Putnam
Capital
Appreciation
Fund
Item 1. Report to Stockholders:
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The following is a copy of the report transmitted to stockholders pursuant
to Rule 30e-1 under the Investment Company Act of 1940:
ANNUAL REPORT ON PERFORMANCE AND OUTLOOK
5-31-05
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From the Trustees
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John A. Hill and
George Putnam, III
Dear Fellow Shareholder:
During the period ended May 31, 2005, the Federal Reserve Board's series
of gradual increases in the federal funds rate occupied investors'
attention. The Fed's more restrictive monetary policy, along with high
energy prices, has moderated the pace of the economic expansion. Recent
reports show the economy is growing at a respectable rate of about 3.5%
annually, but some investors believe that this pace cannot sustain
corporate profits near their robust levels of late. This concern has
held the stock market in check and focused attention on credit risk in
the bond market, even as long-term bond yields remained low. Major
credit rating agencies underscored market concerns in early May by
downgrading bonds issued by Ford and General Motors. Amid the
uncertainties of this environment, security selection takes on even
greater importance and the in-depth, professional research and active
management that mutual funds can provide makes them an intelligent
choice for today's investors.
We want you to know that Putnam Investments' management team, under the
leadership of Chief Executive Officer Ed Haldeman, continues to focus on
investment performance and remains committed to putting the interests of
shareholders first. In keeping with these goals, we are including
additional disclosure about your fund's management team in this report.
Following the Outlook for Your Fund, we provide manager compensation
information that pertains to your fund. In addition, on page 19 of this
report we provide information about the 2004 approval by the Trustees of
your fund's management contract with Putnam.
We would also like to take this opportunity to announce the retirement
of one of your fund's Trustees, Ronald J. Jackson, who has been an
independent Trustee of the Putnam funds since 1996. We thank him for his
service.
In the following pages, members of your fund's management teams discuss
the fund's performance, the strategies used to pursue the fund's
investment objectives during the reporting period, and the teams'
outlook for the months ahead.
As always, we thank you for your continuing confidence in Putnam.
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 20, 2005
Report from Fund Management
Fund highlights
* For the 12 months ended May 31, 2005, Putnam Capital Appreciation
Fund's class A shares returned 11.59% without sales charges.
* The fund's benchmark, the Russell 3000 Index, gained 9.44%.
* The average return for the fund's Lipper category, Multi-Cap Core
Funds, was 8.22%.
* See the Performance Summary beginning on page 10 for additional fund
performance, comparative performance, and Lipper data.
Performance commentary
We are pleased to report that your fund delivered solid returns at net
asset value (NAV, or without sales charges) for the 12 months ended May
31, 2005. Based on results at NAV, the fund finished well ahead of both
its benchmark, the Russell 3000 Index, and the average for its Lipper
category. Stocks in the technology, consumer, and health-care sectors
contributed positively to returns during the fiscal year, while the
fund's limited exposure to utilities stocks detracted from returns to
some extent. During a somewhat choppy period for the stock market, the
fund also benefited from our bottom-up, research-intensive stock
selection process and our ability to invest in both growth- and
value-style stocks.
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TOTAL RETURN FOR
PERIODS ENDED 5/31/05
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Class A
(inception 8/5/93) NAV POP
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1 year 11.59% 5.71%
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5 years -4.29 -9.33
Annual average -0.87 -1.94
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10 years 121.37 109.72
Annual average 8.27 7.69
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Annual average
(life of fund) 10.53 10.03
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Data is historical. Past performance does not guarantee future results.
More recent returns may be less or more than those shown. Investment
return and principal value will fluctuate and you may have a gain or a
loss when you sell your shares. Performance assumes reinvestment of
distributions and does not account for taxes. Returns at NAV do not
reflect a sales charge of 5.25%. For the most recent month-end
performance, visit www.putnaminvestments.com. For a portion of the
period, this fund limited expenses, without which returns would have
been lower. A short-term trading fee of up to 2% may apply.
FUND PROFILE
Putnam Capital Appreciation Fund invests in stocks of companies at all
capitalization levels, and across a broad range of industries. While it
has no bias toward either growth or value stocks, it targets companies
believed to be worth more than their current stock prices indicate. It
may be suitable for investors who are seeking growth through a
well-diversified stock portfolio.
Market overview
Overall, U.S. stocks delivered decent returns in what proved to be a
somewhat uneven year for the financial markets. In the first half of the
period, the backdrop for stocks was generally favorable: the economy
continued to expand, job creation was improving, and corporate profits
were generally solid. However, these positive trends were offset by
investors' worries over rising interest rates and soaring energy prices.
After rallying in response to favorable economic data, stocks fell
sharply from July to mid-August, responding to a series of interest-rate
increases by the Federal Reserve Board, the dramatic rise in oil prices,
and a series of destabilizing events in Iraq. These concerns weighed on
the market, causing choppiness until November, when the resolution of
the U.S. presidential election reduced market uncertainty and oil prices
declined. Stocks advanced strongly in November and December, and for the
second consecutive calendar year, major stock market indexes posted
gains.
For most of the remainder of the fund's fiscal year, however, stocks
struggled, particularly in March and April of 2005. Concerns about an
economic slowdown, combined with rising energy prices and rising
interest rates, kept stock prices mired in a narrow trading range. Oil
prices jumped approximately 25% in the first quarter of 2005, which put
pressure on corporate profit margins.
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MARKET SECTOR PERFORMANCE 12 MONTHS ENDED 5/31/05
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Equities
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Russell 3000 Index (broad stock market) 9.44%
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Russell 1000 Growth Index (large-company growth stocks) 3.33%
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Russell 1000 Value Index (large-company value stocks) 15.49%
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Russell 2000 Index (small-company stocks) 9.82%
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Bonds
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Lehman Aggregate Bond Index (broad bond market) 6.82%
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JP Morgan Global High Yield Index (global high-yield
corporate bonds) 10.10%
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Lehman Government Bond Index (U.S. Treasury and agency
securities) 6.48%
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These indexes provide an overview of performance in different market
sectors for the 12 months ended 5/31/05.
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Strategy overview
In managing your fund's portfolio, we continued to take a bottom-up
approach to stock selection. Regardless of how the economy or markets
are behaving, we look for companies whose stocks appear to be mis-priced
by the market -- in other words, companies that we believe are worth
more than their current stock prices indicate. The fund is managed in a
blend investment style, which means that instead of having a strong
growth or value orientation, it has the flexibility to invest in a wide
range of companies. It can invest in companies that are growing rapidly
and seem to have the potential to continue growing, as well as
out-of-favor companies that are undergoing changes that may improve
their earnings and growth potential. In either case, we look for
companies whose stock prices are currently low relative to our
assessment of the company's earnings and growth potential.
We find that typically, stocks become attractively valued when the
market underestimates the ability of good companies to maintain their
returns and growth rates, or when the market overreacts to short-term
events. We believe that if we focus on cash flows and valuations,
maintain a diversified portfolio, and remain willing to buy and hold
controversial stocks that we think are temporarily out of favor, the
fund will be able to consistently profit from mis-pricings in the
market.
[GRAPHIC OMITTED: horizontal bar chart TOP INDUSTRY WEIGHTINGS COMPARED]
TOP INDUSTRY WEIGHTINGS COMPARED
as of 11/30/04 as of 5/31/05
Retail 7.0% 8.2%
Consumer finance 6.1% 8.0%
Insurance 8.8% 7.5%
Oil and gas 6.9% 7.1%
Banking 5.6% 4.9%
Footnote reads:
This chart shows how the fund's top weightings have changed over the
last six months. Weightings are shown as a percentage of net assets.
Holdings will vary over time.
How fund holdings affected performance
One of the fund's top-performing stocks during the period was that of
Altria Group, the holding company whose subsidiaries include Philip
Morris USA. Altria's U.S. tobacco business has regained market share and
it recently reported strong earnings gains. In addition, investors have
reacted positively to talk of splitting Altria into three separate
businesses. In the health-care portion of the fund's portfolio, a number
of stocks were strong, particularly that of pharmacy benefit manager
Express Scripts, which we had sold by the close of the period. Pharmacy
benefit managers (PBMs) administer prescription drug benefits for
organizations such as managed-care companies, large employers, and
government agencies. A number of industry trends have favored PBMs,
including an increase in prescription orders by mail and more generic
versions of drugs, which offer higher profit margins for PBMs. One
bright spot in the struggling pharmaceutical sector has been fund
holding Johnson & Johnson. Unlike many other pharmaceutical companies,
Johnson & Johnson is widely diversified, with biotechnology products and
business segments such as consumer products and medical devices
providing strength, particularly over the past several years when
pharmaceuticals have been weak.
[GRAPHIC OMITTED: TOP HOLDINGS]
TOP HOLDINGS
(Percent of fund's net assets as of 5/31/05)
1 American International
Group, Inc. (4.7%)
Insurance
2 Commerce Bancorp, Inc. (3.7%)
Banking
3 Amerada Hess Corp. (3.3%)
Oil and gas
4 Capital One Financial Corp. (3.3%)
Consumer finance
5 Countrywide Financial Corp. (3.3%)
Consumer finance
6 Fannie Mae (3.2%)
Financial
7 Royal Carribean Cruises, Ltd. (3.0%)
Lodging/tourism
8 Harley-Davidson, Inc. (2.9%)
Leisure
9 Apollo Group, Inc. (2.8%)
Schools
10 Office Depot, Inc. (2.7%)
Retail
Footnote reads:
The fund's holdings will change over time.
In the retail portion of the fund's portfolio, Abercrombie & Fitch was a
strong performer, exceeding the market's pessimistic expectations for its
sales over the last 12 months. In addition, the company's Hollister brand
began to show evidence of the growth potential of its stores, which
specialize in surfer-style clothing. By the close of the period, we had
sold the fund's position in Abercrombie & Fitch because it had reached our
price target. Also in the retail sector, crafts-store chain Michael's
Stores helped boost fund performance during the period. The company
benefited from a number of operational improvements, including a new
inventory system, and its earnings exceeded expectations. We trimmed the
fund's position in this stock during the period as it approached our price
target. In the technology sector, holdings such as Freescale Semiconductor
and Citrix Systems performed well and contributed to fund performance.
Although the fund delivered positive returns, some holdings detracted
from performance, including Fannie Mae. The stock of this mortgage
financing company declined partly as a result of regulatory
investigations of its accounting practices. While we recognize that this
could continue to put pressure on the stock, we found the stock's
valuation to be very attractive, and we believe the company continues to
offer strong long-term growth potential. Fannie Mae remained a holding
in the fund's portfolio at the close of the period.
The stock of Tyco International also remained in the fund's portfolio at
the close of the period, despite its recent decline. Investors have
became concerned about Tyco's potential, despite the fact that the
company has made significant strides after having problems with its
former management team. We continue to find Tyco stock attractive as the
company has renewed its commitment to improving its balance sheet and
cutting costs.
Another disappointment among the fund's holdings was Pfizer. This drug
company's stock declined after a study found that high doses of its pain
reliever, Celebrex, were associated with increased risk of heart attack.
The stock of Harley Davidson was also a detractor from performance. It
declined when the company announced a weak outlook for the remainder of
2005. This led to investor concerns about slowing growth for Harley
Davidson and the motorcycle industry as a whole. However, we believe the
company, with its dominant brand, strong franchise, and
shareholder-friendly management team, continues to offer attractive
growth potential. Other retail stocks that had a negative effect on
performance were CSK Auto and AutoZone, which were sold from the
portfolio by the close of the period.
