PUTNAM
GROWTH AND
INCOME
FUND II
[Artwork]
ANNUAL REPORT
November 30, 1995
[Putnam Logo]
Boston * London * Tokyo
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FUND HIGHLIGHTS
"Our portfolio is built from the bottom up to generally withstand the volatility
of economic cycles. Financial stocks, among which we found many good values,
performed well in this environment, as did special situations in which internal
change dominated companies' earnings trends. Companies with global presence in
capital spending and infrastructure building also remain a central focus of our
holdings. Regardless of near-term economic fluctuations, we believe the long-
term outlook, particularly for U.S. industrial companies, is exceptionally
bright."
-- Anthony I. Kreisel, Fund Manager, Putnam Growth and Income Fund II
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
14 Portfolio holdings
18 Financial statements
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FROM THE CHAIRMAN [Photograph of George Putnam]
* (C) Karsh, Ottawa
DEAR SHAREHOLDER:
PUTNAM GROWTH AND INCOME FUND II BEGAN INVESTMENT OPERATIONS ON JANUARY 5, 1995,
WITH THE STOCK MARKET IN FULL GALLOP. THE RALLY WAS STILL UNDER WAY IN SEPTEM-
BER, WHEN THE FUND ACQUIRED THE ASSETS OF PUTNAM DIVIDEND GROWTH FUND IN A MER-
GER. IT CONTINUED THROUGHT THE END OF THE ABBREVIATED FIRST FISCAL YEAR, NOVEM-
BER 30, 1995.
AS HE BUILT THE NEW FUND'S PORTFOLIO, FUND MANAGER ANTHONY KREISEL TOOK FULL AD-
VANTAGE OF THE POSITIVE MARKET SITUATION BY FOCUSING IN THE INDUSTRY SECTORS
SHOWING THE GREATEST POTENTIAL FOR LEADING THE CHARGE. AMONG THESE HAVE BEEN IN-
SURANCE AND FINANCE, BOTH AMPLY REPRESENTED IN THE FUND'S PORTFOLIO DURING THE
PERIOD.
TONY ALSO FOCUS HEAVILY ON INDIVIDUAL STOCK SELECTION, SEEKING COMPANIES WITH
EXCEPTIONAL LONG-TERM EARNINGS GROWTH POTENTIAL. FINALLY, HE SOUGHT OUT COMPA-
NIES WHOSE REAL WORTH HAS GONE UNNOTICED BY THE MARKET AT LARGE. THESE STOCKS
FREQUENTLY PROVIDE SIGNIFICANT GROWTH WHEN INVESTORS DISCOVER THEIR HIDDEN VA-
LUE.
IN THE REPORT THAT FOLLOWS, TONY DISCUSSES THE FUND'S PERFORMANCE DURING ITS
INAUGURAL FISCAL PERIOD AND DESCRIBES HIS SELECTION PROCESS IN THE EXISTING
MARKET ENVIRONMENT. FINALLY, HE LOOKS AHEAD TO THE FUND'S FIRST FULL FISCAL
YEAR.
RESPECTFULLY YOURS,
GERORGE PUTNAM
CHAIRMAN OF THE TRUSTEES
JANUARY 17, 1996
* (C) copyright.
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REPORT FROM THE FUND MANAGER
ANTHONY I. KREISEL
Putnam Growth and Income Fund II got off to an excellent start as measured by
its total returns since the fund began investment operations on January 5, 1995.
Between that date and November 30, 1995, your fund returned 30.62% at net asset
value (NAV) for class A shares; 29.72% at NAV for class B shares; and 30.04% at
NAV for class M shares. This was very competitive with the Standard and Poor's
500 *(R) Index's increase of 34.32% over the same period.
At the end of a fiscal year characterized by rallies in both the stock and bond
markets, where the S&P 500 Index achieved new highs while long-term interest ra-
tes gradually stabilized to comfortable lows, your fund's returns are indeed
notable. Impressive as it is, however, your fund's performance does reflect the
somewhat negative effects of a cash drag -- that is, initially having invest a
large amount of incoming cash -- a common problem for the startup funds. This
was particularly frustrating in an up market. Thus, the fund's participation at
its early stages in this year's market rally wan not as extensive as we would
liked. However, midway through the fiscal year, the fund's cash inflows began to
be more readily absorbed by new investments and began making more rapid contry-
butions to performance.
STOCK SELECTIVITY, OVERWEIGHTING IN FINANCIAL SECTOR BOOST PERFORMANCE
Since the start of calendar year 1995, the stock market has demostrated conti-
nuos strength. During most of fiscal period, the market tended to favor stocks
of larger, more established companies, the types of stocks in which your fund
primarily invests. Interest-rate-sensitive stocks performed particularly well
and in early 1995 we increased the fund's exposure to them. At its highest point
this year, the insurance and finance sector comprised nearly 20% of the fund's
net assets. This sector traditionally benefits from stable or declining interest
rates. Banks such J.P. Morgan, Citicorp, and BankAmerica Corp. added tremendous
value to the portfolio. Several insurance companies also had a positive impact
on the fund's results: among them, CIGNA Corp. and Aetna Life & Casualty.
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In addition to successes realized from our decision to weight the portfolio
heavily in the insurance and finance sector, our strategy of careful individual
stock selection among diverse industries helped the fund deliver solid results
this year. Our selectivity was informed by intensive, bottom-up research that
identified companies with what we consider exceptional long-term earning power.
We sought and found value in businesses undergoing changes that, in our opinion,
had the potential to boost their stock prices. Many of the companies we conside-
red have recently restructured, cut costs, enhanced their product lines, or un-
dertaken positive management changes. Examples of holdings in the fund that have
been strong performers this year are Xerox Corporation (business equipment and
services), Case Corporation (basic industrial products), W.R. Grace & Co. (che-
micals), Bristol-Myers Squibb Co. (pharmaceuticals), and Philip Morris Compa,
nies, Inc. (consumer nondurables).
