Putnam
Capital
Appreciation
Fund
SEMIANNUAL REPORT ON PERFORMANCE AND OUTLOOK
11-30-98
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Putnam Capital Appreciation Fund's closing should be good news for
those who already have a seat inside."
-- Morningstar Mutual Funds, August 7, 1998
CONTENTS
4 Report from Putnam Management
9 Fund performance summary
13 Portfolio holdings
22 Financial statements
From the Chairman
[GRAPHIC OMITTED: PHOTO OF GEORGE PUTNAM]
[copyright] Karsh, Ottawa
Dear Shareholder:
The continued underperformance of small-company stocks and the summer's
market plunge with its ensuing turbulence took their toll on Putnam
Capital Appreciation Fund's results during the first half of fiscal 1999.
If not for the fact that your fund was in plenty of company, this turn of
events would indeed be cause for concern.
Rather than dwell on the short term, however, it is far healthier to take
a longer-term perspective. While one can never pin tomorrow's results on
yesterday's performance, experience has taught us that market turbulence
such as we have experienced in recent months tends to be relatively short
lived.
That being the case, your fund's managers are focusing not only on current
performance but on positioning the portfolio for longer-term potential. In
the following report, they not only discuss results for the fiscal year's
first half but comment on the months ahead as well.
Respectfully yours,
/S/GEORGE PUTNAM
George Putnam
Chairman of the Trustees
January 20, 1999
Report from the Fund Managers
Gerald S. Zukowski, Lead Manager
William H. Miller
Edward R. Finch
The first half of fiscal 1999 represented one of the most challenging
periods in the brief history of Putnam Capital Appreciation Fund. As the
fiscal year began, U.S. investors were witnessing increased volatility in
domestic markets. Many factors contributed to this market turbulence,
including investor fears of worsening global economic conditions, negative
corporate profit warnings, and dramatic selloffs in overseas markets. On
July 17, 1998, the Dow Jones Industrial Average reached an all-time high
of 9,333, only to plummet more than 512 points the following month, wiping
out the entire year's gains. The third quarter of 1998 was the Dow's worst
quarter in eight years. However, in the fourth quarter, we saw a dramatic
recovery for the Dow with a year-to-date gain of more than 17%.
Another challenge during the period was the sharp divergence between the
performance of small- and large-company stocks. While large-company stocks
had several high points during the period, investors continued to shun
small-company stocks. From the beginning of 1998 to the close of the
fiscal period, the S&P 500(R) Index, a measure of large-company stocks,
had returned 21.57%, while the Russell 2000 Index had returned -8.22%.
This difference of nearly 30 percentage points indicates a virtually
unprecedented investor preference for the stocks of large,
well-established companies.
The market volatility and continued underperformance of small-company
stocks took their toll on your fund's short-term returns. For the six
months ended November 30, 1998, your fund's class A shares provided a
total return of -5.23% at net asset value and -10.67% at public offering
price. While these results are disappointing, it is important to note that
during the period we were able to make strategic shifts in the portfolio's
focus to lessen the effect of the troubled markets. We trimmed back the
fund's small-company holdings and focused on stronger, large-company
stocks. We are pleased to report on a number of stocks that performed well
during the period and should contribute substantially to the fund's
longer-term returns. For complete performance information, please see the
summary that begins on page 9.
* BIGGER-IS-BETTER MENTALITY CONTINUES
Your fund's ability to invest in companies of all sizes proved especially
beneficial during the past six months as several large-company stocks
delivered outstanding performance, most notably in the technology sector.
One example is Ascend Communications, a computer networking company. In
October, Ascend completed its acquisition of Stratus Computer. This has
enhanced the company's technological capabilities and is furthering the
development of products that integrate telephone networks and the
Internet. In addition, Ascend recently won a bid to provide ATM equipment
for China's postal department, which will connect networks in 31 Chinese
provinces and 200 cities.
Another outstanding technology holding during the period was IBM, the
world's largest computer maker. In an effort to reach double-digit annual
revenue growth, IBM has been building its software and service businesses
while stabilizing its mainframe computer sales. While these holdings,
along with others discussed in this report, were viewed favorably at the
end of the fiscal period, all are subject to review and adjustment in
accordance with the fund's investment strategy and may vary in the future.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Pharmaceuticals 12.7%
Insurance and finance 12.1%
Retail 10.4%
Computer services and software 9.3%
Telecommunications 6.1%
Footnote reads:
*Based on net assets as of 11/30/98. Holdings will vary over time.
* HEALTH-CARE STOCKS DELIVER STRONG PERFORMANCE
The pharmaceutical sector was another bright spot during the fiscal
period, with large U.S. drug stocks such as Schering-Plough, Eli Lilly,
Warner-Lambert, and Merck & Co. delivering impressive performance. In
addition to developing innovative and profitable new products, these
companies have another distinct advantage: health-care products and
services tend to stay in demand regardless of economic conditions. One of
Merck's most promising products is Vioxx, a painkiller with the potential
to produce fewer side effects than aspirin or ibuprofen when taken daily.
An exciting new product from Eli Lilly is Zyprexa, a drug that may
significantly improve symptoms related to Alzheimer's disease, which
affects nearly 4 million people in the United States.
The stocks of several midsize biotechnology companies were also among the
health-care highlights for the period. Biochem Pharma, for example,
recently announced FDA approval of the first oral antiviral treatment for
hepatitis B, one of the world's most prevalent diseases. Other strong
biotech stocks included those of Genzyme Corp., which began marketing a
new drug, Thyrogen, for patients undergoing treatment for thyroid cancer,
and of Centocor, Inc., which recently signed an agreement with a division
of Genzyme to develop antibodies for the treatment of debilitating chronic
diseases.
* STRATEGIC STOCK SELECTION KEY AMONG SMALL CAPS
While most small-company stocks were battered during the period, QLogic
Corp. has been an outstanding exception. This semiconductor company
specializes in chips that allow disk drives, CD/ROMs, and computers to
communicate with each other. Its shares have risen 115% since early
October.
U.S. Foodservice, a distributor of food and related products, was another
stellar small-cap holding in your fund's portfolio. The company markets
and distributes more than 40,000 national, private label, and signature
brand items to over 130,000 food service customers, including restaurants,
hotels, health-care facilities, cafeterias, and schools. In October, U.S.
Foodservice announced its 17th consecutive quarter of record sales. The
company's recent acquisitions, including food service company
Rykoff-Sexton and several smaller businesses, have contributed to its
success. A growing national presence, diverse customer base, and strong
sales and distribution capabilities give U.S. Foodservice strong growth
potential.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
General Electric Company
Conglomerate
Warner-Lambert Company
Pharmaceuticals
Pfizer, Inc.
Pharmaceuticals
Merck & Co., Inc.
Pharmaceuticals
Rite Aid Corp.
Retail
Tele-Communications, Inc., Class A
Broadcasting and cable TV
Bank One Corp.
Banking and financial services
SBC Communications, Inc.
Telecommunications
IBM Corp.
