holding Corp. 1,258,125
50,000 BHC Financial, Inc. 706,250
63,000 Chase Manhattan Corp. 4,410,000
30,000 Citicorp 2,520,000
72,000 Federal National Mortgage Association 2,223,000
40,500 Fremont General Corp. 966,938
60,400 GCR Holdings, Ltd. 1,540,200
30,000 Harrington Financial Group + 318,750
13,000 ITT Hartford Group, Inc. 672,750
20,000 Medallion Financial Corp. + 255,000
20,500 Merrill Lynch & Co., Inc. 1,327,375
49,000 Midocean, Ltd. 2,045,750
33,000 Morgan Stanley Group, Inc. 1,633,500
10,000 NationsBank Corp. 811,250
52,000 The PMI Group, Inc. 2,249,000
55,000 Pioneer Financial Svcs., Inc. 893,750
81,000 Presidential Life Corp. 799,875
90,900 Reliance Group Holdings, Inc. 704,475
76,000 Rockford Industries, Inc. + 1,320,500
45,000 Terra Nova Hldgs Class A (Bermuda) + 686,250
125,963 Titan Holdings, Inc. 1,983,921
57,512 Union Acceptance Corp. Class A + 805,168
170,000 UnionAmerica Holdings ADR 2,677,500
49,000 United Asset Management Corp. 2,450,000
50,000 United Cos. Financial Corp. 1,518,750
4,000 Wells Fargo & Co. 964,000
------------
53,835,677
Metals and Mining (5%)
- ----------------------------------------------------------------------------------------------------------------
167,700 Century Aluminum Co. + 2,536,463
92,000 Mapco, Inc. 5,313,000
385,000 RMI Titanium Co. + 7,748,125
55,000 Zeigler Coal Holding Co. 873,125
------------
16,470,713
Oil and Gas (6.1%)
- ----------------------------------------------------------------------------------------------------------------
323,000 Arakis Energy Corp. + 1,796,688
27,000 Belden & Blake Corp. + 526,500
81,400 Core Laboratories N.V. + 1,241,350
41,900 Dawson Production Services + 492,325
150,000 Forasol -Foramer NV (France)+ 1,856,250
200,000 Fortune Petroleum Corp. + 750,000
72,000 Imperial Oil Ltd. 3,132,000
142,300 Petro-Canada 1st installment + 960,525
73,200 Plains Resources, Inc. + 823,500
70,000 Seitel, Inc. + 1,837,500
58,900 Stone Energy Corp. + 1,097,013
100,000 Tesoro Petroleum Corp. + 1,125,000
52,592 Tosco Corp. 2,603,304
100,000 TransTexas Gas Corp. + 900,000
27,100 Vintage Petroleum, Inc. 704,600
------------
19,846,555
Pharmaceuticals (4.2%)
- ----------------------------------------------------------------------------------------------------------------
77,000 Astra AB ADR 3,484,250
89,500 Euromed, Inc. + 514,625
120,000 Ivax Corp. 3,300,000
29,000 Pfizer, Inc. 2,051,750
93,000 Procept, Inc. + 296,438
72,000 Warner-Lambert Co. 4,032,000
------------
13,679,063
Photography (0.3%)
- ----------------------------------------------------------------------------------------------------------------
15,000 Eastman Kodak Co. 1,115,625
Real Estate (7.1%)
- ----------------------------------------------------------------------------------------------------------------
140,000 Alexander Haagen Properties (R) 1,662,500
101,500 Arcadian Corp. 2,030,000
85,000 CWM Mortgage Holdings, Inc. (R) 1,508,750
65,000 Capstone Capital Trust, Inc. (R) 1,332,500
14,500 CenterPoint Properties Corp. (R) 344,375
45,000 Commercial Net Lease Realty Inc. (R) 601,875
55,000 First Industrial Realty Trust, Inc. (R) 1,299,375
35,000 First Washington Realty Trust, Inc. (R) 691,250
65,000 Healthcare Realty Trust, Inc. (R) 1,478,750
50,000 HGI Realty, Inc. (R) 1,087,500
45,000 Lennar Corp. 1,119,375
105,300 Malan Realty Investors, Inc. (R) 1,526,850
73,600 Millennium & Copthorne Hotels ADR 144A (United Kingdom)+ 1,554,800
35,000 National Health Investors, Inc. (R) 1,181,250
25,000 Omega Healthcare Investors, Inc. (R) 715,625
25,000 Public Storage, Inc. (R) 525,000
61,000 RFS Hotel Investors, Inc. (R) 1,052,250