In our view, the continued growth of emerging economies world-wide, the largest
of which are those of China and India, has had and may continue to have a posi-
tive effect on many U.S. corporations. This has been so despite a slowdown in
the domestic economy. We believe that, in particular, companies that have a glo-
bal perspective are especially likely to prosper; Avon, Eastman Kodak, and Phi-
lip Morris are examples of such companies in your fund's portfolio.
SLIGHT INFLUENCE FROM WEAKNESS IN RETAIL AND AUTOMOTIVE SECTORS
While your fund's retail position was smaller than one would expect, we would
have done better to have kept it smaller still. Even such prominent retail names
as J.C. Penney and Woolworth continued to experience problems and less than
stellar results this
[Bar Chart - Page 5]
TOP INDUSTRY SECTORS *
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Insurance and finance 13.9
Oil and gas 9.7
Utilities 9.6
Conglomerates 7.9
Consumer nondurables 7.8
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* Based on net assets as of 11/30/95. Holdings will vary over time.
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year due to weak demand and heavy competition. However, since this sector cons-
tituted a mere 4% of the fund's holdings even at its peak, any negative impact
to the fund was minimal.
Similarly, automotive companies, considered among the most volatile of the cy-
clical* stocks, provided lackluster performance yet averaged only about 3% of
your fund's holdings during the period.
In contrast, your fund had a relatively high weighting in utilities, particular-
ly telephone companies, up to roughly 10% of net assets. After a difficult 1994,
many utilities -- higher-yielding securities often bolstered by declining inte-
rest rates -- proved strong performers in 1995. Consequently, we maintained the
fund's weighting in utilities at approximately 10% throughout fiscal 1995.
SHIFTING EMPHASIS TO CYCLICAL, INDUSTRIAL STOCKS
Throughout the period we have believed that because of the banking industry's
positive underlying fundamentals and widespread consolidation -- which sparked
considerable merger and takeover activity this year -- a great deal of opportu-
nity was to be found in the financial sector. Results have proved us correct. It
has not been unusual to see bank stocks held in your fund's portfolio increase
in value 40% to 50% -- in some cases, as much as 60% -- since the fund was laun-
ched. Following a continuous and beneficial drop in interest rates throughout
the period, we began to take profits from financial sector stocks in the last
two months of the fund's fiscal year. By the end of the year, we had reduced
their portfolio weighting to just below 6% of net assets.
In preparation for an even more pronounced domestic economic slowdown, otherwise
known as a soft landing, we are shifting our investment emphasis away from fi-
nancials. At the same time, we are seeing new value in cyclical and industrial
stocks. These stocks give us an opportunity to invest early in an area we feel
holds promise for long-term strength in the export-lead growth of the domestic
economy. In the coming years, we believe a long-term trend toward superior rela-
tive performance will become evident in general within the industrial side of
the economy, which has the potential to benefit most from the globalization of
U.S. companies.
We added several new cyclical/industrial names to the portfolio at the close of
fiscal 1995. Ryder and Echlin are recent additions
* Cyclical stocks are those most likely to benefit during the early phase of an
economic recovery, and generally include stocks of paper, metals, automotive,
and industrial companies.
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TOP 10HOLDINGS * (11/30/95)
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EASTMAN KODAK COMPANY
Photographic equipment
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FLEET FINANCIAL GROUP, INC.
Insurance and finance
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TRW, INC.
Space, defense, automotive goods
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AVON PRODUCTS, INC.
Beauty care products, fashion jewelry
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PHILIP MORRIS COMPANIES, INC.
Domestic food processing, alcohol, and tobacco
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J.P. MORGAN &COMPANY, INC.
Banking and finance, multinational
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PHARMACIA &UPJOHN, INC.
Pharmaceuticals
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BAXTER INTERNATIONAL, INC.
Medical devices and technology
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BANKAMERICA CORP.
Regional financial services
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BRISTOL-MYERS SQUIBB COMPANY
Medical devices, drugs, toiletries, health products
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* These holdings represent 20.5% of the fund's net assets. Portfolio holdings
will vary over time.
and we increased our commitment to Weyerhaeuser in the forest products sector.
As of this writing, we have also purchased stocks of Minnesota Mining & Manufac-
turing (3M Company).
OUTLOOK: STEADY TOTAL RETURN VEHICLE OVER TIME
Despite its growth in assets this year, due to its strategically small size
- -- 75 to 90 stocks -- your fund retains the flexibility to move in and out of
positions as market conditions dictate. We feel such agility can provide an
added advantage in an uncertain market. Whatever occurs in the months ahead,
Putnam's basic value equity approach of investing for long-term growth potential
and seeking out undervalued companies that perform well through market ups and
downs should continue to serve your fund in the coming year.
We are pleased with the initial year's performance and believe the fund has a
promising future as a steady total-return vehicle for investors seeking moderate
growth with some income and with lower risk than many other equity funds, over
time.
The views expressed here are exclusively those of Putnam Management. They are
not meant as investment advice. Although the described holdings were viewed fa-
vorably as of 11/30/95, there is no guarantee that the fund will continue to
hold these securities in the future.
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PERFORMANCE SUMMARY
Performance should always be considered in light of a fund's investment strate-
gy. Putnam Growth and Income Fund II is designed for investors seeking primarily
capital growth, but also current income potential through common stocks.
This section provides, at a glance, information about your fund's performance.
Total return shows how the value of the fund's shares changed over time, assu-
ming you held the shares through the entire period and reinvested all distribu-
tions back into the fund.