Computer products and services
H.J. Heinz Company
Food products
Footnote reads:
These holdings represent 19.9% of the fund's net assets as of 11/30/98.
Portfolio holdings will vary over time.
Stock selection in the fund's wholesaling and retail sectors proved
profitable with holdings such as Bergen Brunswig Corp., a company that
distributes drugs and medical-surgical supplies to the managed care and
retail pharmacy markets. In addition, the fund's investment in Wal-Mart
Stores delivered outstanding returns. This huge U.S. company recently
agreed to purchase 74 stores in a German retail and wholesale chain.
* LOOKING AHEAD WITH CAUTIOUS OPTIMISM
Just after the close of the fiscal period, we began to see evidence of a
turnaround in small-company stocks. However, we enter the second half of
fiscal 1999 with our eyes wide open to the possibility that we have not
experienced the last of the market turbulence. The challenges of the past
six months may continue for some time, and patience will be especially
important as we wait for stocks of small companies to come back in favor.
Although small companies have attractive valuations, the confidence of
investors is the missing ingredient. As always, regardless of market
conditions, careful stock selection backed by intensive research will
remain an essential component of your fund's investment strategy.
The views expressed here are exclusively those of Putnam Management. They
are not meant as investment advice. Although the described holdings were
viewed favorably as of 11/30/98, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Capital Appreciation Fund is designed for investors seeking capital gain
through investments in equities chosen for their growth potential.
TOTAL RETURN FOR PERIODS ENDED 11/30/98
Class A Class B Class M
(inception date) (8/5/93) (11/2/94) (1/22/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months -5.23% -10.67% -5.51% -10.24% -5.46% -8.76%
- ------------------------------------------------------------------------------
1 year 3.07 -2.85 2.38 -2.62 2.58 -0.99
- ------------------------------------------------------------------------------
5 years 167.40 152.09 157.65 155.65 160.73 151.60
Annual average 21.74 20.31 20.84 20.65 21.13 20.27
- ------------------------------------------------------------------------------
Life of fund 199.38 182.18 187.87 186.87 191.21 181.13
Annual average 22.89 21.53 21.99 21.91 22.25 21.45
- ------------------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 11/30/98
Russell Standard &
Midcap Poor's Consumer
Index 500 Index Price Index
- ------------------------------------------------------------------------------
6 months -3.39% 7.48% 0.74%
- ------------------------------------------------------------------------------
1 year 6.86 23.66 1.55
- ------------------------------------------------------------------------------
5 years 117.78 181.26 12.48
Annual average 16.85 22.98 2.38
- ------------------------------------------------------------------------------
Life of fund 123.23 192.86 13.57
Annual average 16.25 22.32 2.42
- ------------------------------------------------------------------------------
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 5.75% and
3.50% respectively. Class B share returns for the 1-, 5-, and 10-year
(where available) and life-of-fund periods reflect the applicable
contingent deferred sales charge (CDSC), which is 5% in the first year,
declines to 1% in the sixth year, and is eliminated thereafter. Returns
shown for class B and class M shares for periods prior to their inception
are derived from the historical performance of class A shares, adjusted to
reflect both the initial sales charge or CDSC, if any, currently
applicable to each class and in the case of class B and class M shares,
the higher operating expenses applicable to such shares. All returns
assume reinvestment of distributions at NAV. Investment return and
principal value will fluctuate so that an investor's shares when redeemed
may be worth more or less than their original cost.
PRICE AND DISTRIBUTION INFORMATION
6 months ended 11/30/98
Class A Class B Class M
- ------------------------------------------------------------------------------
Distributions (number) -- -- --
- ------------------------------------------------------------------------------
Income -- -- --
- ------------------------------------------------------------------------------
Capital gains -- -- --
- ------------------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
- ------------------------------------------------------------------------------
5/31/98 $23.15 $24.56 $22.86 $22.91 $23.74
- ------------------------------------------------------------------------------
11/30/98 21.94 23.28 21.60 21.66 22.45
- ------------------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 12/31/98
(most recent calendar quarter)
Class A Class B Class M
(inception date) (8/5/93) (11/2/94) (1/22/96)
NAV POP NAV CDSC NAV POP
- ------------------------------------------------------------------------------
6 months -1.12% -6.80% -1.44% -6.25% -1.41% -4.87%
- ------------------------------------------------------------------------------
1 year 8.69 2.44 7.92 2.92 8.13 4.35
- ------------------------------------------------------------------------------
5 years 161.64 146.49 152.00 150.00 154.87 145.85
Annual average 21.21 19.77 20.30 20.11 20.58 19.71
- ------------------------------------------------------------------------------
Life of fund 218.56 200.26 206.06 205.06 209.64 198.92
Annual average 23.93 22.58 23.02 22.94 23.28 22.48
- ------------------------------------------------------------------------------
Performance data represent past results, do not reflect future
performance, and will differ for each share class. Investment returns and
principal value will fluctuate so that an investor's shares, when sold,
may be worth more or less than their original cost. See first page of
performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested all
distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 5.75% maximum 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.
Russell Midcap Index* is composed of all medium and medium/small companies
in the Russell 1000 Index. The Russell 1000 Index represents the universe
of stocks from which the most active money managers typically select.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
*Securities indexes assume reinvestment of all distributions and interest
payments and do not take in account brokerage fees or taxes. Securities in
the fund do not match those in the indexes and performance of the fund
will differ. It is not possible to invest directly in an index.