Please note that all holdings discussed in this report are subject to
review in accordance with the fund's investment strategy and may vary in
the future.
The outlook for your fund
The following commentary reflects anticipated developments that could
affect your fund over the next six months, as well as your management
teams' plans for responding to them.
At the close of the fund's fiscal year, worries about rising interest
rates and spiking oil prices were weighing on the financial markets.
Higher energy prices could eventually have a negative effect on
corporate profits and consumer spending, and investors were anticipating
the ninth consecutive interest-rate increase by the Federal Reserve
Board since June 2004. However, there was also good news, including
relatively tame inflation, a strong housing market, and a jump in
consumer confidence, which was reported by the Conference Board shortly
after the close of the fund's fiscal year.
Regardless of the direction the markets take in the months ahead, we
remain focused on the long-term potential of individual companies rather
than short-term developments in the economy. While the market as a whole
is affected by world events and economic cycles, we believe investors'
long-term goals are best served by the fund's diversified portfolio and
our bottom-up approach to stock selection, which relies heavily on
fundamental research and analysis. Of course, our beliefs about general
themes at work in the market do influence our decisions as well. At the
close of the period, we were finding more attractive opportunities in
the financial and consumer sectors.
The views expressed in this report are exclusively those of Putnam
Management. They are not meant as investment advice. The fund invests
some or all of its assets in small and/or midsize companies. Such
investments increase the risk of greater price fluctuations.
Your fund's management
Your fund is managed by the members of the Putnam U.S. Core and U.S.
Small- and Mid-Cap Core teams. Joshua Brooks is the Portfolio Leader,
and Richard Cervone, Joseph Joseph, James Wiess, and James Yu are
Portfolio Members. The Portfolio Leader and Portfolio Members coordinate
the teams' management of the fund.
For a complete listing of the members of the Putnam U.S. Core and U.S.
Small- and Mid-Cap Core teams, including those who are not Portfolio
Leaders or Portfolio Members of your fund, visit Putnam's Individual
Investor Web site at www.putnaminvestments.com.
Fund ownership
The table below shows how much the fund's current Portfolio Leader and
Portfolio Members have invested in the fund (in dollar ranges).
Information shown is as of May 31, 2005, and May 31, 2004.
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FUND PORTFOLIO LEADER AND PORTFOLIO MEMBERS
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$1 - $10,001 - $50,001- $100,001 - $500,001 - $1,000,001
Year $0 $10,000 $50,000 $100,000 $500,000 $1,000,000 and over
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Joshua Brooks 2005 *
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Portfolio Leader N/A
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Richard Cervone 2005 *
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Portfolio Member N/A
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Joseph Joseph 2005 *
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Portfolio Member 2004 *
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James Wiess 2005 *
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Portfolio Member N/A
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James Yu 2005 *
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Portfolio Member 2004 *
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N/A indicates the individual was not a Portfolio Leader or Portfolio
Member as of 5/31/04.
Fund manager compensation
The total 2004 fund manager compensation that is attributable to your
fund is approximately $680,000. This amount includes a portion of 2004
compensation paid by Putnam Management to the fund managers listed in
this section for their portfolio management responsibilities, calculated
based on the fund assets they manage taken as a percentage of the total
assets they manage. The compensation amount also includes a portion of
the 2004 compensation paid to the Chief Investment Officer of the team
and the Group Chief Investment Officer of the fund's broader investment
category for their oversight responsibilities, calculated based on the
fund assets they oversee taken as a percentage of the total assets they
oversee. This amount does not include compensation of other personnel
involved in research, trading, administration, systems, compliance, or
fund operations; nor does it include non-compensation costs. These
percentages are determined as of the fund's fiscal period-end. For
personnel who joined Putnam Management during or after 2004, the
calculation reflects annualized 2004 compensation or an estimate of
2005 compensation, as applicable.
Other Putnam funds managed by the Portfolio Leader and Portfolio Members
Joshua Brooks is also a Portfolio Leader of Putnam Research Fund and a
Portfolio Member of Putnam Global Equity Fund and Putnam Investors Fund.
Richard Cervone is also a Portfolio Member of Putnam Investors Fund and
Putnam Tax Smart Equity Fund.
Joseph Joseph is also a Portfolio Leader of Putnam Capital Opportunities
Fund and Putnam International Capital Opportunities Fund.
James Wiess is also a Portfolio Leader of Putnam Investors Fund and
Putnam Tax Smart Equity Fund.
James Yu is also a Portfolio Member of Putnam Investors Fund and Putnam
Tax Smart Equity Fund.
Joshua Brooks, Richard Cervone, Joseph Joseph, James Wiess, and James Yu
may also manage other accounts and variable trust funds advised by
Putnam Management or an affiliate.
Changes in your fund's Portfolio Leader and Portfolio Members
During the year ended May 31, 2005, Joshua Brooks became Portfolio
Leader and Richard Cervone and James Wiess became Portfolio Members of
your fund, following the departure of Portfolio Leader Michael Nance
from your fund's management team.
Fund ownership
The table below shows how much the members of Putnam's Executive Board
have invested in the fund (in dollar ranges). Information shown is as of
May 31, 2005, and May 31, 2004.
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PUTNAM EXECUTIVE BOARD
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$1 - $10,001 - $50,001- $100,001
Year $0 $10,000 $50,000 $100,000 and over
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Philippe Bibi 2005 *
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Chief Technology Officer 2004 *
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John Boneparth 2005 *
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Head of Global Institutional Mgmt 2004 *
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Joshua Brooks 2005 *
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Deputy Head of Investments N/A
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Kevin Cronin 2005 *
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Head of Investments 2004 *
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Charles Haldeman, Jr. 2005 *
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President and CEO 2004 *
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Amrit Kanwal 2005 *
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Chief Financial Officer 2004 *
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Steven Krichmar 2005 *
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Chief of Operations 2004 *
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Francis McNamara, III 2005 *
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General Counsel 2004 *
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Richard Monaghan 2005 *
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Head of Retail Management 2004 *
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Richard Robie, III 2005 *
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Chief Administrative Officer 2004 *
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Edward Shadek 2005 *
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Deputy Head of Investments N/A
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N/A indicates the individual was not a member of Putnam's Executive
Board as of 5/31/04.
Performance summary
This section shows your fund's performance during its fiscal year, which
ended May 31, 2005. In accordance with regulatory requirements, we also
include performance for the most current calendar quarter-end.
Performance should always be considered in light of a fund's investment
strategy. Data represents past performance. Past performance does not
guarantee future results. More recent returns may be less or more than
those shown. Investment return and principal value will fluctuate and
you may have a gain or a loss when you sell your shares. For the most
recent month-end performance, please visit www.putnaminvestments.com.
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TOTAL RETURN FOR PERIODS ENDED 5/31/05
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Class A Class B Class C Class M Class R
(inception dates) (8/5/93) (11/2/94) (7/14/00) (1/22/96) (12/1/03)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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1 year 11.59% 5.71% 10.72% 5.72% 10.69% 9.69% 11.01% 7.13% 11.29%
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5 years -4.29 -9.33 -7.76 -9.26 -7.65 -7.65 -6.65 -9.91 -5.43
Annual average -0.87 -1.94 -1.60 -1.92 -1.58 -1.58 -1.37 -2.07 -1.11
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10 years 121.37 109.72 105.98 105.98 108.34 108.34 110.40 102.95 115.94
Annual average 8.27 7.69 7.49 7.49 7.62 7.62 7.72 7.33 8.00
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Annual average
(life of fund) 10.53 10.03 9.73 9.73 9.96 9.96 9.97 9.64 10.26
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Performance assumes reinvestment of distributions and does not account
for taxes. Returns at public offering price (POP) for class A and M
shares reflect a sales charge of 5.25% and 3.50%, respectively (which
for class M shares does not reflect a reduction in sales charges that
went into effect on April 1, 2005; if this reduction had been in place
for all periods indicated, returns would have been higher). Class B
share returns reflect the applicable contingent deferred sales charge
(CDSC), which is 5% in the first year, declining to 1% in the sixth
year, and is eliminated thereafter. Class C shares reflect a 1% CDSC the
first year that is eliminated thereafter. Class R shares have no initial
sales charge or CDSC. Performance for class B, C, M, and R shares before
their inception is derived from the historical performance of class A
shares, adjusted for the applicable sales charge (or CDSC) and higher
operating expenses for such shares.
For a portion of the period, this fund limited expenses, without which
returns would have been lower.
A 2% short-term trading fee may be applied to shares exchanged or sold
within 5 days of purchase.
[GRAPHIC OMITTED: worm chart CHANGE IN THE VALUE OF A $10,000 INVESTMENT]
CHANGE IN THE VALUE OF A $10,000 INVESTMENT
($9,475 after sales charge)
Cumulative total return, 5/31/95 to 5/31/05
Fund's class A shares Russell 3000
at POP Index
5/31/95 9,475 10,000
5/31/96 13,033 13,008
5/31/97 16,019 16,255
5/31/98 20,290 21,095
5/31/99 19,803 24,932
5/31/00 21,911 27,880
5/31/01 20,804 25,170
5/31/02 18,044 22,032
5/31/03 16,170 20,328
5/31/04 18,794 24,334
5/31/05 $20,972 $26,631
Footnote reads:
Past performance does not indicate future results. At the end of the
same time period, a $10,000 investment in the fund's class B and class C
shares would have been valued at $20,598 and $20,834, respectively, and
no contingent deferred sales charges would apply. A $10,000 investment
in the fund's class M shares would have been valued at $21,040 ($20,295
at public offering price). A $10,000 investment in the fund's class R
shares would have been valued at $21,594. See first page of performance
section for performance calculation method.
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COMPARATIVE INDEX RETURNS FOR PERIODS ENDED 5/31/05
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Russell Lipper Multi-Cap
3000 Core Funds
Index category average*
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1 year 9.44% 8.22%
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5 years -4.48 3.89
Annual average -0.91 0.10
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10 years 166.31 163.55
Annual average 10.29 9.65
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Annual average
(life of fund) 10.52 9.92
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Index and Lipper results should be compared to fund performance at net
asset value.
* Over the 1-, 5-, and 10-year periods ended 5/31/05, there were 744,
372, and 126 funds, respectively, in this Lipper category.
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PRICE AND DISTRIBUTION INFORMATION 12 MONTHS ENDED 5/31/05
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Class A Class B Class C Class M Class R
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Distributions (number) 1 -- -- -- 1
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Income $0.018 -- -- -- $0.027
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Capital gains -- -- -- -- --
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Total $0.018 -- -- -- $0.027
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Share value: NAV POP NAV NAV NAV POP NAV
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5/31/04 $16.55 $17.47 $15.76 $16.09 $15.98 $16.56 $16.54
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5/31/05 18.45 19.47 17.45 17.81 17.74 18.34* 18.38
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* Reflects a reduction in sales charges that took effect on April 1,
2005.