TOTAL RETURNS FOR PERIOD ENDED 11/30/95
CLASS A CLASS B CLASS M
(1/5/95) (1/5/95) (1/5/95)
NAV POP NAV CDSC NAV POP
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Life of class 30.62% 23.11% 29.72% 24.72% 30.04% 25.48%
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COMPARATIVE RETURNS FOR PERIOD ENDED 11/30/95
STANDARD & POOR'S CONSUMER
500 INDEX PRICE INDEX
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Life of class 34.32% 2.61%
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TOTAL RETURNS FOR PERIOD ENDED 12/31/95
(Most recent calendar quarter)
CLASS A CLASS B CLASS M
NAV POP NAV CDSC NAV POP
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Life of class 33.48% 25.81% 32.48% 27.48% 32.87% 28.21%
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Performance data represent past results, do not reflect future performance, and
will differ for each share class. They do not take into account any adjustment
for taxes payable on reinvested distributions. Investment returns and net asset
value will fluctuate so that an investor's shares when sold may be worth more or
less than their original cost. POP assumes 5.75% maximum sales charge for class
A shares and 3.50% for class M shares. CDSC for class B shares assumes 5% maxi-
mum contingent deferred sales charge.
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[Line Chart - Page 9]
GROWTH OFA $10,000 INVESTMENT
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FUND'S CLASS A STANDARD & POOR'S CONSUMER
SHARES AT POP 500 INDEX PRICE INDEX
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1/31/95 $ 9,425 $10,243 $10,040
2/28/95 9,901 10,612 10,080
3/31/95 10,155 10,971 10,114
4/30/95 10,409 11,277 10,147
5/31/95 10,829 11,687 10,167
6/30/95 10,984 12,014 10,187
7/31/95 11,284 12,396 10,187
8/31/95 11,496 12,392 10,214
9/30/95 11,886 12,966 10,234
10/31/95 11,685 12,902 10,267
11/30/95 $12,311 $13,432 $10,261
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Past performance is no assurance of future results. A $10,000 investment in the
fund's class B shares at inception on 1/5/95 would have been valued at $12,972
on 11/30/95 ($12,472 with a redemption at the end of the period). A $10,000 in-
vestment in the fund's class M shares at inception on 1/5/95 would have been va-
lued at $13,004 at net asset value on 11/30/95; at public offering price,
$12,548.
PRICE AND DISTRIBUTION INFORMATION
Period ended 11/30/95
CLASS A CLASS B CLASS M
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DISTRIBUTIONS (NUMBER): 2 2 2
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Income $0.12 $0.096 $0.103
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Total $0.12 $0.096 $0.103
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SHARE VALUE: NAV POP NAV NAV POP
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1/5/95 $ 8.53 $ 9.05 $ 8.53 $ 8.53 $ 8.84
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11/30/95 11.01 11.68 10.96 10.98 11.38
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CURRENT RETURN:
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End of period
Current dividend rate (1) 2.18% 2.05% 1.72% 1.82% 1.76%
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Current 30-day SEC yield (2) 1.56 1.47 0.82 1.07 1.03
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(1) Income portion of most recent distribution, annualized and divided by NAV or
POP at end of period. (2) Based on investment income, calculated using SEC gui-
delines.
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TERMS AND DEFINITIONS
CLASS A SHARES are generally subject to an initial sales charge.
CLASS B SHARES may be subject to a sales charge upon redemption.
CLASS M SHARES have a lower initial sales charge and a higher 12b-1 fee than
class A shares and no sales charge on redemption.
NET ASSET VALUE (NAV) is the value of all your fund's assets, minus any liabili-
ties, divided by the number of outstanding shares, not including any initial or
contingent deferred sales charge.
PUBLIC OFFERING PRICE (POP) is the price of a mutual fund share plus the maximum
sales charge levied at the time of purchase. POP performance figures shown here
assume the maximum 5.75% sales charge for class A shares and 3.50% for class M
shares.
CONTINGENT DEFERRED SALES CHARGE (CDSC) is a charge applied at the time of the
redemption of class B shares and assumes redemption at the end of the period.
Your fund's CDSC declines from a 5% maximum during the first year to 1% during
the sixth year. After the sixth year, the CDSC no longer applies
STANDARD & POOR'S 500 INDEX is an unmanaged list of common stocks that is fre-
quently used as a general measure of stock market performance.
CONSUMER PRICE INDEX (CPI) is a commonly used measure of inflation; it does not
represent an investment return.
These indexes assume reinvestment of all distributions and do not take into
account brokerage commissions or other costs. The fund's portfolio contains se-
curities that do not match those in the indexes and performance will differ. It
is not possible to invest in an index.
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A PUTNAM PERSPECTIVE ON RISK AND REWARD
You've probably been told how important it is to understand the relationship be-
tween an investment's potential rewards and its accompanying risks. Given the
cautionary nature of such instructions, it may take most investors a while to
realize that risk has a positive side.
EVERY RISK SIGNALS A POTENTIAL REWARD. Selecting only those investments that
offer the greatest degree of security generally leads to only modest rewards.
Furthermore, even insured or guaranteed investments may be subject to changes in
their rates of return or, in some cases, in their principal values. Experienced
investors know that no investment is truly risk free and are therefore willing
to take on some measure of risk in order to increase their potential gains.
THE GREATER THE RISK, THE GREATER THE POTENTIAL REWARD. Accepting an appropriate
level of investment risk can give you a better chance of outpacing inflation
over time and seeking to maximize your investment's return. How much risk? Your
financial advisor's feedback and your time horizon can make all the difference
in determining how much risk is compatible with your investment goals and your
peace of mind.
FITTING YOUR FUND SELECTION TO YOUR RISK TOLERANCE
How do you find the right balance between investment risks and their potential
rewards? It's helpful to understand the types of risks that can apply to diffe-
rent types of investments, and to look at your own portfolio with this perspec-
tive.
For short-term goals, your first priority may be managing market risk. Longer-
term investors may be more concerned with inflation risk. And all income-orien-
ted investors should consider interest-rate, credit, and prepayment risks care-
fully. Within each of Putnam's four investment categories, you can select funds
with differing levels of risk and reward potential to customize your portfolio.
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This list covers only the most general types of risks; however, each investment
will also have its own specific risks. You will find a more detailed discussion
of these risk considerations in each fund's prospectus.