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<TABLE>
<CAPTION>
Portfolio of investments owned
November 30, 1998 (Unaudited)
COMMON STOCKS (95.9%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C>
Aerospace and Defense (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
170,000 Raytheon Co Class A $ 9,296,875
215,000 Raytheon Co. Class B 11,905,625
--------------
21,202,500
Automotive (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
228,000 Bonded Motors, Inc. (NON)(AFF) 1,567,500
206,600 Ford Motor Co. 11,414,650
63,300 Keystone Automotive Industries, Inc. 1,206,656
145,900 Standard Automotive Corp. 1,148,963
--------------
15,337,769
Basic Industrial Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
247,000 Integrated Sensor Solutions, Inc. (NON) 1,049,750
394,500 Shorewood Packaging Corp. (NON) 5,843,531
104,100 TransTechnology Corp. 2,381,288
--------------
9,274,569
Biotechnology (1.7%)
- --------------------------------------------------------------------------------------------------------------------------
966,000 BioChem Pharma, Inc. (NON) 23,546,250
585,000 Centocor, Inc. (NON) 23,692,500
180,000 Genzyme Corp. (NON) 7,571,250
14,449 Genzyme Molecular Oncology 50,572
--------------
54,860,572
Building and Construction (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
195,800 Dayton Superior Corp. (NON) 3,818,100
153,700 Group Maintenance America Corp. 2,055,738
120,000 Hospitality Worldwide Services, Inc. 525,000
140,000 Integrated Electrical Services, Inc. (NON) 2,677,500
172,000 Southern Energy Homes, Inc. (NON) 1,204,000
--------------
10,280,338
Business Equipment and Services (2.4%)
- --------------------------------------------------------------------------------------------------------------------------
239,120 Acxiom Corp 5,649,210
236,000 Building One Services Corp. (NON) 4,012,000
930,000 Cendant Corp. (NON) 17,670,000
320,000 Corrpro Cos., Inc. (NON) 3,880,000
76,000 Global Imaging Systems, Inc. 1,377,500
210,000 Herman Miller, Inc. 4,462,500
100,200 NOVA Corp./Georgia (NON) 3,187,613
134,800 Personnel Group of America, Inc. (NON) 2,224,200
587,000 Pitney Bowes, Inc. 32,872,000
248,300 Unidigital, Inc. (NON) (AFF) 1,179,425
--------------
76,514,448
Chemicals (0.2%)
- --------------------------------------------------------------------------------------------------------------------------
130,000 MacDermid, Inc. 4,793,750
106,200 W.R. Grace & Co. 1,752,300
--------------
6,546,050
Computer Equipment (0.9%)
- --------------------------------------------------------------------------------------------------------------------------
580,000 Compaq Computer Corp. 18,850,000
306,000 Seagate Technology, Inc. (NON) 9,027,000
--------------
27,877,000
Computer Services and Software (9.3%)
- --------------------------------------------------------------------------------------------------------------------------
498,220 3Com Corp. (NON) 19,274,886
550,000 4Front Software International, Inc. (NON) 4,400,000
594,000 Acclaim Entertainment, Inc. (NON) 5,680,125
200,000 Bell Microproducts, Inc. (NON) 1,812,500
344,450 CHS Electronics, Inc. (NON) 5,102,166
504,900 Computer Associates International, Inc. 22,341,825
590,000 Computer Sciences Corp. 33,703,750
600,000 Diamond Multimedia Systems, Inc. (NON) 3,937,500
378,000 Gateway 2000, Inc. (NON) 21,215,250
1,010,000 HBO & Co. 25,186,875
150,000 HMT Technology Corp. 1,706,250
620,000 Harbinger Corp. (NON) 5,347,500
290,000 IBM Corp. 47,850,000
330,000 iMALL, Inc. (NON) 4,166,250
285,700 Microsoft Corp. (NON) 34,855,400
190,773 Midway Games Inc. (NON) 1,943,500
140,000 National Computer Systems Inc. 4,602,500
844,000 Parametric Technology Corp. (NON) 14,348,000
250,000 PLATINUM Technology, Inc. (NON) 4,421,875
112,000 Pomeroy Computer Resources, Inc. (NON) 2,163,000
152,000 QuadraMed Corp. 3,648,000
231,000 Sterling Commerce, Inc. (NON) 8,373,750
400,000 Sterling Software, Inc. (NON) 10,300,000
380,000 Storage Technology Corp. (NON) 13,300,000
--------------
299,680,902
Conglomerates (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
850,000 Ogden Corp. 22,578,125
Consumer Durable Goods (--%)
- --------------------------------------------------------------------------------------------------------------------------
122,600 Global-Tech Appliance, Inc. (NON) 628,325
112,100 Home Security International, Inc. 840,750
--------------
1,469,075
Consumer Non Durables (2.6%)
- --------------------------------------------------------------------------------------------------------------------------
42,000 Happy Kids, Inc. (NON) 483,000
140,000 Kellwood Co. 3,780,000
82,000 Loews Corp 8,200,000
300,000 Newell Co. 13,275,000
114,600 Nu Skin Asia Pacific, Inc. Class A (NON) 2,743,238
730,000 Philip Morris Cos., Inc. 40,834,375
330,000 Quaker Fabric Corp. (NON) 2,310,000
200,000 Styling Technology Corp. (NON) 1,825,000
280,000 True North Communications, Inc. 7,875,000
124,500 Westpoint Stevens, Inc. (NON) 3,735,000
--------------
85,060,613
Consumer Services (4.9%)
- --------------------------------------------------------------------------------------------------------------------------
80,000 Applebee's International, Inc. 1,645,000
92,000 Comcast Corp. Class A 4,462,000
550,000 Cracker Barrel Old Country Store, Inc. 12,787,500
110,000 Hertz Corp. Class A 4,042,500
160,000 Hillenbrand Industries, Inc. 9,090,000
380,000 McDonald's Corp. 26,623,750
494,100 MediaOne Group Inc. (NON) 20,011,050
240,000 Paging Network, Inc. (NON) 1,485,000
53,050 Star Buffet, Inc. 318,300
348,000 Steiner Leisure Ltd. (NON) 8,656,500
100,000 Tele-Comm Liberty Media Group, Inc. Class A (NON) 4,031,250
1,450,000 Tele-Communications, Inc. Class A (NON) 61,262,500
88,400 Tele-Communications TCI Ventures Group Class A (NON) 1,751,425
58,000 Young Broadcasting Corp. Class A (NON) 2,066,250
--------------
158,233,025
Electronics and Electrical Equipment (4.5%)
- --------------------------------------------------------------------------------------------------------------------------
123,850 AFC Cable Systems, Inc. (NON) 3,669,056
160,350 Asia Electronics Holding Co. (NON) 85,186
1,110,000 General Electric Co. 100,455,000
230,000 Micron Technology, Inc. (NON) 9,501,875