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TOTAL RETURN FOR PERIODS ENDED 6/30/05 (MOST RECENT CALENDAR QUARTER)
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Class A Class B Class C Class M Class R
(inception dates) (8/5/93) (11/2/94) (7/14/00) (1/22/96) (12/1/03)
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NAV POP NAV CDSC NAV CDSC NAV POP NAV
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1 year 11.64% 5.79% 10.76% 5.76% 10.78% 9.78% 11.10% 7.24% 11.35%
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5 years -9.94 -14.68 -13.27 -14.67 -13.16 -13.16 -12.20 -15.28 -11.03
Annual average -2.07 -3.13 -2.81 -3.12 -2.78 -2.78 -2.57 -3.26 -2.31
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10 years 121.69 109.99 106.17 106.17 108.50 108.50 110.60 103.18 116.30
Annual average 8.29 7.70 7.50 7.50 7.62 7.62 7.73 7.35 8.02
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Annual average
(life of fund) 10.71 10.21 9.90 9.90 10.13 10.13 10.14 9.82 10.43
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Understanding your
fund's expenses
As a mutual fund investor, you pay ongoing expenses, such as management
fees, distribution fees (12b-1 fees), and other expenses. Using the
information below, you can estimate how these expenses affect your
investment and compare them with the expenses of other funds. You may
also pay one-time transaction expenses, including sales charges (loads)
and redemption fees, which are not shown in this section and would have
resulted in higher total expenses. For more information, see your fund's
prospectus or talk to your financial advisor.
Review your fund's expenses
The table below shows the expenses you would have paid on a $1,000
investment in Putnam Capital Appreciation Fund from December 1, 2004, to
May 31, 2005. It also shows how much a $1,000 investment would be worth
at the close of the period, assuming actual returns and expenses.
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EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming actual returns for the 6 months ended 5/31/05
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Class A Class B Class C Class M Class R
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Expenses paid per
$1,000* $6.47 $10.24 $10.23 $8.98 $7.72
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Ending value (after
expenses) $1,026.00 $1,022.30 $1,021.80 $1,023.10 $1,024.90
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* Expenses for each share class are calculated using the fund's annualized
expense ratio for each class, which represents the ongoing expenses as a
percentage of net assets for the six months ended 5/31/05. The expense
ratio may differ for each share class (see the table at the bottom of
the next page). Expenses are calculated by multiplying the expense ratio
by the average account value for the period; then multiplying the result
by the number of days in the period; and then dividing that result by
the number of days in the year.
Estimate the expenses you paid
To estimate the ongoing expenses you paid for the six months ended May
31, 2005, use the calculation method below. To find the value of your
investment on December 1, 2004, go to www.putnaminvestments.com and log
on to your account. Click on the "Transaction History" tab in your Daily
Statement and enter 12/01/2004 in both the "from" and "to" fields.
Alternatively, call Putnam at 1-800-225-1581.
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HOW TO CALCULATE THE EXPENSES YOU PAID
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Total
Value of your Expenses paid expenses
investment on 12/1/04 [DIV] $1,000 X per $1,000 = paid
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Example Based on a $10,000 investment in class A shares of your fund.
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$10,000 [DIV] $1,000 X $6.47 (see table above) = $64.70
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Comparing your fund's expenses with those of other funds
Using the SEC's method to compare expenses
The Securities and Exchange Commission (SEC) has established guidelines
to help investors assess fund expenses. Per these guidelines, the table
below shows your fund's expenses based on a $1,000 investment, assuming
a hypothetical 5% annualized return. You can use this information to
compare the ongoing expenses (but not transaction expenses or total
costs) of investing in the fund with those of other funds. All mutual
fund shareholder reports will provide this information to help you make
this comparison. Please note that you cannot use this information to
estimate your actual ending account balance and expenses paid during the
period.
- -----------------------------------------------------------------------------
EXPENSES AND VALUE OF A $1,000 INVESTMENT
assuming a hypothetical 5% annualized return for the 6 months ended 5/31/05
- -----------------------------------------------------------------------------
Class A Class B Class C Class M Class R
- -----------------------------------------------------------------------------
Expenses paid per
$1,000* $6.44 $10.20 $10.20 $8.95 $7.70
- -----------------------------------------------------------------------------
Ending value (after
expenses) $1,018.55 $1,014.81 $1,014.81 $1,016.06 $1,017.30
- -----------------------------------------------------------------------------
* Expenses for each share class are calculated using the fund's
annualized expense ratio for each class, which represents the ongoing
expenses as a percentage of net assets for the six months ended 5/31/05.
The expense ratio may differ for each share class (see the table at the
bottom of this page). Expenses are calculated by multiplying the expense
ratio by the average account value for the period; then multiplying the
result by the number of days in the period; and then dividing that
result by the number of days in the year.
Using industry averages to compare expenses
You can also compare your fund's expenses with the average of its peer
group, as defined by Lipper, an independent fund-rating agency that
ranks funds relative to others that Lipper considers to have similar
investment styles or objectives. The expense ratio for each share class
shown below indicates how much of your fund's net assets have been used
to pay ongoing expenses during the period.
- ------------------------------------------------------------------------------
EXPENSE RATIO COMPARISONS USING ANNUALIZED DATA
- ------------------------------------------------------------------------------
Class A Class B Class C Class M Class R
- ------------------------------------------------------------------------------
Your fund's annualized
expense ratio+ 1.28% 2.03% 2.03% 1.78% 1.53%
- ------------------------------------------------------------------------------
Average annualized expense
ratio for Lipper peer
group++ 1.39% 2.14% 2.14% 1.89% 1.64%
- ------------------------------------------------------------------------------
+ For the fund's most recent fiscal half year; may differ from expense ratios
based on one-year data in the financial highlights.
++ Simple average of the expenses of all front-end load funds in the fund's
Lipper peer group, calculated in accordance with Lipper's standard
method for comparing fund expenses (excluding 12b-1 fees and without
giving effect to any expense offset and brokerage service arrangements
that may reduce fund expenses). This average reflects each fund's
expenses for its most recent fiscal year available to Lipper as of
3/31/05. To facilitate comparison, Putnam has adjusted this average to
reflect the 12b-1 fees carried by each class of shares. The peer group
may include funds that are significantly smaller or larger than the
fund, which may limit the comparability of the fund's expenses to the
simple average, which typically is higher than the asset-weighted
average.
Understanding your fund's
portfolio turnover
Putnam funds are actively managed by teams of experts who buy and sell
securities based on intensive analysis of companies, industries,
economies, and markets. Portfolio turnover is a measure of how often a
fund's managers buy and sell securities for your fund. A portfolio
turnover of 100%, for example, means that the managers sold and replaced
securities valued at 100% of a fund's assets within a one-year period.
Funds with high turnover may be more likely to generate capital gains
and dividends that must be distributed to shareholders as taxable
income. High turnover may also cause a fund to pay more brokerage
commissions and other transaction costs, which may detract from
performance.
- ------------------------------------------------------------------------------
TURNOVER COMPARISONS
percentage of holdings that change every year
- ------------------------------------------------------------------------------
2005 2004 2003 2002 2001
- ------------------------------------------------------------------------------
Putnam Capital
Appreciation Fund 121% 111% 107% 134% 264%
- ------------------------------------------------------------------------------
Lipper Multi-Cap Core
Funds category
average 87% 87% 80% 87% 96%
- ------------------------------------------------------------------------------
Turnover data for the fund is calculated based on the fund's fiscal-year
period, which ends on May 31. Turnover data for the fund's Lipper
category is calculated based on the average of the turnover of each fund
in the category for its fiscal year ended during the indicated year.
Fiscal years vary across funds in the Lipper category, which may limit
the comparability of the fund's portfolio turnover rate to the Lipper
average. Comparative data for 2005 is based on information available as of
3/31/05.
Risk comparison
This risk comparison is designed to help you understand how your fund
compares with other funds. The comparison utilizes a risk measure
developed by Morningstar, an independent fund-rating agency. This risk
measure is referred to as the fund's Overall Morningstar Risk.
[GRAPHIC OMITTED: chart MORNINGSTAR [REGISTRATION MARK] RISK]
MORNINGSTAR [REGISTRATION MARK] RISK
Fund's Overall
Morningstar Risk 2.97
U.S. stock
fund average 3.10
0% INCREASING RISK 100%
Your fund's Overall Morningstar Risk is shown alongside that of the
average fund in its broad asset class, as determined by Morningstar. The
risk bar broadens the comparison by translating the fund's Overall
Morningstar Risk into a percentile, which is based on the fund's ranking
among all funds rated by Morningstar as of June 30, 2005. A higher
Overall Morningstar Risk generally indicates that a fund's monthly
returns have varied more widely.
Morningstar determines a fund's Overall Morningstar Risk by assessing
variations in the fund's monthly returns -- with an emphasis on downside
variations -- over 3-, 5-, and 10-year periods, if available. Those
measures are weighted and averaged to produce the fund's Overall
Morningstar Risk. The information shown is provided for the fund's class
A shares only; information for other classes may vary. Overall
Morningstar Risk is based on historical data and does not indicate
future results. Morningstar does not purport to measure the risk
associated with a current investment in a fund, either on an absolute
basis or on a relative basis. Low Overall Morningstar Risk does not mean
that you cannot lose money on an investment in a fund. Copyright 2004
Morningstar, Inc. All Rights Reserved. The information contained herein
(1) is proprietary to Morningstar and/or its content providers; (2) may
not be copied or distributed; and (3) is not warranted to be accurate,
complete, or timely. Neither Morningstar nor its content providers are
responsible for any damages or losses arising from any use of this
information.
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.
Net asset value (NAV) is the price, or value, of one share of a mutual
fund, without a sales charge. NAVs fluctuate with market conditions. NAV
is calculated by dividing the net assets of each class of shares by the
number of outstanding shares in the class.
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 5.25% maximum sales charge for class A
shares and 3.50% for class M shares (since reduced to 3.25%).
Contingent deferred sales charge (CDSC) is a charge applied at the time
of the redemption of class B or C 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. The CDSC for class C shares is 1% for one
year after purchase.
Class A shares are generally subject to an initial sales charge and no
sales charge on redemption (except on certain redemptions of shares
bought without an initial sales charge).
Class B shares may be subject to a sales charge upon redemption.
Class C shares are not subject to an initial sales charge and are
subject to a contingent deferred sales charge only if the shares are
redeemed during the first year.
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 (except on certain
redemptions of shares bought without an initial sales charge).
Class R shares are not subject to an initial sales charge or CDSC and
are available only to certain defined contribution plans.
Comparative indexes
JP Morgan Global High Yield Index is an unmanaged index of global
high-yield fixed-income securities.
Lehman Aggregate Bond Index is an unmanaged index of U.S.
investment-grade fixed-income securities.
Lehman Government Bond Index is an unmanaged index of U.S. Treasury and
agency securities.
Russell 1000 Growth Index is an unmanaged index of those companies in
the large-cap Russell 1000 Index chosen for their growth orientation.
Russell 1000 Value Index is an unmanaged index of those companies in the
large-cap Russell 1000 Index chosen for their value orientation.
Russell 2000 Index is an unmanaged index of the 2,000 smallest companies
in the Russell 3000 Index.
Russell 3000 Index is an unmanaged index of the 3,000 largest U.S.
companies.
Indexes assume reinvestment of all distributions and do not account for
fees. Securities and performance of a fund and an index will differ. You
cannot invest directly in an index.
Lipper is a third-party industry ranking entity that ranks funds
(without sales charges) with similar current investment styles or
objectives as determined by Lipper. Lipper category averages reflect
performance trends for funds within a category and are based on results
at net asset value.
Trustee approval of management contract
General conclusions
The Board of Trustees of the Putnam funds oversees the management of
each fund and, as required by law, determines annually whether to
approve the continuance of each fund's management contract with Putnam
Management. In this regard the Board of Trustees, with the assistance of
its Contract Committee consisting solely of Independent Trustees,
requests and evaluates all information it deems reasonably necessary in
the circumstances. Over the course of several months beginning in March
and ending in June of 2004, the Contract Committee reviewed the
information provided by Putnam Management and other information
developed with the assistance of the Board's independent counsel and
independent staff. The Contract Committee reviewed and discussed key
aspects of this information with all of the Independent Trustees. Upon
completion of this review, the Contract Committee recommended and the
Independent Trustees approved the continuance of your fund's contract,
effective July 1, 2004.
