Putnam
Capital
Appreciation
Fund
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-00
[SCALE LOGO OMITTED]
From the Trustees
[GRAPHIC OMITTED: PHOTO OF JOHN A. HILL AND GEORGE PUTNAM, III]
Dear Shareholder:
It is a pleasure to greet you in our new roles as Chairman of the
Trustees and President of the Funds. As you know, both of us have been
members of the Board of Trustees for a number of years -- years in which
Putnam has experienced tremendous growth and transformed itself from a
respected U.S. investment management firm to a financial institution
with a global presence.
As the organization makes its way into the new century, we are certain
that the changes that lie ahead will be even more breathtaking in their
scope. What will not change is the Trustees' dedication to serving the
best interests of our shareholders.
In one additional piece of news, we would like to note that your fund,
which had been closed to new investors since June 1998, recently
re-opened. The fund's management team is monitoring the situation
carefully and, depending on asset flows and market conditions, may
recommend closing it again. As always, we will keep you informed of our
decisions on this matter.
Respectfully yours,
/S/ JOHN A. HILL /S/ GEORGE PUTNAM, III
John A. Hill George Putnam, III
Chairman of the Trustees President of the Funds
July 19, 2000
REPORT FROM THE FUND MANAGERS
Michael K. Arends
Joseph P. Joseph
Thomas Haslett
Putnam Capital Appreciation Fund concluded its 2000 fiscal year on solid
ground despite a market environment that has changed considerably since
our last report six months ago. At the fiscal year's midpoint, we
highlighted the skyrocketing performance of technology stocks and U.S.
market indexes that were headed into record territory. This momentum
continued into 2000 but reversed sharply in the last two months of your
fund's fiscal year.
Total return for 12 months ended 5/31/00
Class A Class B Class M
NAV POP NAV CDSC NAV POP
----------------------------------------------------
10.65% 4.27% 9.90% 4.90% 10.07% 6.20%
----------------------------------------------------
Past performance is no indication of future results. Performance
information for longer periods begins on page 5.
* VOLATILITY CONTINUES TO PLAGUE MARKETS
The decline was swift and dramatic and came as the major stock market
indexes were posting record-breaking performance. The Nasdaq Composite
Index, a common measure of technology stocks, closed 1999 with an 85.6%
return, the biggest annual gain for a major market index in U.S.
history. In addition, the Dow Jones Industrial Average and the Standard
& Poor's 500 Index, which measure the performance of large-company
stocks, posted double-digit gains for a record fifth straight year.
Despite the volatility, we remain committed to our strategic stock
selection process and our search for fundamentally strong companies with
attractive stock prices.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY SECTORS]
TOP INDUSTRY SECTORS*
Electronics 13.7%
Pharmaceuticals 7.8%
Communications
equipment 7.5%
Banking 6.8%
Software 5.7%
Footnote reads:
*Based on net assets as of 5/31/00. Holdings will vary over time.
Beginning in mid March, a number of factors were combining to create
weakness in the stock market. Perhaps most alarming to investors was an
April 14 report on the consumer price index that indicated inflation
could be on the rise. This report was a catalyst for investors who had
been sorting through other potentially negative news, including the
Microsoft antitrust judgment, some disappointing earnings announcements,
and press reports that many stocks, especially in the technology sector,
were overvalued. It is important to note that such volatility is a
natural part of stock market investing and we believe the economy and
the fund's holdings remain fundamentally strong. In fact, the recent
turbulence enabled us to purchase shares of solid companies at
attractively low prices.
* ESTABLISHED TECH COMPANIES CONTRIBUTED TO RETURNS
During the fiscal year, the pervasive influence of technology and
especially the Internet touched almost every growth sector. In the past
year, approximately 150,000 new Internet users worldwide went online
each day and more than 61 million U.S. homes are now connected to the
Internet. We targeted a number of companies that capitalized on this
growth, most notably large, established firms such as Cisco Systems,
Intel Corporation, and Sun Microsystems.
Cisco is a computer networking giant with products, such as high-speed
routers, designed to efficiently send large amounts of information
across computer networks. Intel produces semiconductor chips that are
integral to the performance of computers, servers, and networking
products. Sun provides products and services for building and
maintaining computer networks. While these holdings and 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.
Despite the Nasdaq selloff in April and May, we maintain a positive
outlook for the technology stocks in the fund's portfolio. Demand for
high-tech products and services continues to explode worldwide, and
companies that wish to remain competitive are recognizing that new
technology is essential for improving efficiency, increasing
productivity, and cutting costs.
* STREAMLINED PORTFOLIO BOOSTS GROWTH POTENTIAL
As we noted at the fiscal year's midpoint, we have reduced the number of
fund holdings in an effort to achieve greater long-term growth
potential. The fund invests in companies of all sizes, and as of the
period's end, the greatest portion of the portfolio was invested in
large-company stocks. We target companies with fundamentally sound
business models, leadership positions in their industries, and strong
management teams. In addition, we seek companies whose stock prices are
attractive relative to their long-term fundamental prospects.
"Our commitment to a disciplined investment process did not shift in
response to these short-term market fluctuations."
-- Michael K. Arends, portfolio manager
One notable example in the portfolio's pharmaceutical sector is Pfizer,
Inc. In addition to impressive products, such as the male impotence drug
Viagra and Lipitor, a top-selling cholesterol-lowering treatment, Pfizer
enhances its profitability through cross- licensing, in which it markets
and sells drugs developed by other companies and shares in the resulting
profits. We believe that Pfizer's purchase of competitor Warner-Lambert
Co. also contributes to its long-term growth potential. The combination
of these two companies should result in impressive research and
development advances, effective cost-cutting programs, and improved
sales. After the merger, expected in July, the combined company should
have 8 products with greater than $1 billion in worldwide sales.
* FINANCIAL SECTOR OUTLOOK MAY IMPROVE
Contributing to the market volatility at the end of the period were
investor concerns about rising interest rates. In the past year, the
Federal Reserve Board has raised short-term interest rates six times in
an effort to slow the U.S. economy and hold off inflation. While earlier
increases had been in quarter-point increments, on May 16, rates were
raised by half a percentage point, the first increase of that size in
more than five years.
[GRAPHIC OMITTED: TOP 10 HOLDINGS]
TOP 10 HOLDINGS
Citigroup, Inc.
Financial
Sears, Roebuck & Co.
Retail
Tyco International, Ltd.