43,700 Optek Technology, Inc. 786,600
442,200 Pioneer-Standard Electronics, Inc. 4,808,925
140,000 QLogic Corp. 14,367,500
180,000 Semtech Corp. (NON) 5,332,500
120,000 Sipex Corp. (NON) 3,870,000
200,000 Vishay Intertechnology, Inc. 2,837,500
--------------
145,714,142
Energy-Related (1.3%)
- --------------------------------------------------------------------------------------------------------------------------
1,117,000 Calpine Corp. (NON) (AFF) 26,808,000
300,000 Thermo Electron Corp. (NON) 5,062,500
133,500 U. S. Energy Systems, Inc. (NON) 191,906
750,000 USEC, Inc. 10,171,875
--------------
42,234,281
Environmental Control (1.5%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 Allied Waste Industries, Inc. (NON) 4,686,250
430,975 U.S. Filter Corp. (NON) 9,535,322
787,500 Waste Management, Inc. 33,764,063
--------------
47,985,635
Food and Beverages (5.2%)
- --------------------------------------------------------------------------------------------------------------------------
810,000 Heinz (H.J.) Co. 47,233,125
777,900 U.S. Foodservice (NON) 35,734,781
900,000 PepsiCo, Inc. 34,818,750
730,000 Sara Lee Corp. 42,613,750
400,000 Scheid Vineyards, Inc. Class A (AFF) 1,900,000
267,000 Wendy's International, Inc. 5,340,000
--------------
167,640,406
Health Care (1.4%)
- --------------------------------------------------------------------------------------------------------------------------
960,000 Epitope, Inc. (NON) (AFF) 5,640,000
400,000 Foundation Health Systems, Inc. Class A (NON) 5,525,000
323,100 Omega Orthodontics, Inc. (AFF) 242,325
620,700 Sun Healthcare Group Inc. (NON) 3,258,675
362,700 Wellpoint Health Networks, Inc. (NON) 29,764,069
--------------
44,430,069
Hospital Management and Medical Services (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
420,000 Total Renal Care Holdings, Inc. (NON) 11,156,250
Information Systems (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
53,000 Galileo International, Inc. (NON) 2,120,000
199,800 OptiSystems Solutions Ltd. 1,573,425
--------------
3,693,425
Insurance and Finance (12.1%)
- --------------------------------------------------------------------------------------------------------------------------
44,000 Affiliated Managers Group, Inc. (NON) 1,179,750
599,800 AFLAC Inc. 22,117,625
48,600 American Capital Strategies, Ltd. 741,150
630,000 ARM Financial Group, Inc. 13,545,000
1,147,600 Bank One Corp. 58,886,225
520,000 BankAmerica Corp. 33,897,500
500,000 Beacon Capital Partners 144A 9,000,000
392,400 Chase Manhattan Corp. 24,892,875
95,000 Citigroup, Inc. 4,767,813
250,998 Conseco Inc. 8,314,309
130,000 Dime Bancorp, Inc. 3,453,125
620,000 Fannie Mae 45,105,000
320,000 Federated Investors, Inc. (NON) 5,380,000
650,000 First Union Corp. 39,487,500
192,868 Firstar Corporation 14,127,581
222,000 Fremont General Corp. 11,183,250
121,700 Hartford Life, Inc. (NON) 6,670,681
70,000 Heller Financial, Inc. (NON) 1,833,125
565,000 Long Beach Financial Corp. (NON) 4,502,344
29,200 Merrill Lynch & Co., Inc. 2,190,000
170,894 MMI Companies, Inc. 2,787,708
77,600 Morgan Stanley, Dean Witter, Discover and Co. 5,412,600
80,000 National Australia Bank, Ltd. ADR (Australia) 5,970,000
49,300 Nationwide Financial Services, Inc. Class A 2,372,563
299,650 Preferred Employers Holdings, Inc. (NON) (AFF) 2,584,481
720,400 Scottish Annuity & Life Holdings, Ltd. (NON) 9,095,050
138,000 Symons International Group, Inc. (NON) 1,345,500
9,900 TeleBanc Financial Corp. (NON) 222,750
203,600 The Equitable Companies, Inc. 11,248,900
212,000 The PMI Group, Inc. 11,593,750
40,000 UBS AG (Switzerland) 12,052,515
1,084,000 UniCapital Corp. (NON) 8,943,000
235,000 Waddell & Reed Financial, Inc. 5,610,625
--------------
390,514,295
Medical Supplies and Devices (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
134,900 Arterial Vascular Engineering, Inc. (NON) 6,593,238
630,000 Baxter International, Inc. 40,044,375
446,200 Bergen Brunswig Corp. Class A 27,775,950
507,200 ESC Medical Systems Ltd. (Israel) (NON) 5,325,600
--------------
79,739,163
Metals and Mining (0.1%)
- --------------------------------------------------------------------------------------------------------------------------
260,000 Metals USA, Inc. 2,421,250
127,200 Rti International Metals 1,915,950
--------------
4,337,200
Oil and Gas (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
2,400,000 Abacan Resource Corp. (Canada) (NON) 750,000
650,000 Conoco, Inc. (NON) 15,396,875
570,000 Newpark Resources, Inc. (NON) 4,203,750
483,500 Seitel, Inc. (NON) 6,466,813
416,300 Ultramar Diamond Shamrock Corp. 10,719,725
110,000 Virginia Gas Co. 440,000
--------------
37,977,163
Paper and Forest Products (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
276,500 Fort James Corp. 10,818,063
Pharmaceuticals (12.7%)
- --------------------------------------------------------------------------------------------------------------------------
250,000 American Home Products Corp. 13,312,500
609,333 Astra AB ADR Class A (Sweden) 11,272,661
265,000 Bristol-Myers Squibb Co. 32,479,063
166,500 Elan Corp. PLC ADR (Ireland) (NON) 11,342,813
785,900 ICN Pharmaceuticals, Inc. 19,843,975
370,000 Lilly (Eli) & Co. 33,184,375
161,200 Maxim Pharmaceuticals, Inc. (NON) 2,438,150
435,000 Merck & Co., Inc. 67,370,625
346,000 North American Vaccine, Inc. 3,330,250
640,000 Pfizer, Inc. 71,440,000
550,000 Pharmacia & Upjohn, Inc. 28,634,375
310,000 PharMerica, Inc. (NON) 1,278,750
360,000 Schering-Plough Corp. 38,295,000
994,000 Warner-Lambert Co. 75,047,000
--------------
409,269,537
Publishing (0.7%)
- --------------------------------------------------------------------------------------------------------------------------
230,000 Journal Register Co. (NON) 3,723,125
170,000 McGraw-Hill, Inc. 15,215,000
125,600 World Color Press, Inc. 3,736,600
--------------
22,674,725
Real Estate (3.6%)
- --------------------------------------------------------------------------------------------------------------------------
70,000 Annaly Mortgage Management, Inc. (R) 595,000
193,800 Anthracite Capital, Inc. (NON) (R) 1,441,388
148,000 Anworth Mortgage Asset Corp. (NON) (AFF) (R) 601,250
333,000 Apartment Investment & Management Co.