A RUNDOWN OF RISK TYPES
MARKET RISK Most important for stock funds, but relevant to all funds, this is
a measure of how sensitive a fund's holdings are to changes in general market
conditions. Remember, though, that securities that lose value quickly in market
declines may also show the strongest gains in more favorable environments.
INTEREST-RATE RISK Since bond prices fall as interest rates rise, this type of
risk is a particular concern for fixed-income investors. However, interest-rate
increases can also have a substantial negative effect on the stock market.
INFLATION RISK If your investments cannot keep pace with inflation, your money
will begin to lose its purchasing power. Stock investments are generally consi-
dered among the best ways of addressing inflation risk over the long term.
CREDIT AND PREPAYMENT RISK Credit risk is the concern that the security's issuer
will not be able to meet its payment, while prepayment risk involves the prema-
ture payoff of a loan, with a resulting loss of interest income. Professional
management and in-depth research are invaluable in managing both these risks.
LIQUIDITY RISK Not all investments can be readily converted into cash at their
perceived market values. Liquidity risk can affect the price of securities held
in the fund's portfolio and, thus, the fund's share prices.
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REPORT OF INDEPENDENT ACCOUNTANTS
For the fiscal period ended November 30, 1995
To the Trustees and Shareholders of
Putnam Growth and Income Fund II
We have audited the accompanying statement of assets and liabilities of Putnam
Growth and Income Fund II, including the portfolio of investments owned, as of
November 30, 1995, and the related statement of operations and the statement of
changes in net assets for the period January 5, 1995 (commencement of opera-
tions) to November 30, 1995 and the financial highlights for each of the periods
indicated therein. These financial statement and financial highlights are the
responsibility of the fund's management. Our resposibility is to express an opi-
nion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards required that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. And audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 1995, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Putnam
Growth and Income Fund II as of November 30, 1995, the results of its operations
and the changes in its net assets for the period January 5, 1995 (commencement
of operations) to November 30, 1995 and the financial highlights for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 15, 1996
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PORTFOLIO OF INVESTMENTS OWNED
November 30, 1995
COMMON STOCKS (93.0%)
NUMBER OF SHARES VALUE
AEROSPACE AND DEFENSE (1.2%)
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53,700 Lockheed Martin Corp. $ 3,940,238
36,312 Sundstrand Corp. 2,351,202
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6,291,440
AUTOMOTIVE (5.7%)
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76,356 Chrysler Corp. 3,960,968
172,950 Echlin, Inc. 6,312,675
137,450 General Motors Corp. 6,666,325
140,935 General Motors Corp. Class H 6,694,413
35,160 Magna International, Inc. Class A 1,529,460
144,100 Varity Corp. + 5,583,875
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30,747,716
BASIC INDUSTRIAL PRODUCTS (1.0%)
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175,300 General Signal Corp. 5,653,425
BUILDING AND CONSTRUCTION (0.4%)
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76,000 Masco Corp. 2,242,000
BUSINESS EQUIPMENT AND SERVICES (3.3%)
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110,098 Dun & Bradstreet Corp. 6,867,363
39,806 IBM Corp. 3,846,255
53,518 Xerox Corp. 7,338,656
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18,052,274
CHEMICALS (4.0%)
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120,237 du Pont (E.I.) de Nemours & Co., Ltd. 7,995,761
41,656 Eastman Chemical Co. 2,733,675
42,961 Grace (W.R.) & Co. 2,609,881
113,245 Union Carbide Corp. 4,487,333
135,910 Witco Chemical Corp. 4,179,233
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22,005,883
CONGLOMERATES (7.9%)
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263,700 Corning, Inc. 7,943,963
59,335 ITT Corp. 7,275,954
99,530 Johnson Controls, Inc. 6,892,453
159,300 TRW, Inc. 11,927,588
110,532 Tenneco Inc. (New) 5,305,536
38,161 United Technologies Corp. 3,577,594
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42,923,088
CONSUMER NON DURABLES (7.8%)
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129,550 American Brands, Inc. 5,408,713
163,980 Avon Products, Inc. 11,909,048
74,200 Clorox Co. 5,620,650
103,490 kimberly-Clark Corp. 7,955,794
132,170 Philip Morris Co., Inc. 11,597,918
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42,492,123
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COMMON STOCKS
NUMBER OF SHARES VALUE
ELECTRONICS AND ELECTRICAL EQUIPMENT (2.4%)
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131,210 Eaton Corp. $ 7,150,945
119,875 Honeywell, Inc. 5,709,047
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12,859,992
ENVIRONMENTAL CONTROL (0.9%)
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169,452 WMX Technologies, Inc. 4,998,834
FOOD AND BEVERAGES (2.0%)