Conglomerates
AT&T Corp.-Liberty Media
Cable television
Intel Corp.
Electronics
General Electric Co.
Conglomerates
Pfizer, Inc.
Pharmaceuticals
Viacom, Inc., Class B
Entertainment
LSI Logic Corp.
Electronics
Cisco Systems, Inc.
Communications equipment
Footnote reads:
These holdings represent 22.1% of the fund's net assets as of 5/31/00.
Portfolio holdings will vary over time.
While financial companies performed poorly in this rising-rate
environment, we believe stocks in this sector are now positioned to
improve. We believe the Federal Reserve is nearing the end of its rate
increases and we do not expect major inflationary pressures for the
remainder of the year. This is a positive backdrop for stocks such as
Firstar Corporation, a bank holding company formed when three smaller
banks merged. Their pooled resources have resulted in operational
efficiencies, enhanced research capabilities, and improved client
service.
* FOCUS ON STRATEGY CONTINUES
As the period came to a close, U.S. financial markets were showing signs
of recovery after the sharp declines of April and May. As always, our
commitment to a disciplined investment process did not shift in response
to these short-term fluctuations. Our outlook for the next fiscal year
is positive and we are confident that the companies in the fund's
portfolio remain fundamentally strong. We will continue to employ our
bottom-up process of stock selection, in which we focus on the merits
and potential of individual companies with less emphasis on broad
economic trends.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 5/31/00, there is no guarantee the fund will
continue to hold these securities in the future.
PERFORMANCE SUMMARY
This section provides information about your fund's performance, which
should always be considered in light of its investment strategy. Putnam
Capital Appreciation Fund is designed for investors seeking capital
appreciation through investments in equities chosen for their growth
potential.
TOTAL RETURN FOR PERIODS ENDED 5/31/00
Class A Class B Class M
(inception dates) (8/5/93) (11/2/94) (1/22/96)
NAV POP NAV CDSC NAV POP
----------------------------------------------------------------------
1 year 10.65% 4.27% 9.90% 4.90% 10.07% 6.20%
----------------------------------------------------------------------
5 years 131.28 117.93 123.31 121.31 125.37 117.41
Annual average 18.26 16.86 17.43 17.22 17.65 16.80
----------------------------------------------------------------------
Life of fund 241.12 221.52 224.80 224.80 229.27 217.87
Annual average 19.71 18.68 18.85 18.85 19.09 18.48
----------------------------------------------------------------------
COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/00
Russell Midcap S&P 500 Consumer
Growth Index Index price index
----------------------------------------------------------------------
1 year 43.72% 10.48% 3.07%
----------------------------------------------------------------------
5 years 204.56 190.44 12.55
Annual average 24.94 23.76 2.39
----------------------------------------------------------------------
Life of fund 277.13 264.34 18.63
Annual average 21.44 20.83 2.53
----------------------------------------------------------------------
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. Performance
data reflect a voluntary expense limitation previously in effect.
Without the limitation, total returns would have been lower.
[GRAPHIC OMITTED: worm chart GROWTH OF A $10,000 INVESTMENT]
GROWTH OF A $10,000 INVESTMENT
Cumulative total return of a $10,000 investment since 8/5/93
Fund's class A S&P 500 Russell Midcap Consumer price
shares at POP Index Growth Index index
8/5/93 9,425 10,000 10,000 10,000
5/31/94 12,024 10,437 10,701 10,215
5/31/95 13,902 12,545 12,383 10,540
5/31/96 19,125 16,112 16,499 10,845
5/31/97 23,506 20,851 18,308 11,087
5/31/98 29,774 27,249 22,692 11,274
5/31/99 29,058 32,979 26,241 11,510
5/31/00 $32,152 $36,434 $37,713 $11,863
Footnote reads:
Past performance is no assurance of future results. At the end of the
same time period, a $10,000 investment in the fund's class B shares
would have been valued at $32,480 and no contingent deferred sales
charges would apply; a $10,000 investment in the fund's class M shares
would have been valued at $32,927 ($31,787 at public offering price).
See first page of performance section for performance calculation
method.
PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/00
Class A Class B Class M
----------------------------------------------------------------------
Distributions (number) 1 1 1
----------------------------------------------------------------------
Income $0.107 -- --
----------------------------------------------------------------------
Capital gains
Long-term 0.446 0.446 0.446
----------------------------------------------------------------------
Short-term -- -- --
----------------------------------------------------------------------
Total $0.553 $0.446 $0.446
----------------------------------------------------------------------
Share value: NAV POP NAV NAV POP
----------------------------------------------------------------------
5/31/99 $21.93 $23.27 $21.66 $21.70 $22.49
----------------------------------------------------------------------
5/31/00 23.75 25.20 23.39 23.47 24.32
----------------------------------------------------------------------
TOTAL RETURN FOR PERIODS ENDED 6/30/00 (most recent calendar quarter)
Class A Class B Class M
(inception dates) (8/5/93) (11/2/94) (1/22/96)
NAV POP NAV CDSC NAV POP
----------------------------------------------------------------------
1 year 14.53% 7.95% 13.75% 8.75% 14.00% 10.00%
----------------------------------------------------------------------
5 years 146.17 131.96 137.70 135.70 139.86 131.42
Annual average 19.74 18.33 18.91 18.71 19.12 18.27
----------------------------------------------------------------------
Life of fund 272.57 251.16 254.52 254.52 259.57 247.13
Annual average 21.00 19.97 20.13 20.13 20.38 19.77
----------------------------------------------------------------------
Past performance is no assurance of future results. More recent returns
may be more or less than those shown. They do not take into account any
adjustment for taxes payable on reinvested distributions. Investment
returns and principal value will fluctuate so that an investor's shares
when sold may be worth more or less than their original cost. See first
page of performance section for performance calculation method.
TERMS AND DEFINITIONS
Total return shows how the value of the fund's shares changed over time,
assuming you held the shares through the entire period and reinvested
all distributions in the fund.
Class A shares are generally subject to an initial sales charge.
Class B shares may be subject to a sales charge upon redemption.
Class M shares have a lower initial sales charge and a higher 12b-1 fee
than class A shares and no sales charge on redemption.
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, divided by the number of outstanding shares, not including
any initial or contingent deferred sales charge.