This approval was based on the following conclusions:
* That the fee schedule currently in effect for your fund represents
reasonable compensation in light of the nature and quality of the
services being provided to the fund, the fees paid by competitive funds
and the costs incurred by Putnam Management in providing such service,
and
* That such fee schedule represents an appropriate sharing between fund
shareholders and Putnam Management of such economies of scale as may
exist in the management of the fund at current asset levels.
These conclusions were based on a comprehensive consideration of all
information provided to the Trustees and were not the result of any
single factor. Some of the factors that figured particularly in the
Trustees' deliberations are described below.
Model fee schedules and categories; total expenses
The Trustees, working in cooperation with Putnam Management, have
developed and implemented a series of model fee schedules for the Putnam
funds designed to ensure that each fund's management fee is consistent
with the fees for similar funds in the Putnam complex and compares
favorably with fees paid by competitive funds sponsored by other advisors.
The Trustees reviewed the model fee schedule currently in effect for the
fund, including fee levels and breakpoints, and the assignment of the fund
to a particular fee category under this structure. The Trustees also
reviewed comparative fee and expense information for competitive funds.
The Trustees concluded that no changes should be made in the fund's
current fee schedule at this time. The Trustees noted that expense ratios
for a number of Putnam funds had been increasing recently as a result of
declining net assets and the natural operation of fee breakpoints. They
noted that such expense ratio increases were currently being controlled by
expense limitations implemented in January 2004. They also noted that the
competitive landscape regarding mutual fund fees may be changing as a
result of fee reductions accepted by various other fund groups in
connection with recent regulatory settlements and greater focus on fees
and expenses in the mutual fund industry generally. The Trustees indicated
an intention to monitor these developments closely.
Economies of scale
As noted above, the Trustees concluded that the fee schedule currently
in effect for your fund represents an appropriate sharing of economies
of scale at current asset levels. The Trustees indicated their intention
to continue their ongoing consideration of economies of scale and in
particular to consider further the possible operation of such economies
in the event that a significant recovery in the equity markets or net
fund sales were to raise asset levels substantially above current
levels. In this regard, the Trustees noted that they had reviewed data
relating to the substantial increase in asset levels of the Putnam funds
that occurred during the years leading up to the market peak in 2000,
the subsequent decline in assets and the resulting impact on revenues
and expenses of Putnam Management. The Trustees also noted that recent
declines in net assets in many Putnam funds, together with significant
changes in the cost structure of Putnam Management have altered the
economics of Putnam Management's business in significant ways. The
Trustees concluded that they would monitor these changes carefully and
evaluate the resulting impact on Putnam Management's economics and the
sharing of economies of scale between the parties.
Investment performance
The quality of the investment process provided by Putnam Management
represented a major factor in the Trustees' evaluation of the quality of
services provided by Putnam Management under the Management Contracts.
The Trustees recognized that a high quality investment process -- as
measured by the experience and skills of the individuals assigned to the
management of fund portfolios, the resources made available to such
personnel, and in general the ability of Putnam Management to attract
and retain high-quality personnel -- does not guarantee favorable
investment results for every fund in every time period. The Trustees
considered the investment performance of each fund over multiple time
periods and considered information comparing the fund's performance with
various benchmarks and with the performance of competitive funds. The
Trustees noted the satisfactory investment performance of many Putnam
funds.
They also noted the disappointing investment performance of certain
funds in recent years and continued to discuss with senior management of
Putnam Management the factors contributing to such under-performance and
actions being taken to improve performance. The Trustees recognized
that, in recent years, Putnam Management has made significant changes in
its investment personnel and processes and in the fund product line in
an effort to address areas of underperformance. The Trustees indicated
their intention to continue to monitor performance trends to assess the
effectiveness of these changes and to evaluate whether additional
remedial changes are warranted. As a general matter, the Trustees
concluded that consultation between the Trustees and Putnam Management
represents the most effective way to address investment performance
problems. The Trustees believe that investors in the Putnam funds and
their financial advisors have, as a general matter, effectively placed
their trust in the Putnam organization, under the supervision of the
funds' Trustees, to make appropriate decisions regarding the management
of the funds. The Trustees believe that the termination of the
Management Contract and engagement of a new investment adviser for
under-performing funds, with all the attendant disruptions, would not
serve the interests of fund shareholders at this time and would not
necessarily provide any greater assurance of improved investment
performance.
Brokerage and soft-dollar allocations; other benefits
The Trustees considered various potential benefits that Putnam
Management may receive in connection with the services it provides under
the Management Contract with your fund. These include principally
benefits related to brokerage and soft-dollar allocations, which pertain
mainly to funds investing in equity securities. The Trustees believe
that soft-dollar credits and other potential benefits associated with
the allocation of fund brokerage represent assets of the funds that
should be used for the benefit of fund shareholders. The Trustees noted
recent trends in the allocation of fund brokerage, including commission
costs, the allocation of brokerage to firms that provide research
services to Putnam Management, and the sources and application of
available soft-dollar credits. Effective December 31, 2003, reflecting a
decision made by the Trustees earlier that year, Putnam Management
ceased allocating brokerage in connection with the sale of fund shares.
In addition, in preparing its budget for commission allocations in 2004,
Putnam Management voluntarily reduced substantially the allocation of
brokerage commissions to acquire research services from third-party
service providers. In light of evolving best practices in the mutual
fund industry, the Trustees concluded that this practice should be
further curtailed and possibly eliminated in the near future. The
Trustees indicated that they would continue to monitor the allocation of
the funds' brokerage to ensure that the principle of "best price and
execution" remains paramount in the portfolio trading process.
Comparison of retail and institutional fee schedules
The information examined by the Trustees as part of the annual contract
reviews included information regarding fees charged by Putnam Management
and its affiliates to institutional clients such as defined benefit
pension plans and college endowments. This information included
comparison of such fees with fees charged to the Putnam funds, as well
as a detailed assessment of the differences in the services provided to
these two types of clients. The Trustees devoted special attention to
these issues and reviewed recent articles by critics of mutual fund
fees, articles by the ICI defending such fee differences, and relevant
guidance provided by decisions of the courts. The Trustees observed, in
this regard, that the differences in fee rates between institutional
clients and mutual funds are by no means uniform when examined by
individual asset sectors, suggesting that differences in the pricing of
investment management services to these types of clients reflects to a
substantial degree historical competitive forces operating in separate
market places. In reaching their conclusions, the Trustees considered
the fact that fee rates across all asset sectors are higher on average
for mutual funds than for institutional clients, and also considered the
differences between the services that Putnam provides to the Putnam
funds and those that it provides to institutional clients of the firm.
Settlement of regulatory charges related to market timing
Finally, in reaching their conclusions, the Trustees considered all
matters pertinent to the administrative charges filed against Putnam
Management by the SEC and the Commonwealth of Massachusetts in October
2003 relating to market timing, the firm's settlement of those charges,
and the conclusions and recommendations of the Trustees' Audit and
Pricing Committee based on its review of these matters. The Trustees
considered the actions taken by the owner of Putnam Management and its
new senior management to terminate or discipline the individuals
involved, to implement new compliance systems, to indemnify the funds
against all costs and liabilities related to these matters, and
otherwise to ensure that the interests of the funds and their
shareholders are fully protected. The Trustees noted that, in addition
to the settlements of the regulatory charges which will provide
comprehensive restitution for any losses suffered by shareholders, the
new senior management of Putnam Management has moved aggressively to
control expense ratios of funds affected by market timing, to reduce
charges to new investors, to improve disclosure of fees and expenses,
and to emphasize the paramount role of investment performance in
achieving shareholders' investment goals.
Other information for shareholders
Putnam's policy on confidentiality
In order to conduct business with our shareholders, we must obtain
certain personal information such as account holders' addresses,
telephone numbers, Social Security numbers, and the names of their
financial advisors. We use this information to assign an account number
and to help us maintain accurate records of transactions and account
balances. It is our policy to protect the confidentiality of your
information, whether or not you currently own shares of our funds, and
in particular, not to sell information about you or your accounts to
outside marketing firms. We have safeguards in place designed to prevent
unauthorized access to our computer systems and procedures to protect
personal information from unauthorized use. Under certain circumstances,
we share this information with outside vendors who provide services to
us, such as mailing and proxy solicitation. In those cases, the service
providers enter into confidentiality agreements with us, and we provide
only the information necessary to process transactions and perform other
services related to your account. We may also share this information
with our Putnam affiliates to service your account or provide you with
information about other Putnam products or services. It is also our
policy to share account information with your financial advisor, if
you've listed one on your Putnam account. If you would like
clarification about our confidentiality policies or have any questions
or concerns, please don't hesitate to contact us at 1-800-225-1581,
Monday through Friday, 8:30 a.m. to 7:00 p.m., or Saturdays from 9:00
a.m. to 5:00 p.m. Eastern Time.
Proxy voting
Putnam is committed to managing our mutual funds in the best interests
of our shareholders. The Putnam funds' proxy voting guidelines and
procedures, as well as information regarding how your fund voted proxies
relating to portfolio securities during the 12-month period ended June
30, 2004, are available on the Putnam Individual Investor Web site,
www.putnaminvestments.com/individual, and on the SEC's Web site,
www.sec.gov. If you have questions about finding forms on the SEC's Web
site, you may call the SEC at 1-800-SEC-0330. You may also obtain the
Putnam funds' proxy voting guidelines and procedures at no charge by
calling Putnam's Shareholder Services at 1-800-225-1581.
Fund portfolio holdings
The fund will file a complete schedule of its portfolio holdings with
the SEC for the first and third quarters of each fiscal year on Form
N-Q. Shareholders may obtain the fund's Forms N-Q on the SEC's Web site
at www.sec.gov. In addition, the fund's Forms N-Q may be reviewed and
copied at the SEC's public reference room in Washington, D.C. You may
call the SEC at 1-800-SEC-0330 for information about the SEC's Web site
or the operation of the public reference room.
A guide to the financial statements
These sections of the report, as well as the accompanying Notes,
preceded by the Report of Independent Registered Public Accounting Firm,
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.
This is done by first adding up all the fund's earnings -- from
dividends and interest income -- and subtracting its operating expenses
to determine net investment income (or loss). Then, any net gain or
loss the fund realized on the sales of its holdings -- as well as any
unrealized gains or losses over the period -- is added to or subtracted
from the net investment result to determine the fund's net gain or loss
for the fiscal year.