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131,600 General Mills, Inc. 7,254,450
112,445 Heinz (H.J.) Co. 3,584,184
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10,838,634
FOREST PRODUCTS (2.2%)
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124,100 Rayonier, Inc. 4,746,825
163,700 Weyerhaeuser Co. 7,407,425
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12,154,250
HEALTH CARE (1.6%)
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207,113 Baxter International, Inc. 8,698,746
INSURANCE AND FINANCE (13.9%)
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48,959 Aetna Life & Casualty Co. 3,592,367
47,796 Allstate Corp. 1,959,636
132,345 BankAmerica Corp. 8,420,451
110,925 Bankers Trust New York Corp. 7,196,259
99,145 Beneficial Corp. 5,031,609
37,067 CIGNA Corp. 4,077,370
26,153 Federal National Mortgage Association 2,863,754
318,942 Fleet Financial Group, Inc. (New) 13,315,829
140,579 Morgan (J.P.) & Co., Inc. 11,035,452
77,350 NationsBank Corp. 5,520,856
248,300 PNC Bank Corp. 7,262,775
314,712 Reliance Group Holdings, Inc. 2,793,069
137,450 USF&G Corp. 2,371,013
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75,440,440
METALS AND MINING (0.4%)
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78,150 Freeport-McMoRan Copper & Gold Co., Inc. Class A 2,110,050
OIL AND GAS (9.7%)
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116,365 Amoco Corp. 7,883,716
39,835 Atlantic Richfield Co. 4,317,118
58,200 British Petroleum PLC ADR (United Kingdom) 5,565,375
115,594 Enron Corp. 4,334,775
66,420 Exxon Corp. 5,139,248
25,750 Mobil Corp. 2,687,656
221,392 Occidental Petroleum Corp. 4,898,298
95,650 Panhandle Eastern Corp. 2,714,069
121,399 Phillips Petroleum Co. 4,036,517
159,700 Sonat, Inc. 5,150,325
190,610 Total Corp. ADR (France) 5,885,084
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52,612,181
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COMMON STOCKS
NUMBER OF SHARES VALUE
PHARMACEUTICALS (5.9%)
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58,581 American Home Products Corp. $ 5,345,516
103,068 Bristol-Myers Squibb Co. 8,271,207
285,896 Pharmacia & Upjohn, Inc. 10,256,506
92,150 Warner-Lambert Co. 8,224,388
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32,097,617
PHOTOGRAPHY (4.2%)
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233,142 Eastman Kodak Co. 15,853,656
154,585 Polaroid Corp. 7,130,233
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22,983,889
PUBLISHING (0.9%)
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60,550 McGraw-Hill, Inc. 5,071,063
REAL ESTATE (1.1%)
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178,050 Meditrust Corp. 5,875,650
RETAIL (3.3%)
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459,185 K mart Corp. 3,558,684
163,595 Melville Corp. 5,091,894
89,383 Penney (J.C.) Co., Inc. 4,189,828
133,522 Sears, Roebuck & Co. 5,257,429
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18,097,835
TRANSPORTATION (3.6%)
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68,700 Canadian National Railway Co. (Canada) 1,030,500
81,614 Conrail, Inc. 5,702,778
227,650 Ryder System, Inc. 5,435,144
107,875 Union Pacific Corp. 7,308,531
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19,476,953
UTILITIES (9.6%)
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90,600 American Telephone & Telegraph Corp. 5,979,600
83,150 Bell Atlantic Corp. 5,238,450
177,773 Cinergy Corp. 5,244,304
94,450 Frontier Corp. 2,443,894
163,300 NYNEX Corp. 8,103,763
285,060 Northeast Utilities Co. 6,805,808
74,200 Public Service Co. of Colorado 2,559,900
92,150 SBC Communications, Inc. 4,976,100
198,326 Sprint Corp. 7,933,040
69,774 Texas Utilities Co. 2,686,299
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51,971,158
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TOTAL COMMON STOCKS (cost $467,687,986) $ 505,695,241
<PAGE>
CONVERTIBLE PREFERRED STOCKS (1.9%)*
NUMBER OF SHARES VALUE
51,550 Case Corp. Ser. A, $2.25 cv. pfd. $ 5,412,750
25,770 Citicorp Ser. 13, $5.375 cv. pfd. 4,992,938
3,800 Unisys Corp. Ser. A, $3.75 cv. pfd. 115,900
----------------
TOTAL CONVERTIBLE PREFERRED STOCKS (cost $9,047,071) $ 10,521,588
CONVERTIBLE BONDS AND NOTES (1.4%)*
PRINCIPAL AMOUNT VALUE
$ 2,735,000 Magna International cv. sub. deb. 5s, 2002 $ 2,776,025
6,250,000 Motorola Inc. cv. sub. deb. LYON (Liquid Yield
Option Notes) zero %, 2013 4,984,375
----------------
TOTAL CONVERTIBLE BONDS AND NOTES (cost $7,805,593) $ 7,760,400
SHORT-TERM INVESTMENTS (3.0%)*
PRINCIPAL AMOUNT VALUE
$ 5,000,000 Federal National Mortgage Association 5.57s,
January 11, 1996 $ 4,968,282
11,240,000 Interest in $798,484,000 joint repurchase agreement
dated November 30, 1995 with Morgan (J.P.) & Co., Inc.
due December 1, 1995 with respect to various U.S.
Treasury obligations-maturity value of $11,241,830
for an effective yield of 5.86% 11,241,830
----------------
TOTAL SHORT-TERM INVESTMENTS (cost $16,210,112) $ 16,210,112
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (cost $500,750,762)*** $ 540,187,341
- -------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $543,522,789.
+ Non-income-producing security.
*** The aggregate identified cost for federal income tax purposes is
$501,654,947, resulting in gross unrealized appreciation and depreciation of
$45,216,622 and $6,684,228, respectively, or net unrealized appreciation of
$38,532,394.