Public offering price (POP) is the price of a mutual fund share plus the
maximum sales charge levied at the time of purchase. POP performance
figures shown here assume the 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 class B 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
Consumer price index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
Standard & Poor's 500 Composite Stock Price Index* is an unmanaged list
of common stocks that is frequently used as a general measure of stock
market performance.
Russell Midcap Growth Index* is composed of all medium and medium/small
companies in the Russell 1000 Index with higher price-to-book ratios and
higher forecasted growth rates.
*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.
A GUIDE TO THE FINANCIAL STATEMENTS
These sections of the report, preceded by the Report of independent
accountants, constitute the fund's financial statements.
The fund's portfolio lists all the fund's investments and their values
as of the last day of the reporting period. Holdings are organized by
asset type and industry sector, country, or state to show areas of
concentration and diversification.
Statement of assets and liabilities shows how the fund's net assets and
share price are determined. All investment and noninvestment assets are
added together. Any unpaid expenses and other liabilities are
subtracted from this total. The result is divided by the number of
shares to determine the net asset value per share, which is calculated
separately for each class of shares. (For funds with preferred shares,
the amount subtracted from total assets includes the net assets
allocated to remarketed preferred shares.)
Statement of operations shows the fund's net investment gain or loss
for the reporting period. This is determined by adding up all the fund's
earnings -- from dividends and interest income -- and subtracting its
operating expenses. This statement also lists any net gain or loss the
fund realized on the sales of its holdings and -- for holdings that
remain in the portfolio -- any change in unrealized gains or losses over
the period.
Statement of changes in net assets shows how the fund's net assets were
affected by distributions to shareholders and by changes in the number
of the fund's shares. It lists distributions and their sources (net
investment income or realized capital gains) over the current reporting
period and the most recent fiscal year-end. The distributions listed
here may not match the sources listed in the Statement of operations
because the distributions are determined on a tax basis and may be paid
in a different period from the one in which they were earned.
Financial highlights provide an overview of the fund's investment
results, per-share distributions, expense ratios, net investment income
ratios and portfolio turnover in one summary table, reflecting the five
most recent reporting periods. In a semiannual report, the highlight
table also includes the current reporting period. For open-end funds, a
separate table is provided for each share class.
REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal year ended May 31, 2000
To the Trustees and Shareholders of
Putnam Capital Appreciation Fund
In our opinion, the accompanying statement of assets and liabilities,
including the fund's portfolio, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of
Putnam Capital Appreciation Fund (the "fund") at May 31, 2000, and the
results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with
accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the fund's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments owned at May
31, 2000 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 5, 2000
<TABLE>
<CAPTION>
THE FUND'S PORTFOLIO
May 31, 2000
COMMON STOCKS (99.9%) (a)
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Advertising and Marketing Services (0.7%)
-------------------------------------------------------------------------------------------------------------------
215,800 True North Communications Inc. $ 9,427,763
205,000 Valassis Communications, Inc. (NON) 6,765,000
----------------
16,192,763
Aerospace/Defense (0.6%)
-------------------------------------------------------------------------------------------------------------------
269,000 Aeroflex, Inc. (NON) 9,717,625
40,000 General Motors Corp. Class H (NON) 3,937,500
----------------
13,655,125
Banking (6.8%)
-------------------------------------------------------------------------------------------------------------------
225,300 Bank of America Corp. 12,518,231
191,300 Bank United Corp. Class A 6,862,888
193,300 City National Corp. 7,538,700
175,700 Commerce Bancorp, Inc. 8,060,238
282,500 Fifth Third Bancorp 19,210,000
711,900 Firstar Corp. 18,197,944
105,800 Investors Financial Services Corp. 8,545,003
20,000 M & T Bank Corp. 8,650,000
56,400 Morgan (J.P.) & Co., Inc. 7,261,500
447,600 North Fork Bancorporation, Inc. 7,413,375
95,600 State Street Corp. 10,659,400
105,000 UnionBanCal Corp. 3,596,250
342,800 Wells Fargo & Co. 15,511,700
199,000 Zions Bancorporation 9,278,375
----------------
143,303,604
Beverage (1.7%)
-------------------------------------------------------------------------------------------------------------------
690,900 Coca-Cola Co. 36,876,788
Biotechnology (0.9%)
-------------------------------------------------------------------------------------------------------------------
154,600 Cell Genesys, Inc. (NON) 2,763,475
342,500 Connetics Corp. (NON) 2,911,250
30,200 Gilead Sciences, Inc. (NON) 1,651,563
140,100 Guilford Pharmaceuticals, Inc. (NON) 1,961,400
50,400 Maxim Pharmaceuticals, Inc. (NON) 1,937,250
30,600 Medimmune, Inc. (NON) 4,754,475
200 Sequenom, Inc. (NON) 4,100
110,400 Titan Pharmaceuticals, Inc. (NON) 2,801,400
----------------
18,784,913
Broadcasting (3.6%)
-------------------------------------------------------------------------------------------------------------------
345,600 AMFM, Inc. (NON) 23,414,400
49,400 Clear Channel Communications, Inc. (NON) 3,698,825
167,800 Echostar Communications Corp. Class A (NON) 6,701,513
107,000 Emmis Broadcasting Corp. Class A (NON) 3,651,375
79,900 Entercom Communications Corp. (NON) 3,635,450
1,107,700 Infinity Broadcasting Corp. Class A (NON) 35,031,013
----------------
76,132,576
Building Materials (0.1%)
-------------------------------------------------------------------------------------------------------------------