15,000 Regency Realty Corp. (R) 283,125
130,000 Sizeler Property Investments, Inc. (R) 1,121,250
25,000 Town & Country Trust 337,500
12,000 Walden Residential Props, Inc. (R) 249,000
20,000 Wellsford Residential Property Trust (R) 455,000
88,900 Winston Hotels (R) 1,022,350
10,000 Wyndham Hotel Corp. + 222,500
------------
23,402,750
Retail (4.5%)
- ----------------------------------------------------------------------------------------------------------------
57,000 Best Products, Inc. + 149,625
20,000 Cost Plus, Inc. + 545,000
241,500 Duckwall-Alco Stores, Inc. + 3,109,313
63,300 InterTAN, Inc. + 427,275
93,700 Intimate Brands, Inc. 2,026,263
36,441 Limited, Inc. 756,151
20,000 Loehmann's, Inc. + 515,000
70,000 Lowe's Cos., Inc. 2,397,500
10,000 99 Cents Only Stores + 153,750
37,600 Officemax, Inc. 982,300
45,000 Rite Aid Corp. 1,321,875
90,000 West Coast Entertainment Corp. + 1,158,750
50,000 Waban, Inc. + 1,337,500
------------
14,880,302
Specialty Consumer Products (1.2%)
- ----------------------------------------------------------------------------------------------------------------
57,100 Gucci Group + 3,825,700
Telecommunciations (0.3%)
- ----------------------------------------------------------------------------------------------------------------
12,333 360 Communications Co. + 285,201
43,000 Orange PLC ADR + 817,000
------------
1,102,201
Transportation (4.4%)
- ----------------------------------------------------------------------------------------------------------------
180,000 Airnet Systems 2,745,000
10,000 AMR Corp. + 943,750
50,000 Canadian National Railway Co. (Canada) 925,000
50,000 Coach USA Inc. + 1,000,000
180,900 The Cronos Group + 1,605,488
620,000 Jinhui Shipping & Transportation Ltd. ADR (Hong Kong)+ 527,000
41,000 Northwest Airlines Corp. Class A + 1,629,750
74,500 Pittston Burlington Group 1,480,689
31,000 Qantas Airways Ltd. (Australia) + 534,750
60,000 Railtrack Grp. PLC + 202,740
124,600 Stolt -Nielson S.A. ADR 2,507,575
17,800 Western Pacific Airlines, Inc. + 284,800
------------
14,386,542
Utilities (4.4%)
- ----------------------------------------------------------------------------------------------------------------
39,000 Bell Atlantic Corp. 2,432,625
63,700 Columbia Gas System, Inc. 3,113,338
90,000 GTE Corp. 3,847,500
115,000 Pacific Enterprises 3,033,125
52,000 Sprint Corp. 2,203,500
------------
14,630,088
------------
Total Common Stocks (cost $243,426,680) $306,307,073
CONVERTIBLE BONDS AND NOTES (2.0%) *
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
$1,200,000 Danka Business Systems cv. sub. notes 6 3/4s, 2002 $2,148,000
500,000 Emerson Radio Corp. cv. sr. sub. deb 8 1/2s, 2002 390,000
500,000 Omega Healthcare Invs. Inc. cv. 8 1/2s, 2001 505,000
465,000 Pioneer Financial Svcs. cv. 6 1/2s, 2003 463,838
1,500,000 Youth Services Intl. Inc. cv. 7s, 2006 3,210,000
------------
Total Convertible Bonds and Notes (cost $4,165,000) $6,716,838
CONVERTIBLE PREFERRED STOCKS (1%) *
NUMBER OF SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------
32,700 Callon Petroleum Co. $2.125 cv. pfd. $1,021,875
16,400 Continental Airlines 144A $4.25 cv. pfd. 1,086,500
30 Credit Depot Corp. $9.00 cv. pfd. (acquired 10/13/95, cost $600,000) 468,750
8,000 Service Corp. International $6.25 cv. pfd. 758,000
------------
Total Convertible Preferred Stocks (cost $2,637,500) $3,335,125
SHORT-TERM INVESTMENTS (8%) *
PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
$26,375,000 Interest in $530,273,000 repurchase agreement dated May 31, 1996
with Morgan Stanley due June 3, 1996 with respect to various U.S.