ADR after the name of a holding stands for American Depository Receipt re-
presenting ownership of foreign securities on deposit with a domestic custo-
dian bank.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1995
ASSETS
- -------------------------------------------------------------------------------
Investments in securities, at value
(identified cost $500,750,762) (Note 1) $540,187,341
- -------------------------------------------------------------------------------
Cash 399
- -------------------------------------------------------------------------------
Dividends and interest receivable 1,895,050
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 8,423,403
- -------------------------------------------------------------------------------
Receivable for securities sold 2,051,239
- -------------------------------------------------------------------------------
Unamortized organization expenses (Note 1) 72,322
- -------------------------------------------------------------------------------
TOTAL ASSETS 552,629,754
LIABILITIES
- -------------------------------------------------------------------------------
Payable for securities purchased 7,042,334
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 349,570
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Note 3) 700,837
- -------------------------------------------------------------------------------
Payable for administrative services (Note 3) 1,622
- -------------------------------------------------------------------------------
Payable for compensation of Trustees (Note 3) 249
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 3) 254,608
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 3) 324,907
- -------------------------------------------------------------------------------
Payable for organization expense 74,298
- -------------------------------------------------------------------------------
Other accrued expenses 358,540
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 9,106,965
- -------------------------------------------------------------------------------
NET ASSETS $543,522,789
REPRESENTED BY
- -------------------------------------------------------------------------------
Paid-in capital (Notes 1, 5 and 6) $486,806,206
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,047,745
- -------------------------------------------------------------------------------
Accumulated net realized gain on investment transactions (Note 1) 16,232,259
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 39,436,579
- -------------------------------------------------------------------------------
TOTAL -- REPRESENTING NET ASSETS APPLICABLE TO
CAPITAL SHARES OUTSTANDING $543,522,789
COMPUTATION OF NET ASSET VALUE AND OFFERING PRICE
- -------------------------------------------------------------------------------
Net asset value and redemption price of class A shares
($250,328,080 divided by 22,742,240 shares) $11.01
- -------------------------------------------------------------------------------
Offering price per class A share (100/94.25 of $11.01)* $11.68
- -------------------------------------------------------------------------------
Net asset value and offering price of class B shares
($259,788,928 divided by 23,710,306 shares) + $10.96
- -------------------------------------------------------------------------------
Net asset value and redemption price of class M shares
($33,405,781 divided by 3,043,463 shares) $10.98
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.5 of $10.98)* $11.38
- -------------------------------------------------------------------------------
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF OPERATIONS
For the period January 5, 1995
(commencement of operations) to
November 30, 1995
INVESTMENT INCOME:
- -------------------------------------------------------------------------------
Dividends (net of foreign taxes of $20,926) $6,399,171
- -------------------------------------------------------------------------------
Interest 590,876
- -------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 6,990,047
EXPENSES:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 3) 1,226,161
- -------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 3) 743,327
- -------------------------------------------------------------------------------
Compensation of Trustees (Note 3) 5,983
- -------------------------------------------------------------------------------
Reports to shareholders 31,745
- -------------------------------------------------------------------------------
Auditing 62,571
- -------------------------------------------------------------------------------
Legal 55,646
- -------------------------------------------------------------------------------
Postage 36,165
- -------------------------------------------------------------------------------
Distribution fees -- class A (Note 3) 218,076
- -------------------------------------------------------------------------------
Distribution fees -- class B (Note 3) 885,445
- -------------------------------------------------------------------------------
Distribution fees -- class M (Note 3) 96,727
- -------------------------------------------------------------------------------
Administrative services (Note 3) 7,912
- -------------------------------------------------------------------------------
Registration fees 171,078
- -------------------------------------------------------------------------------
Amortization of organization expenses (Note 1) 1,976
- -------------------------------------------------------------------------------
Other 3,250
- -------------------------------------------------------------------------------
TOTAL EXPENSES 3,546,062
- -------------------------------------------------------------------------------
Expense reduction (Note 3) (73,002)
- -------------------------------------------------------------------------------
NET EXPENSES 3,473,060
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,516,987
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 4) 16,232,259
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments during the period 31,872,124
- -------------------------------------------------------------------------------
NET GAIN ON INVESTMENT TRANSACTIONS 48,104,383
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $51,621,370
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the period
January 5, 1995
(commencement
of operations) to
November 30
1995
- -------------------------------------------------------------------------------
INCREASE IN NET ASSETS
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income $ 3,516,987
- -------------------------------------------------------------------------------
Net realized gain on investment transactions 16,232,259
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 31,872,124
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 51,621,370
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income:
Class A (1,223,270)
Class B (1,065,275)
Class M (174,105)
- -------------------------------------------------------------------------------
Increase from capital share transactions (Notes 5 and 6) 492,264,069
- -------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 541,422,789
- -------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------
Beginning of period (Note 2) 2,100,000
- -------------------------------------------------------------------------------
END OF PERIOD (including undistributed net investment income
of $1,047,745) $543,522,789
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
FOR THE PERIOD FOR THE PERIOD FOR THE PERIOD
JANUARY 5, 1995 JANUARY 5, 1995 JANUARY 5, 1995
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF OPERATIONS) TO OF OPERATIONS) TO OF OPERATIONS) TO
NOVEMBER 30 NOVEMBER 30 NOVEMBER 30
1995 1995 1995
- --------------------------------------------------------------------------------------------------------------
CLASS M CLASS B CLASS A
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.53 $8.53 $8.53
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net investment income .12 .11 .15
- --------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 2.43 2.42 2.45
- --------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT ACTIVITIES 2.55 2.53 2.60
- --------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (.10) (.10) (.12)
- --------------------------------------------------------------------------------------------------------------
Net realized gain on investments -- -- --
- --------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.10) (.10) (.12)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.98 $10.96 $11.01
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN AT NAV (%) (a) 30.04(b) 29.72(b) 30.62(b)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (in thousands) $33,406 $259,789 $250,328
- --------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net
assets (%) (c) 1.80(b) 2.03(b) 1.35(b)
- --------------------------------------------------------------------------------------------------------------
Ratio of net investment income to
average net assets (%) 1.58(b) 1.36(b) 2.03(b)
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 64.18 64.18 64.18
- --------------------------------------------------------------------------------------------------------------
<FN>
(a) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(b) Not annualized.
(c) The ratio of expenses to average net assets for the period ended November 30, 1995 includes amounts paid
through expense offset arrangements. See Note 3.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
November 30, 1995
NOTE 1
SIGNIFICANT ACCOUNTING POLICIES
The fund is registered under the Investment Company Act of 1940, as amended, as
a diversified, open-end management investment company. The fund seeks capital
growth as a primary objective and current income as a secondary objective by in-
vesting primarily in a portfolio of common stocks that offer the potential for
capital growth, current income or both.
The fund offers class A, class B and class M shares. The fund commenced its pu-
blic offering of class A, class B and class M shares on January 5, 1995. Class
A shares are sold with a maximum front-end sales charge of 5.75%. Class B sha-
res, which convert to class A shares after 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 shares and 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 distribu-
tion plan or other matters on which a class vote is required by law or deter-
mined 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 fo-
llowed by the fund in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles.