243,600 Hexcel Corp. (NON) 1,887,900
Cable Television (3.6%)
-------------------------------------------------------------------------------------------------------------------
1,123,500 AT&T Corp.-Liberty Media Group Class A (NON) 49,785,094
120,900 Cablevision Systems Corp. Class A (NON) 7,571,363
268,235 MediaOne Group Inc. (NON) 17,921,451
----------------
75,277,908
Chemicals (1.3%)
-------------------------------------------------------------------------------------------------------------------
33,900 CARBO Ceramics, Inc. 1,059,375
144,200 du Pont (E.I.) de Nemours & Co., Ltd. 7,065,800
462,100 Praxair, Inc. 19,408,200
----------------
27,533,375
Commercial and Consumer Services (1.4%)
-------------------------------------------------------------------------------------------------------------------
143,400 Heidrick & Struggles International, Inc. (NON) 5,888,363
412,500 Korn/Ferry Intl. (NON) 8,920,313
436,000 TeleTech Holdings Inc. (NON) 14,279,000
----------------
29,087,676
Communications Equipment (7.5%)
-------------------------------------------------------------------------------------------------------------------
136,300 ADC Telecommunications Inc. (NON) 9,157,656
80,200 Advanced Fibre Communications, Inc. (NON) 3,689,200
659,500 Cisco Systems, Inc. (NON) 37,550,281
167,281 Corning Inc. 32,358,418
115,800 Digital Microwave Corp. (NON) 3,235,163
56,200 Efficient Networks, Inc. (NON) 2,725,700
547,900 Nokia OYJ ADR (Finland) 28,490,800
330,200 Nortel Networks Corp. 17,933,988
84,300 Powerwave Technologies, Inc. (NON) 4,568,006
41,200 Proxim, Inc. (NON) 3,597,275
49,664 Redback Networks Inc. (NON) 4,165,568
218,700 SpectraLink Corp. (NON) 3,280,500
126,200 Tellabs, Inc. (NON) 8,195,113
100 Turnstone Systems, Inc. (NON) 8,795
----------------
158,956,463
Computers (3.8%)
-------------------------------------------------------------------------------------------------------------------
299,700 Compaq Computer Corp. 7,867,125
530,700 Dell Computer Corp. (NON) 22,886,438
154,300 EMC Corp. 17,947,019
92,000 ONYX Software Corp. (NON) 1,564,000
92,400 Paradyne Networks, Inc. (NON) 2,598,750
43,300 Pivotal Corp. (Canada) (NON) 813,228
347,800 Sun Microsystems, Inc. (NON) 26,650,175
----------------
80,326,735
Conglomerates (4.4%)
-------------------------------------------------------------------------------------------------------------------
831,705 General Electric Co. 43,768,476
1,059,337 Tyco International Ltd. 49,855,048
----------------
93,623,524
Consumer Finance (0.7%)
-------------------------------------------------------------------------------------------------------------------
319,300 Capital One Financial Corp. 15,086,925
Electric Utilities (0.4%)
-------------------------------------------------------------------------------------------------------------------
312,700 Entergy Corp. 9,068,300
Electrical Equipment (0.1%)
-------------------------------------------------------------------------------------------------------------------
96,100 Excel Technology, Inc. (NON) 3,027,150
1,500 ONI Systems Corp. (NON) 37,500
----------------
3,064,650
Electronics (13.7%)
-------------------------------------------------------------------------------------------------------------------
65,600 Alpha Industries, Inc. 3,021,700
99,600 Amphenol Corp. (NON) 4,581,600
88,900 ARM Holdings PLC (United Kingdom) (NON) 2,300,288
67,500 ASM International NV (Netherlands) (NON) 1,746,563
104,600 Cognex Corp. 5,654,938
16,700 CyberOptics Corp. (NON) 626,250
220,900 Cypress Semiconductor Corp. (NON) 9,291,606
20,900 E-Tek Dynamics, Inc. (NON) 3,841,681
7,085 Flextronics International Ltd. (NON) 385,690
376,000 Intel Corp. 46,882,500
204,900 JDS Uniphase Corp. (NON) 18,031,200
123,600 Keithley Instruments, Inc. 7,624,575
24,000 KEMET Corp. (NON) 1,612,500
729,100 LSI Logic Corp. (NON) 38,414,456
420,500 Merix Corp. (NON) 11,248,375
281,100 Methode Electronics, Inc. 10,084,463
33,150 Microchip Technology, Inc. (NON) 1,881,780
448,900 Micron Technology, Inc. 31,394,944
118,900 Nanometrics, Inc. (NON) 2,853,600
20,000 Parthus Technologies PLC ADR (Ireland) (NON) 496,250
75,200 Plexus Corp. (NON) 6,279,200
27,500 PMC-Sierra, Inc. (NON) 4,214,375
69,700 Rambus, Inc. (NON) 12,284,625
31,900 Sawtek Inc. (NON) 2,051,569
43,800 SDL, Inc. (NON) 9,923,438
165,500 Spectra-Physics Lasers, Inc. (NON) 6,516,563
147,000 STMicroelectronics N.V. ADR (France) 8,801,625
311,200 Texas Instruments, Inc. 22,484,200
44,800 TranSwitch Corp. (NON) 2,805,600
60,000 Virata Corp. (NON) 2,475,000
136,300 Xilinx, Inc. (NON) 10,375,838
----------------
290,186,992
Energy (4.0%)
-------------------------------------------------------------------------------------------------------------------
606,100 Baker Hughes, Inc. 21,971,125
82,400 BJ Services Co. (NON) 5,901,900
285,300 Global Marine, Inc. (NON) 8,077,556
184,200 Halliburton Co. 9,394,200
171,400 Marine Drilling Co., Inc. (NON) 4,927,750
107,100 Nabors Industries, Inc. (NON) 4,605,300
87,200 Precision Drilling Corp. (Canada) (NON) 3,357,200
354,800 Schlumberger Ltd. 26,099,975
----------------
84,335,006
Entertainment (2.0%)
-------------------------------------------------------------------------------------------------------------------
670,690 Viacom, Inc. Class B (NON) 41,582,780
Financial (5.1%)
-------------------------------------------------------------------------------------------------------------------
584,100 American Express Co. 31,431,881
1,046,750 Citigroup, Inc. 65,094,766
180,760 Fannie Mae 10,868,195
----------------
107,394,842
Food (0.7%)
-------------------------------------------------------------------------------------------------------------------
211,600 Quaker Oats Co. (The) 15,565,825
Health Care Services (0.7%)
-------------------------------------------------------------------------------------------------------------------
229,300 Baxter International, Inc. 15,248,450
Household Furniture and Appliances (1.0%)
-------------------------------------------------------------------------------------------------------------------
787,500 Newell Rubbermaid Inc. 20,671,875
Insurance (1.5%)
-------------------------------------------------------------------------------------------------------------------
581,000 Allstate Corp. 15,396,500
138,750 American International Group, Inc. 15,618,047