Treasury obligations -- maturity value of $26,386,627 for an
effective yield of 5.29% $26,378,874
------------
Total Short-Term Investments (cost $26,378,874) $26,378,874
- ----------------------------------------------------------------------------------------------------------------
Total Investments (cost $276,608,054)*** $342,737,910
- ----------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $329,250,986.
+ Non-income producing security.
(R) Real Estate Investment Trust
++ Restricted, excluding 144A securities, as to public resale. The total market value of restricted
securities held at May 31, 1996 was $468,750 or less than 1% of net assets.
*** The aggregate identified cost on a tax basis is $276,617,109 resulting in gross unrealized
appreciation and depreciation of $69,625,825 and $3,505,024, respectively, or net
unrealized appreciation of $66,120,801.
ADR after the name of a holding stands for American Depository Receipt
representing ownership of foreign securities on deposit with a domestic custodian bank.
144A after the name of a security represents those exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
May 31 ,1996
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $ 276,608,054) (Note 1) $342,737,910
- -----------------------------------------------------------------------------------------------------------------------
Cash 234,911
- -----------------------------------------------------------------------------------------------------------------------
Dividends, interest and other receivables 414,641
- -----------------------------------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,985,792
- -----------------------------------------------------------------------------------------------------------------------
Receivable for securities sold 607,953
- -----------------------------------------------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 7,445
- -----------------------------------------------------------------------------------------------------------------------
Total assets 345,988,652
Liabilities
- -----------------------------------------------------------------------------------------------------------------------
Payable for securities purchased $15,381,027
- -----------------------------------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 445,151
- -----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 476,468
- -----------------------------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 171,368
- -----------------------------------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 862
- -----------------------------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 1,430
- -----------------------------------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 193,168
- -----------------------------------------------------------------------------------------------------------------------
Payable for organizational expenses (Note 1) 17,091
- -----------------------------------------------------------------------------------------------------------------------
Other accrued expenses 51,101
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 16,737,666
- -----------------------------------------------------------------------------------------------------------------------
Net assets $329,250,986
Represented by
- -----------------------------------------------------------------------------------------------------------------------
Paid-in-capital (Notes 1 and 4) $240,450,729
- -----------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 881,963
- -----------------------------------------------------------------------------------------------------------------------
Accumulated net realized gain on investments 21,788,438
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 66,129,856
- -----------------------------------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital shares outstanding $329,250,986
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class A shares ($173,320,862 divided by 10,610,534 shares) $16.33
- -----------------------------------------------------------------------------------------------------------------------
Offering price of class A shares (100/94.25 of $16.33)* $17.33
- -----------------------------------------------------------------------------------------------------------------------
Net asset value and offering price of class B shares ($153,905,120 divided by 9,477,897 shares)+ $16.24
- -----------------------------------------------------------------------------------------------------------------------
Net asset value and redemption price of class M shares ($2,025,004 divided by 124,316 shares) $16.29
- -----------------------------------------------------------------------------------------------------------------------
Offering price of class M shares (100/96.50 of $16.29)* $16.88
- -----------------------------------------------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000
or more and on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended May 31 ,1996
<S> <C>
Investment Income
Dividends (net of foreign tax of $58,393) $4,776,439
- -----------------------------------------------------------------------------------------
Interest 858,702
- -----------------------------------------------------------------------------------------
Total investment income 5,635,141
Expenses:
- -----------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 1,578,601
- -----------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 713,686
- -----------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 11,999
- -----------------------------------------------------------------------------------------
Administrative services (Note 2) 9,175
- -----------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 321,198
- -----------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 1,139,656
- -----------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 1,806
- -----------------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 3,416
- -----------------------------------------------------------------------------------------
Reports to shareholders 48,068
- -----------------------------------------------------------------------------------------
Registration fees 61,438
- -----------------------------------------------------------------------------------------
Auditing 26,158
- -----------------------------------------------------------------------------------------