Statement of changes in net assets shows how the fund's net assets were
affected by the fund's net investment gain or loss, 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 Registered Public Accounting Firm
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, 2005, and the results
of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, in conformity with
accounting principles generally accepted in the United States of
America. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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, 2005, by correspondence
with the custodian and brokers, provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
July 6, 2005
The fund's portfolio
May 31, 2005
Common stocks (97.6%) (a)
Number of shares Value
Airlines (0.1%)
- -------------------------------------------------------------------------------
66,425 ExpressJet Holdings, Inc. (NON) $573,248
Automotive (0.9%)
- -------------------------------------------------------------------------------
53,275 American Axle & Manufacturing
Holdings, Inc. (S) 1,102,793
47,069 BorgWarner, Inc. 2,516,309
189,300 Tenneco Automotive, Inc. (NON) 2,839,500
--------------
6,458,602
Banking (4.9%)
- -------------------------------------------------------------------------------
957,000 Commerce Bancorp, Inc. (S) 26,556,750
63,294 Compass Bancshares, Inc. (S) 2,821,014
42,584 Doral Financial Corp. (Puerto Rico)
(S) 493,549
62,413 FirstFed Financial Corp. (NON) (S) 3,381,536
47,954 Flagstar Bancorp, Inc. (S) 947,571
59,838 R&G Financial Corp. Class B (Puerto
Rico) (S) 862,864
--------------
35,063,284
Biotechnology (2.2%)
- -------------------------------------------------------------------------------
237,800 Amgen, Inc. (NON) 14,881,524
13,300 Connetics Corp. (NON) 296,191
22,100 Telik, Inc. (NON) (S) 315,146
--------------
15,492,861
Chemicals (0.5%)
- -------------------------------------------------------------------------------
120,054 Georgia Gulf Corp. (S) 3,815,316
Commercial and Consumer Services (4.9%)
- -------------------------------------------------------------------------------
131,321 Administaff, Inc. (S) 2,805,017
59,594 Catalina Marketing Corp. (S) 1,430,256
469,100 eBay, Inc. (NON) (S) 17,830,491
177,400 Sabre Holdings Corp. (S) 3,560,418
252,200 Yahoo!, Inc. (NON) 9,381,840
--------------
35,008,022
Communications Equipment (3.0%)
- -------------------------------------------------------------------------------
130,638 Aspect Communications Corp. (NON) 1,254,125
953,800 Cisco Systems, Inc. (NON) 18,484,644
76,400 Inter-Tel, Inc. (S) 1,568,492
--------------
21,307,261
Computers (0.8%)
- -------------------------------------------------------------------------------
588,605 Brocade Communications Systems, Inc.
(NON) 2,301,446
119,300 Checkpoint Systems, Inc. (NON) 2,102,066
67,393 Netgear, Inc. (NON) (S) 1,325,620
--------------
5,729,132
Conglomerates (2.4%)
- -------------------------------------------------------------------------------
609,200 Tyco International, Ltd. 17,624,156
Consumer Finance (8.0%)
- -------------------------------------------------------------------------------
40,300 Accredited Home Lenders Holding Co.
(NON) 1,691,391
310,933 Capital One Financial Corp. 23,444,348
47,900 CompuCredit Corp. (NON) (S) 1,510,287
629,700 Countrywide Financial Corp. 23,405,949
411,293 Providian Financial Corp. (NON) 7,329,241
--------------
57,381,216
Consumer Goods (0.7%)
- -------------------------------------------------------------------------------
23,897 Blyth Industries, Inc. 677,241
134,475 Yankee Candle Co., Inc. (The) 4,242,686
--------------
4,919,927
Consumer Services (0.1%)
- -------------------------------------------------------------------------------
42,803 Labor Ready, Inc. (NON) (S) 883,454
Electric Utilities (0.9%)
- -------------------------------------------------------------------------------
33,198 Alliant Energy Corp. 916,265
22,997 Black Hills Corp. (S) 842,150
192,296 CMS Energy Corp. (NON) (S) 2,544,076
100,707 Puget Energy, Inc. (S) 2,291,084
--------------
6,593,575
Electronics (3.0%)
- -------------------------------------------------------------------------------
736,600 Freescale Semiconductor, Inc. Class
A (NON) (S) 14,879,320
169,294 Integrated Device Technology, Inc.
(NON) 2,070,466
137,953 Storage Technology Corp. (NON) 4,453,123
--------------
21,402,909
Engineering & Construction (0.5%)
- -------------------------------------------------------------------------------
41,100 Eagle Materials, Inc. (S) 3,603,237
Financial (4.0%)
- -------------------------------------------------------------------------------
390,900 Fannie Mae 23,156,916
23,600 New Century Financial Corp. (R) (S) 1,202,420
61,562 Radian Group, Inc. (S) 2,824,465
6,209 Student Loan Corp. 1,332,638
--------------
28,516,439
Forest Products and Packaging (0.5%)
- -------------------------------------------------------------------------------
52,552 Albany International Corp. 1,643,301
11,197 Grief, Inc. Class A (S) 813,798
54,172 Louisiana-Pacific Corp. 1,364,051
--------------
3,821,150
Health Care Services (3.3%)
- -------------------------------------------------------------------------------
227,600 Cardinal Health, Inc. 13,184,868
52,900 Cerner Corp. (NON) (S) 3,457,015
27,305 Genesis HealthCare Corp. (NON) (S) 1,187,494
150,862 Manor Care, Inc. (S) 5,862,497
--------------
23,691,874
Homebuilding (0.6%)
- -------------------------------------------------------------------------------
5,675 NVR, Inc. (NON) 4,307,325
Household Furniture and Appliances (0.2%)
- -------------------------------------------------------------------------------
23,417 Whirlpool Corp. (S) 1,611,090
Insurance (7.5%)
- -------------------------------------------------------------------------------
29,005 American Equity Investment Life
Holding Co. (S) 295,561
601,300 American International Group, Inc. 33,402,215
60,004 AmerUs Group Co. (S) 2,855,590
18,024 Delphi Financial Group Class A (S) 764,218
116,000 Everest Re Group, Ltd. (Barbados) 10,380,840
38,382 IPC Holdings, Ltd. (Bermuda) 1,467,344
11,570 Stancorp Financial Group 866,015
89,851 W.R. Berkley Corp. 3,186,116
10,198 Zenith National Insurance Corp. 646,043
--------------
53,863,942
Investment Banking/Brokerage (1.1%)
- -------------------------------------------------------------------------------
67,516 Affiliated Managers Group (NON) 4,503,317
76,700 American Capital Strategies, Ltd.
(S) 2,686,034
22,595 IndyMac Bancorp, Inc. (S) 929,784
--------------
8,119,135
Leisure (3.4%)
- -------------------------------------------------------------------------------
428,800 Harley-Davidson, Inc. (S) 21,024,064
112,597 Winnebago Industries, Inc. (S) 3,680,796
--------------
24,704,860
Lodging/Tourism (3.0%)
- -------------------------------------------------------------------------------
465,500 Royal Caribbean Cruises, Ltd. 21,464,205
Machinery (0.9%)
- -------------------------------------------------------------------------------
172,758 Terex Corp. (NON) 6,827,396
Manufacturing (0.3%)
- -------------------------------------------------------------------------------
82,506 Flowserve Corp. (NON) (S) 2,431,452
Medical Technology (1.2%)
- -------------------------------------------------------------------------------
85,819 American Medical Systems Holdings,
Inc. (NON) 1,712,947
83,804 Charles River Laboratories
International, Inc. (NON) (S) 4,030,134
28,478 Epix Pharmaceuticals, Inc. (NON) 225,831
37,156 Respironics, Inc. (NON) 2,483,507
--------------
8,452,419
Metal Fabricators (--%)
- -------------------------------------------------------------------------------
6,900 Mueller Industries, Inc. 186,300
Metals (0.5%)
- -------------------------------------------------------------------------------
348,802 AK Steel Holding Corp. (NON) 2,668,335
41,404 NS Group, Inc. (NON) 1,193,263
--------------
3,861,598
Natural Gas Utilities (0.3%)
- -------------------------------------------------------------------------------
16,754 Energen Corp. (S) 1,092,026
38,100 WGL Holdings, Inc. (S) 1,239,774
--------------
2,331,800
Oil & Gas (7.1%)
- -------------------------------------------------------------------------------
257,500 Amerada Hess Corp. (S) 23,908,875
129,368 Cabot Oil & Gas Corp. Class A 4,055,687
116,672 Denbury Resources, Inc. (NON) 3,731,171
67,593 Giant Industries, Inc. (NON) 1,947,354
200,313 Meridian Resource Corp. (NON) 907,418
27,715 Noble Energy, Inc. 2,061,165
130,500 Occidental Petroleum Corp. 9,540,855
51,802 Swift Energy Co. (NON) (S) 1,769,038
104,600 Vintage Petroleum, Inc. 2,889,052
--------------
50,810,615
Pharmaceuticals (4.3%)
- -------------------------------------------------------------------------------
212,012 Johnson & Johnson (S) 14,226,005
601,784 Pfizer, Inc. (SEG) 16,789,774
--------------
31,015,779
Publishing (0.3%)
- -------------------------------------------------------------------------------
87,609 Marvel Enterprises, Inc. (NON) (S) 1,863,443
Real Estate (2.1%)
- -------------------------------------------------------------------------------
84,109 Capital Automotive (R) 3,009,420
20,600 CBL & Associates Properties (R) (S) 1,678,282
33,800 Mills Corp. (R) (S) 1,942,824
66,542 National Health Investors, Inc. (R) 1,774,675
10,904 Novastar Financial, Inc. (R) (S) 401,267
29,803 RAIT Investment Trust (R) (S) 852,366
64,034 Redwood Trust, Inc. (R) 3,312,479
115,418 Senior Housing Properties Trust (R) 2,076,370
--------------
15,047,683
Restaurants (2.1%)
- -------------------------------------------------------------------------------
483,000 McDonald's Corp. 14,944,020
Retail (8.2%)
- -------------------------------------------------------------------------------
311,300 Best Buy Co., Inc. 16,944,059
54,705 Borders Group, Inc. 1,383,489
73,644 Michaels Stores, Inc. 3,101,149
91,438 Movie Gallery, Inc. (S) 2,922,358
15,196 Nash Finch Co. (S) 540,674
978,200 Office Depot, Inc. (NON) 19,290,104
79,706 Payless ShoeSource, Inc. (NON) 1,341,452
155,551 Rent-A-Center, Inc. (NON) (S) 3,680,337
27,100 ShopKo Stores, Inc. (NON) 642,541
189,880 Supervalu, Inc. 6,220,469
70,208 Timberland Co. (The) Class A (NON) 2,587,867
--------------
58,654,499
Schools (2.9%)
- -------------------------------------------------------------------------------
253,000 Apollo Group, Inc. Class A (NON) (S) 19,860,500
29,900 Education Management Corp. (NON) (S) 970,255
--------------
20,830,755
Software (4.4%)
- -------------------------------------------------------------------------------
411,061 BMC Software, Inc. (NON) 6,996,258
228,139 Citrix Systems, Inc. (NON) 5,739,977
53,496 Hyperion Solutions Corp. (NON) 2,360,778
78,782 McAfee, Inc. (NON) 2,259,468
1,096,000 Oracle Corp. (NON) 14,050,720
--------------
31,407,201
Technology Services (0.9%)
- -------------------------------------------------------------------------------
106,792 Acxiom Corp. (S) 1,970,312
30,050 Transaction Systems Architects, Inc.
(NON) 684,539
316,500 United Online, Inc. (S) 4,095,510
--------------
6,750,361
Telecommunications (1.4%)
- -------------------------------------------------------------------------------
11,032 Commonwealth Telephone Enterprises,
Inc. 576,422
590,396 Earthlink, Inc. (NON) 6,264,102
281,764 Premiere Global Services, Inc. (NON) 3,169,845
--------------
10,010,369
Textiles (0.6%)
- -------------------------------------------------------------------------------
77,598 Tommy Hilfiger Corp. (Hong Kong)
(NON) (S) 864,439
148,424 Wolverine World Wide, Inc. 3,410,784
--------------
4,275,223
Tire & Rubber (0.3%)
- -------------------------------------------------------------------------------
100,388 Cooper Tire & Rubber (S) 1,911,388
Tobacco (2.2%)
- -------------------------------------------------------------------------------
234,700 Altria Group, Inc. 15,757,758
Toys (0.3%)
- -------------------------------------------------------------------------------
102,084 Hasbro, Inc. (S) 2,060,055
Trucks & Parts (0.8%)
- -------------------------------------------------------------------------------
117,549 Autoliv, Inc. (Sweden) 5,455,449
--------------
Total Common stocks
(cost $672,887,370) $700,841,783
Short-term investments (15.2%) (a)
Principal amount Value
- -------------------------------------------------------------------------------
$100,527,726 Short-term investments held as
collateral for loaned
securities with yields ranging from
3.01% to 3.21% and due dates ranging
from June 1, 2005 to June 27, 2005
(d) $100,423,143
8,768,664 Putnam Prime Money Market Fund (e) 8,768,664
--------------
Total Short-term investments
(cost $109,191,807) $109,191,807
- -------------------------------------------------------------------------------
Total Investments
(cost $782,079,177) $810,033,590
- -------------------------------------------------------------------------------
(a) Percentages indicated are based on net assets of $717,729,435.