A) SECURITY VALUATION Investments for which market quotations are readily avail-
able are stated at market value, which is determined using the last reported sa-
le price, or, if no sales are reported -- as in the case of some securities tra-
ded over-the-counter -- the last reported bid price, except that certain U.S.
government obligations are stated at the mean between the bid and asked prices.
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.
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 compa-
nies managed by Putnam Investment Management, Inc., ("Putnam Management") the
fund's Manager, a wholly-owned subsidiary of Putnam Investments, Inc. and cer-
tain other accounts. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
C) REPURCHASE AGREEMENTS The fund, or any joint trading account, through its
custodian, receives delivery of the underlying securities, the market value of
which at the time of purchase is required to be in an amount at least equal to
102% of the
<PAGE>
resale price, including accrued interest. Putnam Management is responsible for
determining that the value of these underlying securities is at all times at
least equal to the resale price, including accrued interest.
D) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are
accounted for on the trade date (date the order to buy or sell is executed). In-
terest income is recorded on the accrual basis and dividend income is recorded
on the ex-dividend date, except that certain dividends from foreign securities
are recorded as soon as the fund is informed of the ex-dividend date.
E) 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 impo-
sition of any excise tax under Section 4982 of the Internal Revenue Code of
1986. Therefore, no provision has been made for federal taxes on income, capital
gains or unrealized appreciation on securities held and excise tax on income and
capital gains.
F) DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders from net invest-
ment income are recorded by the fund on the ex-dividend date. Capital gain dis-
tributions, if any, are recorded on the ex-dividend date and paid annually. The
amount and character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
The differences include treatment of amortization of bond premium and market
discount. reclassifications are made to the fund's capital accounts to reflect
income and gains available for distribution (or available capital loss carry-
overs) under income tax regulations.
For the period ended November 30, 1995, the fund reclassified $6,592 to decrease
undistributed net investment income and $6,592 to increase paid-in-capital. The
calculation of net investment per share in the financial highlights table exclu-
des these adjustments.
G) UNAMORTIZED ORGANIZATION EXPENSES Expenses incurred by the fund in connection
with its organization, its registration with the Securities and Exchange Commi-
ssion and with various states and the initial public offering of its shares were
$74,298. These expenses are being amortize over a five-year period based on cu-
rrent and projected net asset levels. The fund will reimburse Putnam Management
for the payment of these expenses.
NOTE 2
INITIAL CAPITALIZATION AND OFFERING OF SHARES
The fund was established as a Massachusetts business trust under the laws of the
Commonwealth of Massachusetts on October 5, 1994.
During the period October 5, 1994 to January 5, 1995, the fund had no operations
other than those related to organizational matters, including the initial capi-
tal contributions of $33,334, $33,333 and $33,333 for class A, class B and class
M, respectively, and the issuance of 3,922 shares for each class to Putnam Mu-
tual Funds Corp. on November 30, 1994. On January 3, 1995, Putnam Mutual Funds
Corp. made subsequent capital contributions of $666,666, $666,667 and $666,667
for class A, class B and class M, respectively, and received 78,431 shares of
each class.
NOTE 3
MANAGEMENT FEE, ADMINISTRATIVE SERVICES, AND OTHER TRANSACTIONS
Compensation of Putnam Investment Management, Inc. for management and investment
advisory service is
<PAGE>
paid quarterly based on the average net assets for the fund for the quarter.
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% of any excess the-
reafter.
The fund reimburses Putnam Management for the compensation and related expenses
of certain officers of the fund and their staff who provide administrative ser-
vices to the fund. The aggregate amount of all such reimbursements is determined
annually by the trustees.
Trustees of the fund receive an annual Trustee's fee of $820, and an additional
fee for each Trustees' meeting attended. Trustees who are not interested persons
of Putnam Management and who serve in committees of the Trustees receive addi-
tional fee for attendance at certain committee meetings.
During the period ended November 30, 1995, the fund adopted a Trustee Fee Defe-
rral Plan (the "Plan") which allows the Trustees to defer the receipt of all or
portion of Trustees Fees payable on or after July 1, 1995. The deferred fees re-
main in the fund and are invested in the fund or in other Putnam funds until
distribution in accordance with the plan.
Custodial functions for the fund's assets are provided by Putnam Fiduciary Trust
Company (PFTC), a wholly-owned subsidiary of Putnam Investments, Inc. Investor
servicing agent functions are provided by Putnam Investor Services, a division
of PFTC.
For the period ended November 30, 1995, fund expenses were reduced by $73,002
under expense offset arrangements with PFTC. Investor servicing and custodian
fees reported in the Statement of operations exclude these credits. The fund
could have invested the assets utilized in connection with the expense offset
arrangements in an income producing asset if it had not entered into such arran-
gements.
The fund has adopted distributions plans (the "Plan") 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 subsidairy of Putnam Investments, Inc., for services
provided and expenses incurred by it in distributing shares of the fund. The
Plans provide for payments by the fund to Putnam Mutual Funds Corp. at an annual
rate up to 0.35%, 1.00% and 1.00% of the average net assets attributable to
class A, class B and class M shares, respectively. The Trustees have aproved
payment by the fund at an annual rate of 0.25%, 1.00% and 0.75% ot the average
net assets attributable to class A, class B and class M shares respectively.
For the period ended November 30, 1995, Putnam Mutual Funds Corp., acting as un-
derwriter received net commissions of $476,365 and $50,489 from the sale of
class A and class M shares, respectively and received $133,724 in contingent de-
ferred 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 period
ended November 30, 1995, Putnam Mutual Funds Corp., acting as underwriter recei-
ved no monies on class A redemptions.
NOTE 4
PURCHASES AND SALES OF SECURITIES
During the period ended November 30, 1995, purchases and sales of investment
securities other than short-term investments aggregated $555,354,498 and
$141,134,845, respectively. There were no purchases or sales of U.S. government
<PAGE>
obligations. In determining the net gain or loss on securities sold, the cost of
securities has been determined on the identified cost basis.