Legal 11,677
- -----------------------------------------------------------------------------------------
Postage 56,940
- -----------------------------------------------------------------------------------------
Other 7,005
- -----------------------------------------------------------------------------------------
Total expenses 3,990,823
- -----------------------------------------------------------------------------------------
Expense reduction (Note 2) (47,450)
- -----------------------------------------------------------------------------------------
Net expenses 3,943,373
- -----------------------------------------------------------------------------------------
Net investment income 1,691,768
- -----------------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 26,670,081
- -----------------------------------------------------------------------------------------
Net unrealized appreciation of investments during the year 49,972,462
- -----------------------------------------------------------------------------------------
Net gain on investments 76,642,543
- -----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $78,334,311
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended May 31
-------------------------
1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets
- -------------------------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------------------------
Net investment income $1,691,768 $950,057
- -------------------------------------------------------------------------------------------------
Net realized gain on investments 26,670,081 208,076
- -------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 49,972,462 15,958,951
- -------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 78,334,311 17,117,084
- -------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -------------------------------------------------------------------------------------------------
From net investment income
- -------------------------------------------------------------------------------------------------
Class A (1,132,760) (127,251)
- -------------------------------------------------------------------------------------------------
Class B (407,457) (67,212)
- -------------------------------------------------------------------------------------------------
From net realized gain on investments
- -------------------------------------------------------------------------------------------------
Class A (2,552,443) (329,475)
- -------------------------------------------------------------------------------------------------
Class B (2,295,863) (204,599)
- -------------------------------------------------------------------------------------------------
In excess of realized gain on investments
- -------------------------------------------------------------------------------------------------
Class A -- (20,787)
- -------------------------------------------------------------------------------------------------
Class B -- (12,908)
- -------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 63,788,075 174,100,271
- -------------------------------------------------------------------------------------------------
Total increase in net assets 135,733,863 190,455,123
- -------------------------------------------------------------------------------------------------
Net Assets
- -------------------------------------------------------------------------------------------------
Beginning of year 193,517,123 3,062,000
- -------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $881,963 and $727,495, respectively) $329,250,986 $193,517,123
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
For the Period For the Period For the Period
January 22, 1996 November 2, 1994 August 5,1993
(commencement (commencement (commencement
of operations) Year ended of operations) Year ended of operations)
to May 31 May 31 to May 31 May 31 to May 31
---------------------------------------------------------------------------------
1996 1996 1995 1996 1995 1994
---------------------------------------------------------------------------------
Class M Class B Class A
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $13.84 $12.19 $11.08 $12.24 $10.74 $8.53
- -----------------------------------------------------------------------------------------------------------------------
Investment operations
- -----------------------------------------------------------------------------------------------------------------------
Net investment income .02 (a) .04 .06 (b) .14 .06 (b) .07 (a)(b)
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments 2.43 4.35 1.20 4.37 1.59 2.27
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations 2.45 4.39 1.26 4.51 1.65 2.34
- -----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- -----------------------------------------------------------------------------------------------------------------------
From net investment income -- (.05) (.03) (.13) (.03) (.04)
- -----------------------------------------------------------------------------------------------------------------------
From net realized gains on investments -- (.29) (.10) (.29) (.10) (.09)
- -----------------------------------------------------------------------------------------------------------------------
In excess of realized gain on
investments -- -- (.02) -- (.02) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions -- (.34) (.15) (.42) (.15) (.13)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $16.29 $16.24 $12.19 $16.33 $12.24 $10.74
- -----------------------------------------------------------------------------------------------------------------------
Total investment return at net asset
value (%)(c) 17.70 (d) 36.62 11.55 (d) 37.57 15.61 27.58 (d)
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $2,025 $153,905 $89,962 $173,321 $103,555 $3,062
- -----------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (e) .66 (d) 2.05 1.12 (b)(d) 1.29 1.13 (b) .78 (b)(d)
- -----------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) .16 (d) .30 .65 (b)(d) 1.05 1.89 (b) .73 (b)(d)
- -----------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 76.68 76.68 15.32 76.68 15.32 102.99 (d)
- -----------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income for the period ended May 31, 1994 for class A and May 31, 1996 for class M,
respectively, has been determined on the basis of the weighted average number of shares outstanding during the period.