(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,
2005.
(R) Real Estate Investment Trust.
(S) Securities on loan, in part or in entirety, at May 31, 2005.
(d) See Note 1 to the financial statements.
(e) See Note 5 to the financial statements regarding investments in
Putnam Prime Money Market Fund.
At May 31, 2005, liquid assets totaling $14,765,130 have been designated
as collateral for open futures contracts.
Futures contracts outstanding at May 31, 2005
Unrealized
Number of Expiration appreciation/
contracts Value date (depreciation)
- ---------------------------------------------------------------------------------------------
S&P 500 Index (Long) 40 $11,923,000 Jun-05 $(22,186)
Russell 2000
Mini Index (Long) 46 2,839,580 Jun-05 84,358
- ---------------------------------------------------------------------------------------------
$62,172
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of assets and liabilities
May 31, 2005
Assets
- -------------------------------------------------------------------------------
Investments in securities, at value, including $97,519,380 of securities
on loan (Note 1)
- -------------------------------------------------------------------------------
Unaffiliated issuers (identified cost $773,310,513) $801,264,926
- -------------------------------------------------------------------------------
Affiliated issuers (identified cost $8,768,664) (Note 5) 8,768,664
- -------------------------------------------------------------------------------
Dividends, interest and other receivables 1,427,879
- -------------------------------------------------------------------------------
Receivable for shares of the fund sold 254,084
- -------------------------------------------------------------------------------
Receivable for securities sold 26,740,168
- -------------------------------------------------------------------------------
Receivable for variation margin (Note 1) 36,880
- -------------------------------------------------------------------------------
Total assets 838,492,601
Liabilities
- -------------------------------------------------------------------------------
Payable for securities purchased 16,481,718
- -------------------------------------------------------------------------------
Payable for shares of the fund repurchased 1,565,641
- -------------------------------------------------------------------------------
Payable for compensation of Manager (Notes 2 and 5) 1,121,477
- -------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 329,834
- -------------------------------------------------------------------------------
Payable for Trustee compensation and expenses (Note 2) 172,343
- -------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,998
- -------------------------------------------------------------------------------
Payable for distribution fees (Note 2) 413,353
- -------------------------------------------------------------------------------
Collateral on securities loaned, at value (Note 1) 100,423,143
- -------------------------------------------------------------------------------
Other accrued expenses 252,659
- -------------------------------------------------------------------------------
Total liabilities 120,763,166
- -------------------------------------------------------------------------------
Net assets $717,729,435
Represented by
- -------------------------------------------------------------------------------
Paid-in capital (unlimited shares authorized) (Notes 1 and 4) $805,102,539
- -------------------------------------------------------------------------------
Undistributed net investment income (Note 1) 1,508,067
- -------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (116,897,756)
- -------------------------------------------------------------------------------
Net unrealized appreciation of investments 28,016,585
- -------------------------------------------------------------------------------
Total -- Representing net assets applicable to capital
shares outstanding $717,729,435
Computation of net asset value and offering price
- -------------------------------------------------------------------------------
Net asset value and redemption price per class A share
($429,901,946 divided by 23,299,858 shares) $18.45
- -------------------------------------------------------------------------------
Offering price per class A share (100/94.75 of $18.45)* $19.47
- -------------------------------------------------------------------------------
Net asset value and offering price per class B share
($267,368,644 divided by 15,325,468 shares) $17.45
- -------------------------------------------------------------------------------
Net asset value and offering price per class C share
($3,460,065 divided by 194,251 shares)** $17.81
- -------------------------------------------------------------------------------
Net asset value and redemption price per class M share
($16,983,680 divided by 957,255 shares) $17.74
- -------------------------------------------------------------------------------
Offering price per class M share (100/96.75 of $17.74)* $18.34
- -------------------------------------------------------------------------------
Net asset value, offering price and redemption price per
class R share ($15,100 divided by 822 shares) $18.38
- -------------------------------------------------------------------------------
* 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.
Statement of operations
Year ended May 31, 2005
Investment income:
- -------------------------------------------------------------------------------
Dividends (net of foreign tax of $3,518) $11,969,818
- -------------------------------------------------------------------------------
Interest (including interest income of $139,789 from
investments in affiliated issuers) (Note 5) 143,655
- -------------------------------------------------------------------------------
Securities lending 306,769
- -------------------------------------------------------------------------------
Other income (Note 6) 997,890
- -------------------------------------------------------------------------------
Total investment income 13,418,132
Expenses:
- -------------------------------------------------------------------------------
Compensation of Manager (Note 2) 4,604,728
- -------------------------------------------------------------------------------
Investor servicing fees (Note 2) 2,311,590
- -------------------------------------------------------------------------------
Custodian fees (Note 2) 223,978
- -------------------------------------------------------------------------------
Trustee compensation and expenses (Note 2) 30,725
- -------------------------------------------------------------------------------
Administrative services (Note 2) 30,312
- -------------------------------------------------------------------------------
Distribution fees -- Class A (Note 2) 1,020,296
- -------------------------------------------------------------------------------
Distribution fees -- Class B (Note 2) 3,155,852
- -------------------------------------------------------------------------------
Distribution fees -- Class C (Note 2) 34,635
- -------------------------------------------------------------------------------
Distribution fees -- Class M (Note 2) 133,713
- -------------------------------------------------------------------------------
Distribution fees -- Class R (Note 2) 52
- -------------------------------------------------------------------------------
Other 514,890
- -------------------------------------------------------------------------------
Non-recurring costs (Notes 2 and 6) 34,050
- -------------------------------------------------------------------------------
Costs assumed by Manager (Notes 2 and 6) (34,050)
- -------------------------------------------------------------------------------
Fees waived and reimbursed by Manager (Note 5) (11,178)
- -------------------------------------------------------------------------------
Total expenses 12,049,593
- -------------------------------------------------------------------------------
Expense reduction (Note 2) (653,364)
- -------------------------------------------------------------------------------
Net expenses 11,396,229
- -------------------------------------------------------------------------------
Net investment income 2,021,903
- -------------------------------------------------------------------------------
Net realized gain on investments (Notes 1 and 3) 104,947,203
- -------------------------------------------------------------------------------
Net realized gain on swap contracts (Note 1) 67,455
- -------------------------------------------------------------------------------
Net realized gain on futures contracts (Note 1) 209,171
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments and futures
contracts during the year (28,617,402)
- -------------------------------------------------------------------------------
Net gain on investments 76,606,427
- -------------------------------------------------------------------------------
Net increase in net assets resulting from operations $78,628,330
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Statement of changes in net assets
Year ended May 31
Decrease in net assets 2005 2004
- -------------------------------------------------------------------------------
Operations:
- -------------------------------------------------------------------------------
Net investment income (loss) $2,021,903 $(3,614,897)
- -------------------------------------------------------------------------------
Net realized gain on investments 105,223,829 156,330,205
- -------------------------------------------------------------------------------
Net unrealized depreciation of investments (28,617,402) (20,149,222)
- -------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 78,628,330 132,566,086
- -------------------------------------------------------------------------------
Distributions to shareholders: (Note 1)
- -------------------------------------------------------------------------------
From net investment income
Class A (415,329) --
- -------------------------------------------------------------------------------
Class R (17) --
- -------------------------------------------------------------------------------
Redemption fees (Note 1) 3,247 --
- -------------------------------------------------------------------------------
Decrease from capital share transactions
(Note 4) (147,783,445) (259,289,670)
- -------------------------------------------------------------------------------
Total decrease in net assets (69,567,214) (126,723,584)
Net assets
- -------------------------------------------------------------------------------
Beginning of year 787,296,649 914,020,233
- -------------------------------------------------------------------------------
End of year (including undistributed net
investment income of $1,508,067 and $--,
respectively) $717,729,435 $787,296,649
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS A
- ----------------------------------------------------------------------------------------------------------------------------
Per-share Year ended May 31
operating performance 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $16.55 $14.24 $15.89 $18.32 $23.75
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .10 (d)(e) (.01) (d) -- (f) -- (f) -- (f)
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.82 2.32 (1.65) (2.43) (.75)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.92 2.31 (1.65) (2.43) (.75)
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
From net
investment income (.02) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (4.61)
- ----------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- (.07)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (.02) -- -- -- (4.68)
- ----------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (f) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.45 $16.55 $14.24 $15.89 $18.32
- ----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 11.59 (e) 16.22 (10.38) (13.26) (5.06)
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $429,902 $416,249 $495,165 $697,394 $911,299
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.28 (d) 1.23 (d) 1.22 1.08 1.00
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) .60 (d)(e) (.07) (d) .01 .02 -- (g)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 121.26 111.20 107.08 133.78 263.98
- ----------------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage service
arrangements (Note 2).
(d) Reflects waivers of certain fund expenses in connection with
investments in Putnam Prime Money Market Fund during the period. As a
result of such waivers, the expenses of the fund for the periods ended
May 31, 2005 and May 31, 2004 reflect a reduction of less than 0.01% of
average net assets for class A shares (Note 5).
(e) Reflects a non-recurring accrual related to Putnam Management's
settlement with the SEC regarding brokerage allocation practices, which
amounted to $0.03 per share and 0.14% of average net assets for class A
shares (Note 6).
(f) Amount represents less than $0.01 per share.
(g) Ratio of net investment income to average net assets is less than
0.01%.
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------
Per-share Year ended May 31
operating performance 2005 2004 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $15.76 $13.66 $15.35 $17.84 $23.39
- ----------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ----------------------------------------------------------------------------------------------------------------------------
Net investment loss (a) (.02) (d)(e) (.12) (d) (.09) (.12) (.15)
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.71 2.22 (1.60) (2.37) (.72)
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.69 2.10 (1.69) (2.49) (.87)
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (4.61)
- ----------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- (.07)
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions -- -- -- -- (4.68)
- ----------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (f) -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $17.45 $15.76 $13.66 $15.35 $17.84
- ----------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 10.72 (e) 15.37 (11.01) (13.96) (5.70)
- ----------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $267,369 $348,212 $391,161 $554,719 $796,227
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 2.03 (d) 1.98 (d) 1.97 1.83 1.70
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.14) (d)(e) (.82) (d) (.74) (.73) (.70)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 121.26 111.20 107.08 133.78 263.98
- ----------------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage service
arrangements (Note 2).
(d) Reflects waivers of certain fund expenses in connection with
investments in Putnam Prime Money Market Fund during the period. As a
result of such waivers, the expenses of the fund for the periods ended
May 31, 2005 and May 31, 2004 reflect a reduction of less than 0.01% of
average net assets for class B shares (Note 5).
(e) Reflects a non-recurring accrual related to Putnam Management's
settlement with the SEC regarding brokerage allocation practices, which
amounted to $0.02 per share and 0.12% of average net assets for class B
shares (Note 6).