NOTE 5
CAPITAL SHARES
At November 30, 1995, there was an unlimited number of shares of beneficial in-
terest authorized divided into three classes, designated class A, class B and
class M capital stock. Transactions in capital shares were as follows:
FOR THE PERIOD
JANUARY 5, 1995
(COMMENCEMENT
OF OPERATIONS) TO
NOVEMBER 30, 1995
CLASS A SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 19,356,148 $191,344,508
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 114,421 1,163,096
- -------------------------------------------------------------------------------
Shares issued in connection with
the merger of Putnam Dividend Growth Fund 4,765,630 50,372,714
- -------------------------------------------------------------------------------
24,236,199 242,880,318
- -------------------------------------------------------------------------------
Shares repurchased (1,576,312) (16,055,983)
- -------------------------------------------------------------------------------
NET INCREASE 22,659,887 $226,824,335
- -------------------------------------------------------------------------------
FOR THE PERIOD
JANUARY 5, 1995
(COMMENCEMENT
OF OPERATIONS) TO
NOVEMBER 30, 1995
CLASS B SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 23,950,321 $238,931,212
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 99,507 1,010,371
- -------------------------------------------------------------------------------
Shares issued in connection with
the merger of Putnam Dividend Growth Fund 1,116,576 11,768,715
- -------------------------------------------------------------------------------
25,166,404 251,710,298
- -------------------------------------------------------------------------------
Shares repurchased (1,538,451) (15,606,751)
- -------------------------------------------------------------------------------
NET INCREASE 23,627,953 $236,103,547
- -------------------------------------------------------------------------------
FOR THE PERIOD
JANUARY 5, 1995
(COMMENCEMENT
OF OPERATIONS) TO
NOVEMBER 30, 1995
CLASS M SHARES AMOUNT
- -------------------------------------------------------------------------------
Shares sold 3,172,893 $31,479,095
- -------------------------------------------------------------------------------
Shares issued in connection with
reinvestment of distributions 6,569 64,181
- -------------------------------------------------------------------------------
3,179,462 31,543,276
- -------------------------------------------------------------------------------
Shares repurchased (218,352) (2,207,089)
- -------------------------------------------------------------------------------
NET INCREASE 2,961,110 $29,336,187
- -------------------------------------------------------------------------------
NOTE 6
ACQUISITION OF PUTNAM DIVIDEND GROWTH FUND
On September 22, 1995, the fund issued 4,765,630 and 1,116,576 of class A and
class B shares, respectively, to shareholders of the Putnam Dividend Growth Fund
to acquire the fund's net assets in a tax-free exchange approved by the share-
holders. The net assets of the fund and Putnam Dividend Growth Fund on September
22, 1995, valuation date, were $343,915,341 and $62,141,429, respectively. On
September 22, 1995, Putnam Dividend Growth Fund had an unrealized appreciation
of $7,564,455.
The aggregate net assets of the fund immediately following the acquisition were
$406,056,770.
<PAGE>
FEDERAL TAX INFORMATION
(Unaudited)
The fund has designated 32.64% of the distributions from net investment income
as qualifying for the dividends received deduction for corporations.
<PAGE>
FUND INFORMATION
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT ACCOUNTANTS
Coopers &Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman William F. Pounds, Vice Chairman
Jameson Adkins Baxter Hans H. Estin
John A. Hill Elizabeth T. Kennan
Lawrence J. Lasser Robert E. Patterson
Donald S. Perkins George Putnam, III
Eli Shapiro A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam Charles E. Porter
President Executive Vice President
Patricia C. Flaherty Lawrence J. Lasser
Senior Vice President Vice President
Gordon H. Silver Peter Carman
Vice President Vice President
Brett C. Browchuk Thomas V. Reilly
Vice President Vice President
Anthony I. Kreisel William N. Shiebler
Vice President and Fund Manager Vice President
John R. Verani Paul M. O'Neil
Vice President Vice President
John D. Hughes Beverly Marcus
Senior Vice President and Treasurer Clerk and Assistant Treasurer
This report is for the information of shareholders of Putnam Growth and Income
Fund II. It may also be used as sales literature when preceded or accompanied by
the current prospectus, which gives details of sales charges, investment objec-
tives, and operating policies of the fund, and the most recent copy of Putnam's
Quarterly Performance Summary. For more information, or to request a prospectus,
call toll free: 1-800-225-1581.
SHARES OF MUTUAL FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR EN-
DORSED BY, ANY FINANCIAL INSTITUTION; ARE NOT INSURED BY THE FEDERAL DEPOSIT IN-
SURANCE CORPORATION (FDIC), THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY; AND
INVOLVE RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
<PAGE>
<PAGE>
---------------
PUTNAM INVESTMENTS Bulk Rate
U.S. Postage
THE PUTNAM FUNDS PAID
One Post Office Square Putnam
Boston, Massachusetts 02109 Investments
---------------
22181 949/990/096 1/96
<PAGE>
<PAGE>
APPENDIX TO FORM N-30D FILINGS TO DESCRIBE DIFFERENCES BETWEEN PRINTED AND
EDGAR-FILED TEXTS:
(1) Boldface typeface is displayed with capital letters, italic typeface is
displayed in normal type.
(2) Because the printed page breaks are not reflected, certain tabular and
columnar headings and symbols are displayed differently in this filing.
(3) Bullet points and similar graphic signals are omitted.
(4) Page numbering has been omitted.
(5) The trademark symbol has been replaced by (TM).
(6) The copyright symbol has been replaced by (C).
(7) The registered mark symbol has been replaced by (R).
(8) The dagger symbol has been replaced by +
(9) The double dagger symbol has been replaced by ++
(10) The triple dagger symbol has been replaced by +++
(11) The section symbol has been replaced by ^
(12) The double section symbol has been replaced by ^^
(13) The trile section symbol has been replaced by ^^^