Class A (R) 11,405,250
316,000 Boston Properties, Inc. (R) 9,973,750
151,700 Burnham Pacific Properties, Inc. (R) 1,953,138
381,000 Capital Automotive REIT (R) 5,095,875
485,700 Captec Net Lease Realty, Inc. (AFF) (R) 5,706,975
383,600 CCA Prison Realty Trust (R) 9,302,300
228,500 Centertrust Retail Prop Inc (R) 2,684,875
507,900 Chastain Capital Corp. (NON) (AFF) (R) 2,285,550
349,900 Cornerstone Properties, Inc. (R) 5,489,056
169,700 Correctional Properties Trust (NON) (R) 3,266,725
150,000 CRIIMI MAE, Inc. (R) 553,125
220,000 Engel General Developers Ltd. (AFF) 825,000
15,000 Equity Residential Properties Trust (R) 634,688
200,000 Fortress Group, Inc. 487,500
125,700 Glenborough Realty Trust, Inc. (R) 2,686,838
557,200 Hanover Capital Mortgage Holdings, Inc. (AFF) (R) 1,358,175
366,465 Healthcare Realty Trust, Inc. (R) 8,428,695
114,900 Indymac Mortgage Holdings, Inc. (R) 1,105,913
235,700 Innkeepers USA Trust (R) 2,607,431
43,300 Kilroy Realty Corp. (R) 968,838
68,100 Lexington Corporate Properties Trust (R) 893,813
40,000 Malan Realty Investors, Inc. (R) 605,000
128,100 Mills Corp. (R) 2,746,144
48,000 New Plan Excel Realty Trust 1,050,000
218,400 Novastar Financial, Inc. (R) 1,269,450
971,110 Prime Retail, Inc. (R) 10,257,349
163,300 RFS Hotel Investors, Inc. (R) 2,337,231
95,000 Sizeler Property Investments, Inc. (R) 807,500
198,200 SL Green Realty Corp. (R) 4,236,525
614,000 Sunstone Hotel Investors, Inc. (R) 6,523,750
74,500 Tower Realty Trust, Inc. (R) 1,401,531
845,000 Wilshire Real Estate Investment Trust, Inc. (AFF) (R) 2,851,875
110,900 Winston Hotels, Inc. 1,039,688
--------------
115,477,191
Recreation (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
557,200 Royal Caribbean Cruises Ltd. 16,924,950
252,200 Royal Olympic Cruise Lines, Inc. (NON) 977,275
--------------
17,902,225
Retail (10.4%)
- --------------------------------------------------------------------------------------------------------------------------
806,000 Albertsons, Inc. 45,992,375
207,400 BJ's Wholesale Club, Inc. (NON) 7,997,863
230,000 Claire's Stores, Inc. 3,910,000
280,000 Cole National Corp. Class A (NON) 4,322,500
337,400 CompUSA, Inc. (NON) 4,997,738
137,400 CVS Corp. 6,784,125
212,500 Dollar General Corp. 5,060,156
265,000 Duckwall-Alco Stores, Inc. (NON) (AFF) 3,511,250
227,400 Federated Department Stores, Inc. (NON) 9,479,738
21,000 Friendly Ice Cream Corp. 165,375
430,000 General Nutrition Companies, Inc. (NON) 7,632,500
279,000 InterTAN, Inc. (NON) 1,865,813
610,000 Intimate Brands, Inc. 17,575,625
224,300 Jo-Ann Stores, Inc. class A 3,532,725
205,041 Limited, Inc. (The) 5,933,374
770,000 Lowe's Cos., Inc. 32,532,500
93,750 99 Cents Only Stores (NON) 4,031,250
1,050,000 Officemax, Inc. (NON) 11,156,250
1,175,000 Pier 1 Imports, Inc. 12,631,250
1,400,000 Rite Aid Corp. 64,925,000
65,400 Sensormatic Electronics Corp. 531,375
300,000 Tandy Corporation 13,518,750
321,300 The Men's Wearhouse, Inc. (NON) 8,132,906
119,700 Tiffany & Co. 5,229,394
800,000 TJX Cos., Inc. (The) 20,500,000
430,000 Wal-Mart Stores, Inc. 32,384,375
949,000 West Coast Entertainment Corp. (NON) (AFF) 504,156
--------------
334,838,363
Specialty Consumer Products (0.4%)
- --------------------------------------------------------------------------------------------------------------------------
335,000 Mattel, Inc. 11,578,438
Telecommunications (6.1%)
- --------------------------------------------------------------------------------------------------------------------------
520,000 American Telephone & Telegraph Co. 32,402,500
262,000 Ascend Communications, Inc. (NON) 14,721,125
400,000 Bell Atlantic Corp. 22,250,000
525,700 Cable & Wireless Optus Ltd. 144A 982,249
270,000 Davox Corp 1,923,750
536,666 Hellenic Telecommunication
Organization S.A. (Greece) 13,419,013
52,000 Inter-Tel, Inc. (NON) 1,248,000
1,000,000 SBC Communications, Inc. 47,937,500
37,100 Sonera Group GDR 144A 2,114,700
466,200 Swisscom AG- ADR 15,734,250
142,625 Telecom Corp. of New Zealand Ltd. (New Zealand) 2,424,625
699,100 U S West, Inc. 43,518,975
--------------
198,676,687
Textiles (0.5%)
- --------------------------------------------------------------------------------------------------------------------------
210,000 Mohawk Industries, Inc. (NON) 7,835,625
248,550 Novel Denim Holdings Ltd. (Hong Kong) 4,955,466
134,000 Unifi, Inc. 2,579,500
--------------
15,370,591
Transportation (2.5%)
- --------------------------------------------------------------------------------------------------------------------------
239,400 Airborne Freight Corp. 6,388,988
200,000 CNF Transportation, Inc. 7,137,500
784,400 GATX Corp. 29,660,125
68,200 International Total Services, Inc. 332,475
259,110 MIF Ltd. (Norway) (NON) 4,704,173
385,000 Sea Containers, Ltd. Class A 12,512,500
465,000 Southwest Airlines Co. 9,997,500
311,600 Stolt-Nielsen S.A. ADR 3,739,200
96,000 UAL Corp. (NON) 6,114,000
100,000 USFreightways Corp. 2,687,500
--------------
83,273,961
Utilities (3.5%)
- --------------------------------------------------------------------------------------------------------------------------
430,000 Baltimore Gas & Electric Co. 13,195,625
300,400 CiNergy Corp. 10,382,575
310,000 Consolidated Edison, Inc. 15,751,875
90,000 DPL, Inc. 1,800,000
890,000 Endesa Sp Adr 23,140,000
230,000 Houston Industries, Inc. 7,273,750
8,400 Light, Servicos de Electricidade S.A. 1,503,176
560,000 MCN Corp. 10,605,000
370,000 Nevada Power Co. 8,764,375
93,400 P P & L Resources, Inc. 2,550,988
60,000 Pinnacle West Capital Corp. 2,733,750
330,000 Texas Utilities Co. 14,705,625
--------------
112,406,739
--------------
Total Common Stocks (cost $2,733,521,188) $3,096,623,535
CONVERTIBLE PREFERRED STOCKS (0.9%) (a)
NUMBER OF SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------
400,000 Cendant Corp. $0.65 cv. pfd. $ 10,700,000
259,000 National Australia Bank Ltd. $1.969 cv. pfd. 7,413,875
112,200 Standard Automotive Corp. $1.02 cv.pfd. 1,122,000
320,000 WBK STRYPES Trust $3.135 cv. pfd. 9,800,000
--------------
Total Convertible Preferred Stocks
(cost $34,853,638) $ 29,035,875
CONVERTIBLE BONDS AND NOTES (0.6%) (a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$ 875,000 Complete Management, Inc. cv. sub. deb. 8s, 2003 $ 166,250
3,850,000 HMT Technology Corp. 144A cv. sub. notes
5 3/4s, 2004 2,829,750
2,000,000 Hutchinson Technology 144A cv. sub. notes 6s, 2005 2,487,500
3,900,000 May & Speh Inc. cv. sub. notes 5 1/4s, 2003 5,352,738
2,000,000 Preferred Employers Holdings, Inc. cv. sub. notes
7s, 2003 1,916,000
850,000 Southern Mineral Corp. cv. deb. 6 7/8s, 2007 382,500
3,300,000 USA Waste Services, Inc. cv. sub. notes 4s, 2002 3,828,000
10,000,000 World Airways, Inc. 144A cv. sub. deb. 8s, 2004 3,400,000
--------------
Total Convertible Bonds and Notes
(cost $26,746,582) $ 20,362,738
WARRANTS (--%)(a)(NON) EXPIRATION
NUMBER OF WARRANTS DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------
173,100 Omega Orthodontics, Inc. 9/30/02 $ 5,409
88,500 U. S. Energy Systems, Inc. 12/2/01 13,828
--------------
Total Warrants (cost $26,160) $ 19,237
SHORT-TERM INVESTMENTS (3.0%)(a)
PRINCIPAL AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------
$25,000,000 General Electric Co. effective yield of 5.11%,
December 17, 1998 $ 24,943,222
72,624,000 Interest in $756,318,000 joint repurchase
agreement dated November 30, 1998, with
Merrill, Lynch, Pierce, Fenner & Smith due
December 1, 1998 with respect to various
U.S. Treasury obligations -- maturity value of
$72,634,692 for an effective yield of 5.3% 72,634,692
--------------
Total Short-Term Investments (cost $97,577,914) $ 97,577,914
- --------------------------------------------------------------------------------------------------------------------------
Total Investments (cost $2,892,725,482) (b) $3,243,619,299
- --------------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $3,229,832,623.