(b) Reflects an expense limitation during the period. As a result of these
limitations, expenses of the fund for the period ended May 31, 1994
reflect a reduction of $0.11 per share. For the period ended
May 31, 1995 the reduction was less than $0.01 per share for
both class A and class B. (Note 2)
(c) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(d) Not annualized.
(e) The ratio of expenses to average net assets for the year ended May 31, 1996 includes
amounts paid through expense offset arrangements. Prior periods exclude these amounts.
(Note 2)
</TABLE>
Notes to financial statements
May 31, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end management investment company. The
fund seeks capital appreciation by investing primarily in common stocks
that offer potential for capital appreciation. Current income is only an
incidental consideration in selecting investments for the fund.
The fund offers class A, class B and class M shares. The fund commenced
its public offering of class M shares on January 22, 1996. Class A
shares are sold with a maximum front-end sales charge of 5.75%. 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 3.50% 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 Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter -- the last reported bid
price. Short-term investments having remaining maturities of 60 days or
less are stated at amortized cost which approximates market, and other
investments are stated at fair value following procedures approved by
the Trustees. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the current exchange rate.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies managed by Putnam Investment Management,
Inc. ("Putnam Management"), the fund's Manager, a wholly-owned
subsidiary of Putnam Investments, Inc. and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or
short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) 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 and dividend income is
recorded on the ex-dividend date, except that certain dividends from
foreign securities are recorded as soon as the fund is informed of the
ex-dividend date.
E) Foreign currency translation The accounting records of the fund are
maintained in U.S. dollars. The market value of foreign securities,
currency holdings, other assets and liabilities are recorded in the
books and records of the fund after translation to U.S. dollars based on
the exchange rates on that day. The cost of each security is determined
using historical exchange rates. Income and withholding taxes are
translated at prevailing exchange rates when accrued or incurred. The
fund does not isolate that portion of realized or unrealized gains or
losses resulting from changes in the foreign exchange rate on
investments from fluctuations arising from changes in the market prices
of the securities. Such fluctuations are included with the net realized
and unrealized gain or loss on investments. Net realized gains and
losses on foreign currency transactions represent net exchange gains or
losses on closed forward currency contracts, disposition of foreign
currencies and the difference between the amount of investment income
and foreign withholding taxes recorded on the fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net unrealized
gains and losses on foreign currency transactions arise from changes in
the value of open forward currency contracts and assets and liabilities
other than investments at the period end, resulting from changes in the
exchange rate.
F) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains.
G) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Capital gain distributions, if any, are recorded on the ex-dividend date
and paid 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 treatment of losses on wash sales transaction
and organization expenses. For the year ended May 31, 1996, the fund
reclassified $2,917 to increase undistributed net investment income and
$3,275 to decrease paid-in-capital, with an increase to accumulated net
realized gains of $358. The calculation of net investment income per
share in the financial highlights table excludes these adjustments.
H) Unamortized organization expenses Expenses incurred by the fund in
connection with it organization, its registration with the Securities
and Exchange Commission and with various states and the initial public
offering of its shares were $17,091. These expenses are being amortized
on a straight line basis over a five-year period.
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: 0.65% of the
first $500 million, 0.55% of the next $500 million, 0.50% of the next
$500 million, and 0.45% of any amount over $1.5 billion.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Trustees of the fund receive an annual Trustees fee of $880 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain invested in
certain Putnam funds until distribution in accordance with the Plan.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended May 31, 1996, fund expenses were reduced by $47,450
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.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Mutual Funds Corp., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Mutual Funds Corp. at an annual rate up to 0.35%,
1.00% and 1.00% of the average net assets attributable to class A, class
B and class M shares, respectively. The Trustees have approved payment
by the fund at an annual rate of 0.25%, 1.00% and 0.75% of the average
net assets attributable to class A, class B and class M shares
respectively.