(f) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
For the period
July 14, 2000+
Per-share Year ended May 31 to May 31
operating performance 2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $16.09 $13.94 $15.67 $18.21 $27.15
- ---------------------------------------------------------------------------------------------------------------------------
Investment operations:
- ---------------------------------------------------------------------------------------------------------------------------
Net investment loss (a) (.03) (d)(e) (.12) (d) (.10) (.12) (.11)
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
loss on investments 1.75 2.27 (1.63) (2.42) (4.15)
- ---------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.72 2.15 (1.73) (2.54) (4.26)
- ---------------------------------------------------------------------------------------------------------------------------
Less distributions:
- ---------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (4.61)
- ---------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- (.07)
- ---------------------------------------------------------------------------------------------------------------------------
Total distributions -- -- -- -- (4.68)
- ---------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (f) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $17.81 $16.09 $13.94 $15.67 $18.21
- ---------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 10.69 (e) 15.42 (11.04) (13.95) (17.40)*
- ---------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $3,460 $3,547 $2,993 $3,405 $2,175
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 2.03 (d) 1.98 (d) 1.97 1.83 1.54*
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net investment loss
to average net assets (%) (.15) (d)(e) (.83) (d) (.74) (.71) (.44)*
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 121.26 111.20 107.08 133.78 263.98
- ---------------------------------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage service
arrangements (Note 2).
(d) Reflects waivers of certain fund expenses in connection with
investments in Putnam Prime Money Market Fund during the period. As a
result of such waivers, the expenses of the fund for the periods ended
May 31, 2005 and May 31, 2004 reflect a reduction of less than 0.01% of
average net assets for class C shares (Note 5).
(e) Reflects a non-recurring accrual related to Putnam Management's
settlement with the SEC regarding brokerage allocation practices, which
amounted to $0.02 per share and 0.14% of average net assets for class C
shares (Note 6).
(f) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS M
- -------------------------------------------------------------------------------------------------------------------------
Per-share Year ended May 31
operating performance 2005 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $15.98 $13.82 $15.49 $17.96 $23.47
- -------------------------------------------------------------------------------------------------------------------------
Investment operations:
- -------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .02 (d)(e) (.09) (d) (.06) (.08) (.11)
- -------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 1.74 2.25 (1.61) (2.39) (.72)
- -------------------------------------------------------------------------------------------------------------------------
Total from
investment operations 1.76 2.16 (1.67) (2.47) (.83)
- -------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------
From net realized gain
on investments -- -- -- -- (4.61)
- -------------------------------------------------------------------------------------------------------------------------
Return of capital -- -- -- -- (.07)
- -------------------------------------------------------------------------------------------------------------------------
Total distributions -- -- -- -- (4.68)
- -------------------------------------------------------------------------------------------------------------------------
Redemption fees -- (f) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net asset value,
end of period $17.74 $15.98 $13.82 $15.49 $17.96
- -------------------------------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 11.01 (e) 15.63 (10.78) (13.75) (5.49)
- -------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $16,984 $19,280 $24,702 $38,646 $55,231
- -------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.78 (d) 1.73 (d) 1.72 1.58 1.50
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) .11 (d)(e) (.57) (d) (.49) (.48) (.50)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 121.26 111.20 107.08 133.78 263.98
- -------------------------------------------------------------------------------------------------------------------------
(a) Per share net investment income has been determined on the basis of
the weighted average number of shares outstanding during the period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset and brokerage service
arrangements (Note 2).
(d) Reflects waivers of certain fund expenses in connection with
investments in Putnam Prime Money Market Fund during the period. As a
result of such waivers, the expenses of the fund for the periods ended
May 31, 2005 and May 31, 2004 reflect a reduction of less than 0.01% of
average net assets for class M shares (Note 5).
(e) Reflects a non-recurring accrual related to Putnam Management's
settlement with the SEC regarding brokerage allocation practices, which
amounted to $0.02 per share and 0.13% of average net assets for class M
shares (Note 6).
(f) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial
statements.
Financial highlights
(For a common share outstanding throughout the period)
CLASS R
- ------------------------------------------------------------------------------------------------
For the period
December 1,
Year ended 2003+ to
Per-share May 31 May 31
operating performance 2005 2004
- ------------------------------------------------------------------------------------------------
Net asset value,
beginning of period $16.54 $15.82
- ------------------------------------------------------------------------------------------------
Investment operations:
- ------------------------------------------------------------------------------------------------
Net investment income (loss) (a) .07 (d)(e) (.02) (d)
- ------------------------------------------------------------------------------------------------
Net realized and unrealized
gain on investments 1.80 .74
- ------------------------------------------------------------------------------------------------
Total from
investment operations 1.87 .72
- ------------------------------------------------------------------------------------------------
Less distributions:
- ------------------------------------------------------------------------------------------------
From net
investment income (.03) --
- ------------------------------------------------------------------------------------------------
Total distributions (.03) --
- ------------------------------------------------------------------------------------------------
Redemption fees -- (f) --
- ------------------------------------------------------------------------------------------------
Net asset value,
end of period $18.38 $16.54
- ------------------------------------------------------------------------------------------------
Total return at
net asset value (%)(b) 11.29 (e) 4.55*
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $15 $8
- ------------------------------------------------------------------------------------------------
Ratio of expenses to
average net assets (%)(c) 1.53 (d) .74* (d)
- ------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets (%) .39 (d)(e) (.19)* (d)
- ------------------------------------------------------------------------------------------------
Portfolio turnover (%) 121.26 111.20
- ------------------------------------------------------------------------------------------------
+ Commencement of operations.
* Not annualized.
(a) Per share net investment income (loss) has been determined on the
basis of the weighted average number of shares outstanding during the
period.
(b) Total return assumes dividend reinvestment and does not reflect the
effect of sales charges.
(c) Includes amounts paid through expense offset arrangements (Note 2).
(d) Reflects waivers of certain fund expenses in connection with
investments in Putnam Prime Money Market Fund during the period. As a
result of such waivers, the expenses of the fund for the periods ended
May 31, 2005 and May 31, 2004 reflect a reduction of less than 0.01% of
average net assets for class R shares (Note 5).
(e) Reflects a non-recurring accrual related to Putnam Management's
settlement with the SEC regarding brokerage allocation practices, which
amounted to $0.03 per share and 0.18% of average net assets for class R
shares (Note 6).
(f) Amount represents less than $0.01 per share.
The accompanying notes are an integral part of these financial
statements.
Notes to financial statements
May 31, 2005
Note 1
Significant accounting policies
Putnam Capital Appreciation Fund (the "fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The fund seeks capital appreciation by
investing primarily in common stocks that offer potential for capital
appreciation. Current income is only an incidental consideration in
selecting investments for the fund.
The fund offers class A, class B, class C, class M and class R shares.
Class A and class M shares are sold with a maximum front-end sales
charge of 5.25% and 3.25%, respectively, and do not pay a contingent
deferred sales charge. Prior to April 1, 2005 the maximum front-end
sales charge for class M was 3.50%. Class B shares, which convert to
class A shares after approximately eight years, do not pay a front-end
sales charge and are subject to a contingent deferred sales charge, if
those shares are redeemed within six years of purchase. Class C shares
are subject to the same fees as class B shares, except that class C
shares have a one-year 1.00% contingent deferred sales charge and do not
convert to class A shares. Class R shares, which are offered to
qualified employee-benefit plans are sold without a front-end sales
charge or a contingent deferred sales charge. The expenses for class A,
class B, class C, class M and class R shares may differ based on each
class' distribution fee, which is identified in Note 2.
A 2.00% redemption fee may apply to any shares that are redeemed (either
by selling or exchanging into another fund) within 5 days of purchase.
The redemption fee is accounted for as an addition to paid-in-capital.
Investment income, realized and unrealized gains and losses and expenses
of the fund are borne pro-rata based on the relative net assets of each
class to the total net assets of the fund, except that each class bears
expenses unique to that class (including the distribution fees
applicable to such classes). 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.
In the normal course of business, the fund enters into contracts that
may include agreements to indemnify another party under given
circumstances. The fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be, but have not
yet been, made against the fund. However, the fund expects the risk of
material loss to be remote.
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 accounting principles generally accepted in the United States of
America and requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities in 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 valued at the last reported sales price on their principal
exchange, or official closing price for certain markets. If no sales are
reported -- as in the case of some securities traded over-the-counter -- a
security is valued at its last reported bid price. Many securities markets
and exchanges outside the U.S. close prior to the close of the New York
Stock Exchange and therefore the closing prices for securities in such
markets or on such exchanges may not fully reflect events that occur after
such close but before the close of the New York Stock Exchange.
Accordingly, on certain days, the fund will fair value foreign securities
taking into account multiple factors, including movements in the U.S.
securities markets. The number of days on which fair value prices will be
used will depend on market activity and it is possible that fair value
prices will be used by the fund to a significant extent. Securities quoted
in foreign currencies are tran s lated into U.S. dollars at the current
exchange rate. Short-term investments having remaining maturities of 60
days or less are valued at amortized cost, which approximates fair value.
Other investments, including certain restricted securities, are valued at
fair value following procedures approved by the Trustees. Such valuations
and procedures are reviewed periodically by the Trustees.
B) Joint trading account Pursuant to an exemptive order from the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances, including cash collateral received under security lending
arrangements, into a joint trading account along with the cash of other
registered investment companies and certain other accounts managed by
Putnam Investment Management, LLC ("Putnam Management"), the fund's
manager, an indirect wholly-owned subsidiary of Putnam, LLC. These
balances may be invested in issues of high-grade short-term investments
having maturities of up to 397 days for collateral received under
security lending arrangements and up to 90 days for other cash
investments.
C) Security transactions and related investment income Security
transactions and related investment income Security transactions are
recorded 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, net of applicable withholding taxes, is recognized on the
ex-dividend date. Non-cash dividends, if any, are recorded at the fair
market value of the securities received. All premiums/discounts are
amortized/accreted on a yield-to-maturity basis.
D) Futures and options contracts The fund may use futures and options
contracts to hedge against changes in the values of securities the fund
owns or expects to purchase. The fund may also write options on
securities it owns or in which it may invest to increase its current
returns.
The potential risk to the fund is that the change in value of futures
and options contracts may not correspond to the change in value of the
hedged instruments. In addition, losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contracts, or if the counterparty to the contract is
unable to perform. Risks may exceed amounts recognized on the statement
of assets and liabilities. When the contract is closed, the fund records
a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed. Realized gains and losses on purchased options are included in
realized gains and losses on investment securities. If a written call
option is exercised, the premium originally received is recorded as an
addition to sales proceeds. If a written put option is exercised, the
premium originally received is recorded as a reduction to the cost of
investments.
Futures contracts are valued at the quoted daily settlement prices
established by the exchange on which they trade. The fund and the broker
agree to exchange an amount of cash equal to the daily fluctuation in
the value of the futures contract. Such receipts or payments are known
as "variation margin." Exchange traded options are valued at the last
sale price, or if no sales are reported, the last bid price for
purchased options and the last ask price for written options. Options
traded over-the-counter are valued using prices supplied by dealers.
Futures and written option contracts outstanding at period end, if any,
are listed after the fund's portfolio.
E) Total return swap contracts The fund may enter into total return swap
contracts, which are arrangements to exchange a market linked return for a
periodic payment, both based on a notional principal amount. To the extent
that the total return of the security or index underlying the transaction
exceeds or falls short of the offsetting interest rate obligation, the
fund will receive a payment from or make a payment to the counterparty.