(b) The aggregate identified cost on a tax basis is $2,893,006,489, resulting in gross unrealized appreciation and
depreciation of $608,754,351 and $258,141,541, respectively, or net unrealized appreciation of $350,612,810.
(NON) Non-income-producing security.
(AFF) Affiliated Companies (Note 5).
(R) Real Estate Investment Trust.
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.
ADR or GDR after the name of a foreign holding stands for American Depository Receipts or Global Depository
Receipts respectively, representing ownership of foreign securities on deposit with a domestic custodian bank.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
November 30, 1998 (Unaudited)
<S> <C>
Assets
- -----------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $2,892,725,482) (Note 1) $3,243,619,299
- -----------------------------------------------------------------------------------------------
Dividends, interest and other receivables 2,931,623
- -----------------------------------------------------------------------------------------------
Foreign currency (cost $2,028,641) 1,961,565
- -----------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 2,631,632
- -----------------------------------------------------------------------------------------------
Receivable for securities sold 4,859,224
- -----------------------------------------------------------------------------------------------
Total assets 3,256,003,343
Liabilities
- -----------------------------------------------------------------------------------------------
Payable to subcustodian (Note 2) 4,897,359
- -----------------------------------------------------------------------------------------------
Payable for securities purchased 8,029,478
- -----------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 6,587,046
- -----------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 3,822,719
- -----------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 316,077
- -----------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 21,324
- -----------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 5,572
- -----------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 2,050,395
- -----------------------------------------------------------------------------------------------
Other accrued expenses 440,750
- -----------------------------------------------------------------------------------------------
Total liabilities 26,170,720
- -----------------------------------------------------------------------------------------------
Net assets $3,229,832,623
Represented by
- -----------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $2,895,381,580
- -----------------------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 12,883,469
- -----------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (Note 1) (29,259,078)
- -----------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and
assets and liabilities in foreign currencies 350,826,652
- -----------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $3,229,832,623
Computation of net asset value and offering price
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($1,477,064,428 divided by 67,313,449 shares) $21.94
- -----------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $21.94)* $23.28
- -----------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,641,812,080 divided by 76,016,240 shares)** $21.60
- -----------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($110,956,115 divided by 5,122,487 shares) $21.66
- -----------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $21.66)* $22.45
- -----------------------------------------------------------------------------------------------
* 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 charges.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Six months ended November 30, 1998 (Unaudited)
<S> <C>
Investment income:
- -----------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $35,110) $ 24,894,388
- -----------------------------------------------------------------------------------------------
Interest 5,830,712
- -----------------------------------------------------------------------------------------------
Total investment income 30,725,100
Expenses:
- -----------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 8,205,572
- -----------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 2,228,277
- -----------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 24,263
- -----------------------------------------------------------------------------------------------
Administrative services (Note 2) 16,908
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,852,147
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 7,650,017
- -----------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 422,453
- -----------------------------------------------------------------------------------------------
Reports to shareholders 131,017
- -----------------------------------------------------------------------------------------------
Registration fees 9,041
- -----------------------------------------------------------------------------------------------
Auditing 38,792
- -----------------------------------------------------------------------------------------------
Legal 12,861
- -----------------------------------------------------------------------------------------------
Postage 520,997
- -----------------------------------------------------------------------------------------------
Other 395,699
- -----------------------------------------------------------------------------------------------
Total expenses 21,508,044
- -----------------------------------------------------------------------------------------------
Expense reduction (Note 2) (371,833)
- -----------------------------------------------------------------------------------------------
Net expenses 21,136,211
- -----------------------------------------------------------------------------------------------
Net investment income 9,588,889
- -----------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1, 3 and 5)
(including realized loss of $14,431,611 on sales of
investments in affiliated issuers) (103,054,315)
- -----------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (7,101)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of assets and liabilities
in foreign currencies during the period (67,165)
- -----------------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (110,297,837)
- -----------------------------------------------------------------------------------------------
Net loss on investments (213,426,418)
- -----------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(203,837,529)
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Six months ended Year ended
November 30 May 31
1998* 1998
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets
- ---------------------------------------------------------------------------------------------------------------
Operations:
- ---------------------------------------------------------------------------------------------------------------
Net investment income $ 9,588,889 $ 8,172,787
- ---------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions (103,061,416) 95,643,722
- ---------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in foreign currencies (110,365,002) 295,714,232
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (203,837,529) 399,530,741
- ---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
- ---------------------------------------------------------------------------------------------------------------
From net investment income
Class A -- (4,172,539)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (147,312)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (169,011)
- ---------------------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A -- (20,953,406)
- ---------------------------------------------------------------------------------------------------------------
Class B -- (22,686,031)
- ---------------------------------------------------------------------------------------------------------------
Class M -- (1,774,614)
- ---------------------------------------------------------------------------------------------------------------
Increase from capital share transactions (Note 4) 59,702,911 1,920,758,165
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (144,134,618) 2,270,385,993
Net assets
- ---------------------------------------------------------------------------------------------------------------
Beginning of period 3,373,967,241 1,103,581,248
- ---------------------------------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $12,883,469 and $3,294,580, respectively) $3,229,832,623 $3,373,967,241
- ---------------------------------------------------------------------------------------------------------------
* Unaudited
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 Aug. 5, 1993+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $23.15 $18.76 $16.33 $12.24 $10.74 $8.53
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .10(c) .17(c) .13(c) .14 .06(d) .07(c)(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (1.31) 4.77 3.48 4.37 1.59 2.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.21) 4.94 3.61 4.51 1.65 2.34
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.09) (.10) (.13) (.03) (.04)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.46) (1.08) (.29) (.10) (.09)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of realized
gain on investments -- -- -- -- (.02) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (.55) (1.18) (.42) (.15) (.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $21.94 $23.15 $18.76 $16.33 $12.24 $10.74
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (5.23)* 26.67 22.91 37.57 15.61 27.58*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,477,064 $1,530,290 $525,804 $173,321 $103,555 $3,062
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .48* 1.03 1.20 1.29 1.13 (d) .78*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .48* .77 .79 1.05 1.89 (d) .73*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 35.16* 31.08 38.35 76.68 15.32 102.99*
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes
amounts paid through expense offset and brokerage service arrangements. Prior periods exclude these
amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
(d) Reflects an expense limitation in effect 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.