For the year ended May 31, 1996, Putnam Mutual Funds Corp., acting as
underwriter received net commissions of $187,303 and $5,090 from the
sale of class A and class M shares, respectively and $199,759 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended May 31, 1996, Putnam Mutual Funds
Corp., acting as underwriter received $153 on class A redemptions.
Note 3
Purchase and sales of securities
During the year ended May 31, 1996, purchases and sales of investment
securities other than short-term investments aggregated $255,985,906 and
$203,062,777, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At May 31, 1996, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended
May 31, 1996
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 3,976,974 $57,497,542
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 261,712 3,554,184
- ----------------------------------------------------
4,238,686 61,051,726
Shares
repurchased (2,090,445) (29,527,440)
- ----------------------------------------------------
Net increase 2,148,241 $31,524,286
- ----------------------------------------------------
Year ended
May 31, 1995
- ----------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------
Shares sold 8,977,882 $100,455,028
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 8,592 90,470
- ----------------------------------------------------
8,986,474 100,545,498
Shares
repurchased (809,397) (9,031,629)
- ----------------------------------------------------
Net increase 8,177,077 $91,513,869
- ----------------------------------------------------
Year ended
May 31, 1996
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 3,190,077 $45,830,333
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 190,587 2,580,381
- ----------------------------------------------------
3,380,664 48,410,714
Shares
repurchased (1,284,596) (18,077,077)
- ----------------------------------------------------
Net increase 2,096,068 $30,333,637
- ----------------------------------------------------
For the period
November 2, 1994
(commencement of
operations) to
May 31, 1995
- ----------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------
Shares sold 7,750,225 $86,801,011
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 4,256 44,813
- ----------------------------------------------------
7,754,481 86,845,824
Shares
repurchased (372,652) (4,259,422)
- ----------------------------------------------------
Net increase 7,381,829 $82,586,402
- ----------------------------------------------------
For the period
January 22, 1996
(commencement of
operations) to
May 31, 1996
- ----------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------
Shares sold 158,457 $2,440,937
- ----------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- ----------------------------------------------------
158,457 2,440,937
Shares
repurchased (34,141) (510,785)
- ----------------------------------------------------
Net increase 124,316 $1,930,152
- ----------------------------------------------------
Note 5
Transactions with Affiliated Companies
Transactions during the year with companies in which the fund owns at
least 5% of the voting securities were as follows:
Affiliates Purchase cost Sales cost Dividend income Market value
- ------------------------------------------------------------------------
Duckwall-Alco
Stores, Inc. $2,360,375 $ -- $ -- $3,109,313
Federal tax information
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, the fund hereby
designates $.003 per share as capital gain dividends for its taxable
year ended May 31, 1996.
The fund has designated 20.42% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Our commitment to quality service
* CHOOSE AWARD-WINNING SERVICE
Putnam Investor Services has won the DALBAR Quality Tested Service Seal
for the past six years. In 1995, over 146,000 tests of 56 shareholder
service components demonstrated that Putnam outperformed the industry
standard in every category.
* HELP YOUR INVESTMENT GROW
Set up a systematic program for investing with as little as $25 a month
from a Putnam money market fund or from your checking or savings
account.*
* SWITCH FUNDS EASILY
You can move money from one account to another with the same class of
shares without a service charge. (This privilege is subject to change or
termination.)
* ACCESS YOUR MONEY QUICKLY
You can get checks sent regularly or redeem shares any business day at
the then-current net asset value, which may be more or less than the
original cost of the shares.
For details about any of these or other services, contact your financial
advisor or call the toll-free number shown below and speak with a
helpful Putnam representative.
To make an additional investment in this or any other Putnam fund,
contact your financial advisor or call our toll-free number: 1-800-225-
1581.
* Regular investing of course, does not guarantee a profit or protect
against a loss in a declining market.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Brett C. Browchuk
Vice President
Gerald Zukowski
Vice President and Fund Manager
Anthony C. Santosus
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Capital
Appreciation Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, which gives details of sales
charges, investment objectives, and operating policies of the fund, and
the most recent copy of Putnam's Quarterly Performance Summary. For
more information, or to request a prospectus, call toll free: 1-800-225-
1581.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution, are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board
or any other agency, and involve risk, including the possible loss of
principal amount invested.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- -----------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- -----------------------
25858 433/948/2BN 7/96