----------------
31,014,547
Investment Banking/Brokerage (1.6%)
-------------------------------------------------------------------------------------------------------------------
84,200 Merrill Lynch & Co., Inc. 8,304,225
79,600 Morgan Stanley, Dean Witter, Discover and Co. 5,726,225
670,650 Schwab (Charles) Corp. 19,281,188
----------------
33,311,638
Machinery (0.6%)
-------------------------------------------------------------------------------------------------------------------
199,600 Deere & Co. 8,295,875
88,000 Precision Castparts Corp. 4,290,000
----------------
12,585,875
Manufacturing (0.2%)
-------------------------------------------------------------------------------------------------------------------
166,400 GSI Lumonics, Inc. (Canada) (NON) 3,556,800
Media (1.1%)
-------------------------------------------------------------------------------------------------------------------
577,200 Disney (Walt) Productions, Inc. 24,350,625
Medical Technology (2.7%)
-------------------------------------------------------------------------------------------------------------------
150,200 Allergan, Inc. 10,316,863
66,700 Avigen, Inc. (NON) 1,984,325
505,200 Bausch & Lomb, Inc. 35,111,400
53,000 Coherent, Inc. (NON) 2,994,500
213,900 Sybron International Corp. (NON) 6,777,956
----------------
57,185,044
Natural Gas Utilities (1.3%)
-------------------------------------------------------------------------------------------------------------------
75,400 Coastal Corp. 4,627,675
299,915 Enron Corp. 21,856,306
----------------
26,483,981
Oil & Gas (3.3%)
-------------------------------------------------------------------------------------------------------------------
104,400 Anadarko Petroleum Corp. 5,539,725
153,300 Apache Corp. 9,332,138
87,400 Devon Energy Corp. 5,227,613
348,800 ExxonMobil Corp. 29,059,400
456,800 Noble Drilling Corp. (NON) 19,813,700
----------------
68,972,576
Paper & Forest Products (0.5%)
-------------------------------------------------------------------------------------------------------------------
198,900 Sealed Air Corp. (NON) 11,138,400
Pharmaceuticals (7.8%)
-------------------------------------------------------------------------------------------------------------------
451,700 American Home Products Corp. 24,335,338
225,700 Johnson & Johnson 20,200,150
245,700 Lilly Eli & Co. 18,703,913
274,000 NPS Pharmaceuticals, Inc. (NON) 3,322,250
937,900 Pfizer, Inc. 41,795,169
646,460 Pharmacia Corp. 33,575,516
413,700 Schering-Plough Corp. 20,012,738
38,800 United Therapeutics Corp. (NON) 2,483,200
----------------
164,428,274
Real Estate (0.5%)
-------------------------------------------------------------------------------------------------------------------
500,000 Beacon Capital Partners, Inc. (R) 10,250,000
Restaurants (0.1%)
-------------------------------------------------------------------------------------------------------------------
188,500 Buca, Inc. (NON) 2,627,219
Retail (5.0%)
-------------------------------------------------------------------------------------------------------------------
97,100 Ames Department Stores, Inc. (NON) 1,153,063
305,300 CVS Corp. 13,280,550
222,400 Duane Reade, Inc. (NON) 6,658,100
47,800 Michaels Stores, Inc. (NON) 2,046,438
278,000 RadioShack Corp. 11,797,625
1,442,700 Sears, Roebuck & Co. 53,289,731
460,000 TJX Cos., Inc. (The) 9,947,500
132,800 Too, Inc. (NON) 3,403,000
125,500 Whole Foods Market, Inc. (NON) 4,361,125
----------------
105,937,132
Semiconductor (1.5%)
-------------------------------------------------------------------------------------------------------------------
97,000 Applied Materials, Inc. (NON) 8,099,500
310,800 LAM Research Corp. (NON) 9,984,450
157,700 Novellus Systems, Inc. (NON) 7,599,169
77,400 Teradyne, Inc. (NON) 6,656,400
----------------
32,339,519
Shipping (0.1%)
-------------------------------------------------------------------------------------------------------------------
106,900 Circle International Group, Inc. 2,017,738
Software (5.7%)
-------------------------------------------------------------------------------------------------------------------
63,200 Adobe Systems, Inc. 7,113,950
225,000 BMC Software, Inc. (NON) 9,900,000
72,900 Business Objects S.A. (France) (NON) 5,832,000
70,300 Documentum, Inc. (NON) 3,870,894
76,100 Entrust Technologies Inc. (NON) 3,709,875
43,100 Informatica Corp. (NON) 1,734,775
39,500 ISS Group, Inc. (NON) 2,923,000
203,300 Macromedia, Inc. (NON) 16,146,467
56,200 Micromuse, Inc. (NON) 5,595,413
263,800 Microsoft Corp. (NON) 16,503,988
332,700 Oracle Corp. (NON) 23,912,813
106,700 Rational Software Corp. (NON) 7,822,444
133,750 VERITAS Software Corp. (NON) 15,581,875
----------------
120,647,494
Technology Services (0.1%)
-------------------------------------------------------------------------------------------------------------------
106,600 FactSet Research Systems, Inc. 2,744,950
Telecommunications (1.5%)
-------------------------------------------------------------------------------------------------------------------
126,900 Sprint Corp. 7,677,433
198,100 Vodafone AirTouch PLC (United Kingdom) 9,075,456
405,800 Worldcom, Inc. (NON) 15,268,225
----------------
32,021,114
----------------
Total Common Stocks (cost $1,773,158,607) $ 2,115,457,921
SHORT-TERM INVESTMENTS (--%) (a) (cost $147,812)
PRINCIPAL AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
$ 150,000 U.S. Treasury Note effective yield of 5.77%, August 31, 2000 (SEG) $ 147,812
-------------------------------------------------------------------------------------------------------------------
Total Investments (cost $1,773,306,419) (b) $ 2,115,605,733
-------------------------------------------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $2,116,958,695.
(b) The aggregate identified cost on a tax basis is $1,787,921,263,
resulting in gross unrealized appreciation and depreciation of
$415,373,813 and $87,689,343, respectively, or net unrealized
appreciation of $327,684,470.
(NON) Non-income-producing security.
(SEG) A portion of this security was pledged and segregated with the
custodian to cover margin requirements for futures contracts at May 31,
2000.
(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 after the name of a foreign holding stands for American
Depositary Receipts representing ownership of foreign securities on
deposit with a domestic custodian bank.