(e) Distributions from net investment income amounted to less than $0.01 per share for class B.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 Nov. 2, 1994+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $22.86 $18.59 $16.24 $12.19 $11.08
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .03(c) --(c) --(c) .04 .06(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (1.29) 4.73 3.45 4.35 1.20
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.26) 4.73 3.45 4.39 1.26
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- -- (e) (.02) (.05) (.03)
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.46) (1.08) (.29) (.10)
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of realized
gain on investments -- -- -- -- (.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (.46) (1.10) (.34) (.15)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $21.60 $22.86 $18.59 $16.24 $12.19
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (5.51)* 25.72 21.95 36.62 11.55*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,641,812 $1,723,054 $543,015 $153,905 $89,962
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .82* 1.78 1.95 2.05 1.12*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .14* .02 .03 .30 .65*(d)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 35.16* 31.08 38.35 76.68 15.32
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes
amounts paid through expense offset and brokerage service arrangements. Prior periods exclude these
amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
(d) Reflects an expense limitation in effect 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.
(e) Distributions from net investment income amounted to less than $0.01 per share for class B.
</TABLE>
<TABLE>
<CAPTION>
Financial highlights
(For a share outstanding throughout the period)
CLASS M
- ------------------------------------------------------------------------------------------------------------------------------------
Six months
ended For the period
Per-share Nov. 30 Jan. 22, 1996+
operating performance (Unaudited) Year ended May 31 to May 31
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $22.91 $18.62 $16.29 $13.84
- ------------------------------------------------------------------------------------------------------------------------------------
Investment operations
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income .05(c) .06(c) .04(c) .02(c)
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments (1.30) 4.73 3.46 2.43
- ------------------------------------------------------------------------------------------------------------------------------------
Total from
investment operations (1.25) 4.79 3.50 2.45
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------------------------------------------
From net
investment income -- (.04) (.09) --
- ------------------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- (.46) (1.08) --
- ------------------------------------------------------------------------------------------------------------------------------------
In excess of realized
gain on investments -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions -- (.50) (1.17) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $21.66 $22.91 $18.62 $16.29
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment return
at net asset value (%)(a) (5.46)* 26.04 22.28 17.70*
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $110,956 $120,624 $34,763 $2,025
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .73* 1.53 1.70 .66*
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income
to average net assets (%) .22* .28 .23 .16*
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 35.16* 31.08 38.35 76.68
- ------------------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) The ratio of expenses to average net assets for the year ended May 31, 1996 and thereafter, includes
amounts paid through expense offset and brokerage service arrangements. Prior periods exclude these
amounts. (Note 2)
(c) Per share net investment income has been determined on the basis of the weighted average number
of shares outstanding during the period.
(d) Reflects an expense limitation in effect 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.
(e) Distributions from net investment income amounted to less than $0.01 per share for class B.
</TABLE>
Notes to financial statements
November 30, 1998 (Unaudited)
Note 1
Significant accounting policies
Putnam Capital Appreciation 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 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. 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.
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 and certain other accounts managed by
Putnam Investment Management, Inc. ("Putnam Management"), the fund's
Manager, a wholly-owned subsidiary of Putnam Investments, Inc. 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. Collateral for certain tri-party repurchase
agreements is held at the counterparty's custodian in a segregated account
for the benefit of the fund and the counterparty. 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.
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 gains
and losses 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 appreciation and depreciation of
assets and liabilities in foreign currencies 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) Line of credit The fund has entered into a committed line of credit
with certain banks. This line of credit agreement includes restrictions
that the fund maintain an asset coverage ratio of at least 300% and
borrowings must not exceed prospectus limitations. For the six months
ended November 30, 1998, the funds had no borrowings against the line of
credit.
G) 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, 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.
H) 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 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.
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 of average net assets, 0.55% of the next $500 million, 0.50% of
the next $500 million, 0.45% of the next $5 billion, 0.425% of the next $5
billion, 0.405% of the next $5 billion, 0.39% of the next $5 billion, and
0.38% thereafter.
As part of the subcustodian contract between the subcustodian bank and
Putnam Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments,
Inc., the subcustodian bank has a lien on the securities of the fund to
the extent permitted by the fund's investment restrictions to cover any
advances made by the subcustodian bank for the settlement of securities
purchased by the fund. At November 30, 1998, the payable to the
subcustodian bank represents the amount due for cash advance for the
settlement of a security purchased.
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 PFTC. Investor
servicing agent functions are provided by Putnam Investor Services, a
division of PFTC.
For the six months ended November 30, 1998, fund expenses were reduced by
$371,833 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 $3,200
has been allocated to the fund, and an additional fee for each Trustee's
meeting attended. Trustees who are not interested persons of Putnam
Management and who serve on committees of the Trustees receive additional
fees for attendance at certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
in the fund and are invested in certain Putnam funds until distribution in
accordance with the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as Trustee for at least five years. Benefits under the Pension Plan
are equal to 50% of the Trustee's average total retainer and meeting fees
for the three years preceding retirement. Pension expense for the fund is
included in Compensation of trustees in the Statement of operations.
Accrued pension liability is included in Payable for compensation of
Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to compensate
Putnam Mutual Funds Corp., a wholly-owned subsidiary of Putnam Investments
Inc., for services provided and expenses incurred by it in distributing
shares of the fund. The Plans provide for payments by the fund to Putnam
Mutual Funds Corp. at an annual rate up to 0.35%, 1.00% and 1.00% of the
average net assets attributable to class A, class B and class M shares,
respectively. The Trustees currently limit payment by the fund to an
annual rate of 0.25%, 0.85% and 0.75% of the average net assets
attributable to class A, class B and class M shares, respectively. Prior
to July 22, 1998 the annual rate was 1.00% of the average net assets
attributable to class B shares.
For the six months ended November 30, 1998, Putnam Mutual Funds Corp.,
acting as underwriter received net commissions of $699,699 and $35,962
from the sale of class A and class M shares, respectively and $1,572,679
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 six months ended November 30, 1998, Putnam Mutual
Funds Corp., acting as underwriter received $41,832 on class A
redemptions.
Note 3
Purchases and sales of securities
During the six months ended November 30, 1998, purchases and sales of
investment securities other than short-term investments aggregated
$1,256,598,837 and $1,084,148,867, respectively. There were no purchases
and sales of U.S. government obligations. In determining the net gain or
loss on securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Capital shares
At November 30, 1998, there was an unlimited number of shares of
beneficial interest authorized. Transactions in capital shares were as
follows:
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 11,977,167 $ 264,547,566
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
11,977,167 264,547,566
Shares
repurchased (10,776,251) (228,894,448)
- -----------------------------------------------------------------------------
Net increase 1,200,916 $ 35,653,118
- -----------------------------------------------------------------------------
Year ended
May 31, 1998
- -----------------------------------------------------------------------------
Class A Shares Amount
- -----------------------------------------------------------------------------
Shares sold 51,074,128 $1,123,253,209
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,143,129 23,946,747
- -----------------------------------------------------------------------------
52,217,257 1,147,199,956
Shares
repurchased (14,135,542) (309,703,535)
- -----------------------------------------------------------------------------
Net increase 38,081,715 $ 837,496,421
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 11,489,376 $ 253,509,243
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
11,489,376 253,509,243
Shares
repurchased (10,853,202) (226,993,016)
- -----------------------------------------------------------------------------
Net increase 636,174 $ 26,516,227
- -----------------------------------------------------------------------------
Year ended
May 31, 1998
- -----------------------------------------------------------------------------
Class B Shares Amount
- -----------------------------------------------------------------------------
Shares sold 57,943,337 $1,265,178,122
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,013,073 21,030,886
- -----------------------------------------------------------------------------
58,956,410 1,286,209,008
Shares
repurchased (12,789,657) (276,546,324)
- -----------------------------------------------------------------------------
Net increase 46,166,753 $1,009,662,684
- -----------------------------------------------------------------------------
Six months ended
November 30, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 879,315 $ 19,212,454
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions -- --
- -----------------------------------------------------------------------------
879,315 19,212,454
Shares
repurchased (1,022,844) (21,678,888)
- -----------------------------------------------------------------------------
Net decrease (143,529) $ (2,466,434)
- -----------------------------------------------------------------------------
Year ended
May 31, 1998
- -----------------------------------------------------------------------------
Class M Shares Amount
- -----------------------------------------------------------------------------
Shares sold 4,053,490 $88,211,779
- -----------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 90,372 1,877,929
- -----------------------------------------------------------------------------
4,143,862 90,089,708
Shares
repurchased (744,948) (16,490,648)
- -----------------------------------------------------------------------------
Net increase 3,398,914 $73,599,060
- -----------------------------------------------------------------------------
Note 5
<TABLE>
<CAPTION>
Transactions with Affiliated Issuers
Transactions during the year with companies in which the fund owns at
least 5% of the voting securities were as follows:
Purchase Sales Dividend Market
Affiliates cost cost Income Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Name of affiliates
- -------------------------------------------------------------------------------------------------------------------
American Residential
Investment Trust, Inc. $ -- $ 7,345,680 $-- $--
Anworth Mortgage
Asset Corp. -- 562,500 -- 601,250
Bonded Motors, Inc. -- -- -- 1,567,500
Calpine Corp. 535,824 6,438,195 -- 26,808,000
Captec Net Lease Realty, Inc. -- -- -- 5,706,975
Chastain Capital Corp. -- 1,381,500 -- 2,285,550
Complete Management, Inc. -- 10,837,398 -- --
Duckwall-Alco Stores, Inc. -- -- -- 3,511,250
Engel General Developers, Ltd. -- -- -- 825,000
Epitope Inc. -- -- -- 5,640,000
4Front Software
International, Inc. 1,100,000 -- -- 4,400,000
Hanover Capital
Mortgage Holdings, Inc. -- -- -- 1,358,175
Omega Orthodontics Inc. -- -- -- 242,325
Preferred Employers Holdings 1,106,250 -- -- 2,584,481
Scheid Vineyards Inc. Class A 773,875 -- -- 1,900,000
Unidigital Inc. -- -- -- 1,179,425
West Coast
Entertainment Corp. -- -- -- 504,156
Wilshire Real Estate
Investment Trust, Inc. -- 1,478,400 -- 2,851,875
- -------------------------------------------------------------------------------------------------------------------
Totals $3,515,949 $28,043,673 $-- $61,965,962
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
PUTNAM GROWTH FUNDS
Asia Pacific Growth Fund
Capital Appreciation Fund [DBL. DAGGER]
Capital Opportunities Fund
Diversified Equity Trust
Europe Growth Fund
Global Growth Fund
Global Natural Resources Fund
Growth Opportunities Fund
Health Sciences Trust
International Growth Fund
International New Opportunities Fund
Investors Fund
New Opportunities Fund [DBL. DAGGER]
OTC & Emerging Growth Fund
Research Fund
Vista Fund
Voyager Fund
Voyager Fund II
PUTNAM GROWTH
AND INCOME FUNDS
Balanced Retirement Fund
Convertible Income-Growth Trust
Equity Income Fund
The George Putnam Fund of Boston
Global Growth and Income Fund
The Putnam Fund for Growth and Income
Growth and Income Fund II
International Growth and Income Fund
New Value Fund
Utilities Growth and Income Fund
PUTNAM INCOME FUNDS
American Government Income Fund
Diversified Income Trust
Global Governmental Income Trust
High Quality Bond Fund +
High Yield Advantage Fund [DBL. DAGGER]
High Yield Total Return Fund
High Yield Trust [DBL. DAGGER]
High Yield Trust II
Income Fund
Intermediate U.S. Government
Income Fund
Money Market Fund **
Preferred Income Fund
Strategic Income Fund *
U.S. Government Income Trust
PUTNAM TAX-FREE
INCOME FUNDS
Municipal Income Fund
Tax Exempt Income Fund
Tax Exempt Money Market Fund**
Tax-Free High Yield Fund
Tax-Free Insured Fund
State tax-free income funds [SECTION MARK]
Arizona, California, Florida, Massachusetts, Michigan, Minnesota,
New Jersey, New York, Ohio and Pennsylvania
State tax-free money market funds [SECTION MARK]
California, New York
LIFESTAGE SM FUNDS
Putnam Asset Allocation Funds -- three investment portfolios that spread
your money across a variety of stocks, bonds, and money market
investments.
The three portfolios:
Asset Allocation: Balanced Portfolio
Asset Allocation: Conservative Portfolio
Asset Allocation: Growth Portfolio
*Formerly Putnam Diversified Income Trust II
+Formerly Putnam Federal Income Trust
[DBL. DAGGER] Closed to new investors. Some exceptions may apply.
Contact Putnam for details.
[SECTION MARK] Not available in all states.
**An investment in a money market fund is neither insured nor guaranteed
by the U.S. government. These funds are managed to maintain a price of
$1.00 per share, although there is no assurance that this price will be
maintained in the future.
Please call your financial advisor or Putnam at 1-800-225-1581 to obtain
a prospectus for any Putnam fund. It contains more complete information,
including charges and expenses. Please read it carefully before you invest
or send money.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
John A. Hill, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Gerald S. Zukowski
Vice President and Fund Manager
William H. Miller
Vice President and Fund Manager
Edward R. Finch
Vice President and Fund Manager
John R. Verani
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam 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.
You can also learn more at Putnam Investments' website:
http://www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the Federal
Deposit Insurance Corporation (FDIC), the Federal Reserve Board, or any
other agency; and involve risk, including the possible loss of the
principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
www.putnaminv.com
- --------------------
BULK RATE
U.S. POSTAGE
PAID
PUTNAM
INVESTMENTS
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SA002-48657 433/948/2BN 1/99