----------------------------------------------------------------------------
Futures Contracts Outstanding at May 31, 2000
Aggregate Face Expiration Unrealized
Total Value Value Date Appreciation
----------------------------------------------------------------------------
S&P 500 Index
(long) $2,488,850 $2,427,345 Jun-00 $61,505
----------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
May 31, 2000
<S> <C>
Assets
-------------------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $1,773,306,419) (Note 1) $2,115,605,733
-------------------------------------------------------------------------------------------
Cash 9,833,341
-------------------------------------------------------------------------------------------
Dividends, interest and other receivables 1,560,974
-------------------------------------------------------------------------------------------
Receivable for shares of the fund sold 1,234,611
-------------------------------------------------------------------------------------------
Receivable for securities sold 28,983,244
-------------------------------------------------------------------------------------------
Total assets 2,157,217,903
Liabilities
-------------------------------------------------------------------------------------------
Payable for variation margin 8,750
-------------------------------------------------------------------------------------------
Distributions payable to shareholders 2,125
-------------------------------------------------------------------------------------------
Payable for securities purchased 29,688,596
-------------------------------------------------------------------------------------------
Payable for shares of the fund repurchased 5,739,064
-------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 3,076,369
-------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 199,178
-------------------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 2) 42,419
-------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 3,230
-------------------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 1,322,362
-------------------------------------------------------------------------------------------
Other accrued expenses 177,115
-------------------------------------------------------------------------------------------
Total liabilities 40,259,208
-------------------------------------------------------------------------------------------
Net assets $2,116,958,695
Represented by
-------------------------------------------------------------------------------------------
Paid-in capital (Notes 1 and 4) $1,547,151,631
-------------------------------------------------------------------------------------------
Accumulated net realized gain on investments and
foreign currency transactions (Note 1) 227,446,123
-------------------------------------------------------------------------------------------
Net unrealized appreciation of investments and assets and
liabilities in foreign currencies 342,360,941
-------------------------------------------------------------------------------------------
Total -- Representing net assets applicable to
capital shares outstanding $2,116,958,695
Computation of net asset value and offering price
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($999,789,446 divided by 42,098,106 shares) $23.75
-------------------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $23.75)* $25.20
-------------------------------------------------------------------------------------------
Net asset value and offering price per class B share
($1,047,039,891 divided by 44,765,414 shares)** $23.39
-------------------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($70,129,358 divided by 2,987,817 shares) $23.47
-------------------------------------------------------------------------------------------
Offering price per class M share (100/96.50 of $23.47)* $24.32
-------------------------------------------------------------------------------------------
* 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
Year ended May 31, 2000
<S> <C>
Investment income:
-------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $11,641) $ 18,790,479
-------------------------------------------------------------------------------------------
Interest 1,731,078
-------------------------------------------------------------------------------------------
Total investment income 20,521,557
Expenses:
-------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 12,772,500
-------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 3,556,507
-------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 64,489
-------------------------------------------------------------------------------------------
Administrative services (Note 2) 23,297
-------------------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 2,851,509
-------------------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 11,305,299
-------------------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 605,697
-------------------------------------------------------------------------------------------
Reports to shareholders 80,836
-------------------------------------------------------------------------------------------
Registration fees 75
-------------------------------------------------------------------------------------------
Auditing 55,535
-------------------------------------------------------------------------------------------
Legal 16,148
-------------------------------------------------------------------------------------------
Postage 361,436
-------------------------------------------------------------------------------------------
Other 548,120
-------------------------------------------------------------------------------------------
Total expenses 32,241,448
-------------------------------------------------------------------------------------------
Expense reduction (Note 2) (727,575)
-------------------------------------------------------------------------------------------
Net expenses 31,513,873
-------------------------------------------------------------------------------------------
Net investment loss (10,992,316)
-------------------------------------------------------------------------------------------
Net realized gain on investments (including realized loss of $20,003,211
on sales of investments in affiliated issuers) (Notes 1, 3 and 5) 325,735,319
-------------------------------------------------------------------------------------------
Net realized loss on futures contracts (Note 1) (1,358,135)
-------------------------------------------------------------------------------------------
Net realized loss on foreign currency transactions (Note 1) (1,220)
-------------------------------------------------------------------------------------------
Net unrealized appreciation of assets and liabilities
in foreign currencies during the year 387
-------------------------------------------------------------------------------------------
Net unrealized depreciation of investments and
futures contracts during the year (49,640,516)
-------------------------------------------------------------------------------------------
Net gain on investments 274,735,835
-------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $263,743,519
-------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
Year ended May 31
---------------------------------
2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
--------------------------------------------------------------------------------------------------
Operations:
--------------------------------------------------------------------------------------------------
Net investment income (loss) $ (10,992,316) $ 13,877,187
--------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and
foreign currency transactions 324,375,964 (46,008,008)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments
and assets and liabilities in foreign currencies (49,640,129) (69,190,584)
--------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations 263,743,519 (101,321,405)
--------------------------------------------------------------------------------------------------
Distributions to shareholders:
--------------------------------------------------------------------------------------------------
From net investment income
Class A (4,849,044) (9,606,931)
--------------------------------------------------------------------------------------------------
Class B -- (151,081)
--------------------------------------------------------------------------------------------------
Class M -- (183,347)
--------------------------------------------------------------------------------------------------
From net realized gain on investments
Class A (20,211,903) (33,490,827)
--------------------------------------------------------------------------------------------------
Class B (22,037,891) (37,921,426)
--------------------------------------------------------------------------------------------------
Class M (1,435,937) (2,556,667)
--------------------------------------------------------------------------------------------------
Decrease from capital share transactions (Note 4) (796,863,431) (490,122,175)
--------------------------------------------------------------------------------------------------
Total decrease in net assets (581,654,687) (675,353,859)
Net assets
--------------------------------------------------------------------------------------------------
Beginning of year 2,698,613,382 3,373,967,241
--------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $-- and $6,753,608, respectively) $2,116,958,695 $2,698,613,382
--------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $21.93 $23.15 $18.76 $16.33 $12.24
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income (loss) (.02)(c) .17(c) .17(c) .13(c) .14
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.39 (.75) 4.77 3.48 4.37
------------------------------------------------------------------------------------------------
Total from
investment operations 2.37 (.58) 4.94 3.61 4.51
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income (.10) (.14) (.09) (.10) (.13)
------------------------------------------------------------------------------------------------
From net realized gain
on investments (.45) (.50) (.46) (1.08) (.29)
------------------------------------------------------------------------------------------------
Total distributions (.55) (.64) (.55) (1.18) (.42)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $23.75 $21.93 $23.15 $18.76 $16.33
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 10.65 (2.40) 26.67 22.91 37.57
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $999,789 $1,246,913 $1,530,290 $525,804 $173,321
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) .96 .93 1.03 1.20 1.29
------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (.10) .77 .77 .79 1.05
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 188.16 92.49 31.08 38.35 76.68
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset and brokerage service arrangements. (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) 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
------------------------------------------------------------------------------------------------
Per-share
operating performance Year ended May 31
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $21.66 $22.86 $18.59 $16.24 $12.19
------------------------------------------------------------------------------------------------
Investment operations
------------------------------------------------------------------------------------------------
Net investment income (loss) (.18)(c) .03(c) --(c) --(c) .04
------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.36 (.73) 4.73 3.45 4.35
------------------------------------------------------------------------------------------------
Total from
investment operations 2.18 (.70) 4.73 3.45 4.39
------------------------------------------------------------------------------------------------
Less distributions:
------------------------------------------------------------------------------------------------
From net
investment income -- --(d) --(d) (.02) (.05)
------------------------------------------------------------------------------------------------
From net realized gain
on investments (.45) (.50) (.46) (1.08) (.29)
------------------------------------------------------------------------------------------------
Total distributions (.45) (.50) (.46) (1.10) (.34)
------------------------------------------------------------------------------------------------
Net asset value,
end of period $23.39 $21.66 $22.86 $18.59 $16.24
------------------------------------------------------------------------------------------------
Ratios and supplemental data
------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 9.90 (2.99) 25.72 21.95 36.62
------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $1,047,040 $1,361,513 $1,723,054 $543,015 $153,905
------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.63 1.55 1.78 1.95 2.05
------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (.79) .15 .02 .03 .30
------------------------------------------------------------------------------------------------
Portfolio turnover (%) 188.16 92.49 31.08 38.35 76.68
------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset and brokerage service arrangements. (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) 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
-------------------------------------------------------------------------------------------------------
For the period
Per-share Jan. 22, 1996+
operating performance Year ended May 31 to May 31
-------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $21.70 $22.91 $18.62 $16.29 $13.84
-------------------------------------------------------------------------------------------------------
Investment operations
-------------------------------------------------------------------------------------------------------
Net investment income (loss)(c) (.14) .06 .06 .04 .02
-------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 2.36 (.73) 4.73 3.46 2.43
-------------------------------------------------------------------------------------------------------
Total from
investment operations 2.22 (.67) 4.79 3.50 2.45
-------------------------------------------------------------------------------------------------------
Less distributions:
-------------------------------------------------------------------------------------------------------
From net
investment income -- (.04) (.04) (.09) --
-------------------------------------------------------------------------------------------------------
From net realized gain
on investments (.45) (.50) (.46) (1.08) --
-------------------------------------------------------------------------------------------------------
Total distributions (.45) (.54) (.50) (1.17) --
-------------------------------------------------------------------------------------------------------
Net asset value,
end of period $23.47 $21.70 $22.91 $18.62 $16.29
-------------------------------------------------------------------------------------------------------
Ratios and supplemental data
-------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(a) 10.07 (2.87) 26.04 22.28 17.70*
-------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $70,129 $90,187 $120,624 $34,763 $2,025
-------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(b) 1.46 1.43 1.53 1.70 .66*
-------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) (.59) .27 .28 .23 .16*
-------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 188.16 92.49 31.08 38.35 76.68
-------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Total return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(b) The ratio of expenses to average net assets includes amounts paid
through expense offset and brokerage service arrangements. (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) Distributions from net investment income amounted to less than
$0.01 per share for class B.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
May 31, 2000
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. 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 higher than class A but lower than
class B shares.
Expenses of the fund are borne pro-rata by the holders of each class of
shares, except that each class bears expenses unique to that class
(including the distribution fees applicable to such class). Each class
votes as a class only with respect to its own distribution plan or other
matters on which a class vote is required by law or determined by the
Trustees. Shares of each class would receive their pro-rata share of the
net assets of the fund, if the fund were liquidated. In addition, the
Trustees declare separate dividends on each class of shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities of the financial statements and the reported
amounts of increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sales price on its principal exchange, 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 value. Other investments, including
restricted securities, are stated at fair value following procedures
approved by the Trustees.
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.
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). Gains or losses on securities sold are determined
on the identified cost basis.
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, and 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 realized
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. Investments in foreign securities involve certain risks, including
those related to economic instability, unfavorable political
developments, and currency fluctuations, not present with domestic
investments.
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 year ended
May 31, 2000, the fund 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. These differences
include temporary and permanent differences of losses on wash sale
transactions, foreign currency gains and losses and nontaxable
dividends. Reclassifications are made to the fund's capital accounts to
reflect income and gains available for distribution (or available
capital loss carryovers) under income tax regulations. For the year
ended May 31, 2000, the fund reclassified $9,087,752 to decrease
distributions in excess of net investment income and $1,468,616 to
increase paid-in-capital, with a decrease to accumulated net realized
gains of $10,556,368. The calculation of net investment income per share
in the financial highlights table excludes these adjustments.
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.
The fund reimburses Putnam Management an allocated amount for the
compensation and related expenses of certain officers of the fund and
their staff who provide administrative services to the fund. The
aggregate amount of all such reimbursements is determined annually by
the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a subsidiary of Putnam Investments, Inc.
Investor servicing agent functions are provided by Putnam Investor
Services, a division of PFTC.
For the year ended May 31, 2000, fund expenses were reduced by $727,575
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 $2,143
has been allocated to the fund, and an additional fee for each Trustees
meeting attended. Trustees receive additional fees for attendance at
certain committee meetings.
The fund has adopted a Trustee Fee Deferral Plan (the "Deferral Plan")
which allows the Trustees to defer the receipt of all or a portion of
Trustees Fees payable on or after July 1, 1995. The deferred fees remain
invested in certain Putnam funds until distribution in accordance with
the Deferral Plan.
The fund has adopted an unfunded noncontributory defined benefit pension
plan (the "Pension Plan") covering all Trustees of the fund who have
served as a Trustee for at least five years. Benefits under the Pension
Plan are equal to 50% of the Trustee's average total retainer and
meeting fees for the three years preceding retirement. Pension expense
for the fund is included in Compensation of Trustees in the Statement of
operations. Accrued pension liability is included in Payable for
compensation of Trustees in the Statement of assets and liabilities.
The fund has adopted distribution plans (the "Plans") with respect to
its class A, class B and class M shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The purpose of the Plans is to
compensate Putnam Retail Management, Inc., a wholly-owned subsidiary of
Putnam Investments Inc., for services provided and expenses incurred by
it in distributing shares of the fund. The Plans provide for payments by
the fund to Putnam Retail Management, Inc. at an annual rate up to
0.35%, 1.00% and 1.00% of the average net assets attributable to class
A, class B and class M shares, respectively. The Trustees have approved
payment by the fund to an annual rate of 0.25%, 0.95% and 0.75% of the
average net assets attributable to class A, class B and class M shares,
respectively. Prior to September 10, 1999, the annual rate was 0.85% of
the average net assets attributable to class B shares.
For the year ended May 31, 2000, Putnam Retail Management, Inc., acting
as underwriter received net commissions of $201,418 and $11,985 from the
sale of class A and class M shares, respectively and $3,596,911 in
contingent deferred sales charges from redemptions of class B shares. A
deferred sales charge of up to 1% is assessed on certain redemptions of
class A shares. For the year ended May 31, 2000, Putnam Retail
Management, Inc., acting as underwriter received $36,549 on class A
redemptions.
Note 3
Purchases and sales of securities
During the year ended May 31, 2000, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $4,568,309,617 and $5,392,017,538, respectively. There were
no purchases or sales of U.S. government obligations.
Note 4
Capital shares
At May 31, 2000, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 2000
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 6,662,951 $ 161,189,930
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 935,912 23,893,586
---------------------------------------------------------------------------
7,598,863 185,083,516
Shares
repurchased (22,351,830) (533,202,060)
---------------------------------------------------------------------------
Net decrease (14,752,967) $(348,118,544)
---------------------------------------------------------------------------
Year ended May 31, 1999
---------------------------------------------------------------------------
Class A Shares Amount
---------------------------------------------------------------------------
Shares sold 17,214,139 $ 381,173,721
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,917,532 40,920,114
---------------------------------------------------------------------------
19,131,671 422,093,835
Shares
repurchased (28,393,131) (622,371,499)
---------------------------------------------------------------------------
Net decrease (9,261,460) $(200,277,664)
---------------------------------------------------------------------------
Year ended May 31, 2000
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 3,457,026 $ 82,029,945
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 810,829 20,448,940
---------------------------------------------------------------------------
4,267,855 102,478,885
Shares
repurchased (22,355,117) (523,987,104)
---------------------------------------------------------------------------
Net decrease (18,087,262) $(421,508,219)
---------------------------------------------------------------------------
Year ended May 31, 1999
---------------------------------------------------------------------------
Class B Shares Amount
---------------------------------------------------------------------------
Shares sold 14,733,005 $ 324,951,994
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 1,657,373 35,036,895
---------------------------------------------------------------------------
16,390,378 359,988,889
Shares
repurchased (28,917,768) (625,889,357)
---------------------------------------------------------------------------
Net decrease (12,527,390) $(265,900,468)
---------------------------------------------------------------------------
Year ended May 31, 2000
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 566,231 $ 13,515,701
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 54,591 1,380,612
---------------------------------------------------------------------------
620,822 14,896,313
Shares
repurchased (1,789,485) (42,132,981)
---------------------------------------------------------------------------
Net decrease (1,168,663) $(27,236,668)
---------------------------------------------------------------------------
Year ended May 31, 1999
---------------------------------------------------------------------------
Class M Shares Amount
---------------------------------------------------------------------------
Shares sold 1,265,021 $ 27,716,635
---------------------------------------------------------------------------
Shares issued in
connection with
reinvestment of
distributions 123,959 2,622,987
---------------------------------------------------------------------------
1,388,980 30,339,622
Shares
repurchased (2,498,516) (54,283,665)
---------------------------------------------------------------------------
Net decrease (1,109,536) $(23,944,043)
---------------------------------------------------------------------------
Note 5
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:
<TABLE>
<CAPTION>
Purchase Sales Dividend Market
Affiliates cost cost Income Value
----------------------------------------------------------------------------------------------------------
Name of affiliate
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Duckwall-Alco Stores, Inc. $ -- $ 2,724,625 $ -- $ --
Engel General Developers, Ltd. -- 1,887,600 -- --
Epitope Inc. -- 7,275,461 -- --
Pentegra Dental Group, Inc. * -- 1,488,600 -- --
Preferred Employers Holdings -- 4,241,836 -- --
Scheid Vineyards Inc. Class A -- 3,281,375 -- --
Wilshire Real Estate Investment
Trust, Inc. -- 13,520,000 -- --
----------------------------------------------------------------------------------------------------------
Totals $ -- $34,419,497 $ -- $ --
*Formerly Omega Orthodontics, Inc.
</TABLE>
FEDERAL TAX INFORMATION
(Unaudited)
Pursuant to Section 852 of the Internal Revenue Code, as amended, the
Fund hereby designates $213,333,440 as capital gain, for its taxable
year ended May 31, 2000.
The fund has designated 23.12% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 2001 will show the tax status of
all distributions paid to your account in calendar 2000.
FUND INFORMATION
WEB SITE
www.putnaminv.com
INVESTMENT MANAGER
Putnam Investment Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Retail Management, Inc.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
TRUSTEES
John A. Hill, Chairman
Jameson Adkins Baxter
Hans H. Estin
Ronald J. Jackson
Paul L. Joskow
Elizabeth T. Kennan
Lawrence J. Lasser
John H. Mullin III
Robert E. Patterson
Donald S. Perkins
George Putnam, III
A.J.C. Smith
W. Thomas Stephens
W. Nicholas Thorndike
OFFICERS
George Putnam, III
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Ian C. Ferguson
Vice President
Brett C. Browchuk
Vice President
Michael K. Arends
Vice President and Fund Manager
Joseph P. Joseph
Vice President and Fund Manager
Thomas Haslett
Vice President and Fund Manager
Richard A. Monaghan
Vice President
Richard G. Leibovitch
Vice President
John R. Verani
Vice President
This report is for the information of shareholders of Putnam 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' Web site: www.putnaminv.com.
Shares of mutual funds are not deposits or obligations of, or guaranteed
or endorsed by, any financial institution; are not insured by the
Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board,
or any other agency; and involve risk, including the possible loss of
the principal amount invested.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
---------------------
BULK RATE
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
---------------------
For account balances, economic forecasts, and the latest on Putnam funds, visit
www.putnaminv.com
AN002 62271 433/948/2BN 7/00