Total return swap contracts are marked to market daily based upon
quotations from market makers and the change, if any, is recorded as
unrealized gain or loss. Payments received or made are recorded as
realized gains or loss. The fund could be exposed to credit or market risk
due to unfavorable changes in the fluctuation of interest rates or in the
price of the underlying security or index, the possibility that there is
no liquid market for these agreements or that the counterparty may default
on its obligation to perform. Risk of loss may exceed amounts recognized
on the statement of assets and liabilities. Total return swap contracts
outstanding at period end, if any, are listed after the fund's portfolio.
F) Security lending The fund may lend securities, through its agents, to
qualified borrowers in order to earn additional income. The loans are
collateralized by cash and/or securities in an amount at least equal to
the market value of the securities loaned. The market value of
securities loaned is determined daily and any additional required
collateral is allocated to the fund on the next business day. The risk
of borrower default will be borne by the fund's agents; the fund will
bear the risk of loss with respect to the investment of the cash
collateral. Income from securities lending is included in investment
income on the statement of operations. At May 31, 2005, the value of
securities loaned amounted to $97,519,380. The fund received cash
collateral of $100,423,143 which is pooled with collateral of other
Putnam funds into 21 issuers of high grade short-term investments.
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 of 1986 (the "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 Code, as amended. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held nor for excise tax on income and capital
gains.
At May 31, 2005, the fund had a capital loss carryover of $116,591,775
available to the extent allowed by the Code to offset future net capital
gain, if any. This capital loss carryover will expire on May 31, 2011.
H) Distributions to shareholders Distributions to shareholders from net
investment income are recorded by the fund on the ex-dividend date.
Distributions from capital gains, 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. These differences include temporary and permanent
differences of losses on wash sale transactions, nontaxable dividends
and realized gains and losses on certain futures contracts.
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,
2005, the fund reclassified $98,490 to decrease undistributed net
investment income and $126,923 to decrease paid-in-capital, with an
decrease to accumulated net realized losses of $225,413.
The tax basis components of distributable earnings and the federal tax
cost as of period end were as follows:
Unrealized appreciation $65,138,142
Unrealized depreciation (37,394,769)
------------
Net unrealized appreciation 27,743,373
Undistributed ordinary income 1,475,298
Capital loss carryforward (116,591,775)
Cost for federal income
tax purposes $782,290,217
Note 2
Management fee, administrative
services and other transactions
Putnam Management is paid for management and investment advisory services
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.
Putnam Management has agreed to waive fees and reimburse expenses of the
fund through May 31, 2006 to the extent necessary to ensure that the
fund's expenses do not exceed the average expenses of the front-end load
funds viewed by Lipper Inc. as having the same investment classification
or objective as the fund. The expense reimbursement is based on a
comparison of the fund's expenses with the average annualized operating
expenses of the funds in its Lipper peer group for each calendar quarter
during the fund's last fiscal year, excluding 12b-1 fees and without
giving effect to any expense offset and brokerage service arrangements
that may reduce fund expenses. For the year ended May 31, 2005, Putnam
Management did not waive any of its management fee from the fund.
For the period ended May 31, 2005, Putnam Management has assumed $34,050
of legal, shareholder servicing and communication, audit and Trustee fees
incurred by the fund in connection with certain legal and regulatory
matters (including those described in Note 6).
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, LLC. Putnam Investor
Services, a division of PFTC, provides investor servicing agent functions
to the fund. During the year ended May 31, 2005, the fund paid PFTC
$2,485,602 for these services.
The fund has entered into an arrangement with PFTC whereby credits
realized as a result of uninvested cash balances are used to reduce a
portion of the fund's expenses. The fund also reduced expenses through
brokerage service arrangements. For the year ended May 31, 2005, the
fund's expenses were reduced by $653,364 under these arrangements.
Each independent Trustee of the fund receives an annual Trustee fee, of
which $1,363, as a quarterly retainer, 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. George
Putnam III also receives the foregoing fees for his services as a Trustee.
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 Trustee compensation and expenses in the statement of
operations. Accrued pension liability is included in Payable for Trustee
compensation and expenses in the statement of assets and liabilities. The
Trustees have terminated the Pension Plan with respect to any Trustee
first elected after 2003.
The fund has adopted distribution plans (the "Plans") with respect to its
class A, class B, class C, class M and class R shares pursuant to Rule
12b-1 under the Investment Company Act of 1940. The purpose of the Plans
is to compensate Putnam Retail Management, a wholly-owned subsidiary of
Putnam, LLC and Putnam Retail Management GP, Inc., for services provided
and expenses incurred in distributing shares of the fund. The Plans
provide for payments by the fund to Putnam Retail Management at an annual
rate of up to 0.35%, 1.00%, 1.00%, 1.00% and 1.00% of the average net
assets attributable to class A, class B, class C, class M and class R
shares, respectively. The Trustees have approved payment by the fund at an
annual rate of 0.25%, 1.00%, 1.00%, 0.75% and 0.50% of the average net
assets attributable to class A, class B, class C, class M and class R
shares, respectively.
For the year ended May 31, 2005, Putnam Retail Management, acting as
underwriter, received net commissions of $31,124 and $1,212 from the sale
of class A and class M shares, respectively, and received $201,141 and
$253 in contingent deferred sales charges from redemptions of class B and
class C shares, respectively.
A deferred sales charge of up to 1.00% and 0.65% is assessed on certain
redemptions of class A and class M shares, respectively. For year ended
May 31, 2005, Putnam Retail Management, acting as underwriter, received
$458 and no monies on class A and class M redemptions, respectively.
Note 3
Purchases and sales of securities
During the year ended May 31, 2005, cost of purchases and proceeds from
sales of investment securities other than short-term investments
aggregated $897,618,301 and $1,056,631,291, respectively. There were no
purchases or sales of U.S. government securities.
Note 4
Capital shares
At May 31, 2005, there was an unlimited number of shares of beneficial
interest authorized. Transactions in capital shares were as follows:
Year ended May 31, 2005
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 4,775,978 $84,506,446
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 21,827 398,551
- ----------------------------------------------------------------
4,797,805 84,904,997
Shares repurchased (6,642,953) (115,348,347)
- ----------------------------------------------------------------
Net decrease (1,845,148) $(30,443,350)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class A Shares Amount
- ----------------------------------------------------------------
Shares sold 3,543,043 $55,256,831
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
3,543,043 55,256,831
Shares repurchased (13,169,296) (206,905,636)
- ----------------------------------------------------------------
Net decrease (9,626,253) $(151,648,805)
- ----------------------------------------------------------------
Year ended May 31, 2005
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 1,103,114 $18,233,282
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
1,103,114 18,233,282
Shares repurchased (7,879,069) (130,993,276)
- ----------------------------------------------------------------
Net decrease (6,775,955) $(112,759,994)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class B Shares Amount
- ----------------------------------------------------------------
Shares sold 1,927,979 $28,844,587
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
1,927,979 28,844,587
Shares repurchased (8,470,405) (127,609,791)
- ----------------------------------------------------------------
Net decrease (6,542,426) $(98,765,204)
- ----------------------------------------------------------------
Year ended May 31, 2005
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 55,032 $923,741
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
55,032 923,741
Shares repurchased (81,293) (1,352,168)
- ----------------------------------------------------------------
Net decrease (26,261) $(428,427)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class C Shares Amount
- ----------------------------------------------------------------
Shares sold 255,781 $3,941,343
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
255,781 3,941,343
Shares repurchased (249,923) (3,884,872)
- ----------------------------------------------------------------
Net increase 5,858 $56,471
- ----------------------------------------------------------------
Year ended May 31, 2005
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 89,908 $1,496,168
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
89,908 1,496,168
Shares repurchased (339,015) (5,653,378)
- ----------------------------------------------------------------
Net decrease (249,107) $(4,157,210)
- ----------------------------------------------------------------
Year ended May 31, 2004
- ----------------------------------------------------------------
Class M Shares Amount
- ----------------------------------------------------------------
Shares sold 180,057 $2,684,985
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
180,057 2,684,985
Shares repurchased (761,321) (11,625,052)
- ----------------------------------------------------------------
Net decrease (581,264) $(8,940,067)
- ----------------------------------------------------------------
Year ended May 31, 2005
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 530 $8,996
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions 1 17
- ----------------------------------------------------------------
531 9,013
Shares repurchased (208) (3,477)
- ----------------------------------------------------------------
Net increase 323 $5,536
- ----------------------------------------------------------------
For the period December 1, 2003
(commencement of operations)
to May 31, 2004
- ----------------------------------------------------------------
Class R Shares Amount
- ----------------------------------------------------------------
Shares sold 499 $7,935
- ----------------------------------------------------------------
Shares issued in
connection with
reinvestment
of distributions -- --
- ----------------------------------------------------------------
499 7,935
Shares repurchased -- --
- ----------------------------------------------------------------
Net increase 499 $7,935
- ----------------------------------------------------------------
At May 31, 2005, Putnam , LLC owned 63 class R shares of the fund
(7.6% of class R shares outstanding), valued at $1,158.
Note 5
Investment in Putnam Prime Money Market Fund.
Pursuant to an exemptive order from the Securities and Exchange
Commission, the fund invests in Putnam Prime Money Market Fund, an
open-end management investment company managed by Putnam Management.
Management fees paid by the fund are reduced by an amount equal to the
management and administrative services fees paid by Putnam Prime Money
Market Fund with respect to assets invested by the fund in Putnam Prime
Money Market Fund. For the year ended May 31, 2005, management fees paid
were reduced by $11,178 relating to the fund's investment in Putnam Prime
Money Market Fund. Income distributions earned by the fund are recorded as
income in the statement of operations and totaled $139,789 for the year
ended May, 31, 2005. During the year ended May 31, 2005, cost of purchases
and cost of sales of investments in Putnam Prime Money Market Fund
aggregated $221,895,073 and $214,092,434, respectively.
Note 6
Regulatory matters and litigation
Putnam Management has entered into agreements with the Securities and
Exchange Commission and the Massachusetts Securities Division settling
charges connected with excessive short-term trading by Putnam employees
and, in the case of the charges brought by the Massachusetts Securities
Division, by participants in some Putnam-administered 401(k) plans.
Pursuant to these settlement agreements, Putnam Management will pay a
total of $193.5 million in penalties and restitution, with $153.5 million
being paid to shareholders and the funds. The restitution amount will be
allocated to shareholders pursuant to a plan developed by an independent
consultant, with payments to shareholders following approval of the plan
by the SEC and the Massachusetts Securities Division.
The Securities and Exchange Commission's and Massachusetts Securities
Division's allegations and related matters also serve as the general basis
for numerous lawsuits, including purported class action lawsuits filed
against Putnam Management and certain related parties, including certain
Putnam funds. Putnam Management will bear any costs incurred by Putnam
funds in connection with these lawsuits. Putnam Management believes that
the likelihood that the pending private lawsuits and purported class
action lawsuits will have a material adverse financial impact on the fund
is remote, and the pending actions are not likely to materially affect its
ability to provide investment management services to its clients,
including the Putnam funds.
On March 23, 2005, Putnam Management entered into a settlement with the
Securities and Exchange Commission resolving its inquiry into Putnam
Management's alleged failure to fully and effectively disclose a former
brokerage allocation practice to the Board of Trustees and shareholders of
the Putnam Funds. This practice, which Putnam Management ceased as of
January 1, 2004, involved allocating a portion of the brokerage on
mutual fund portfolio transactions to certain broker-dealers who sold
shares of Putnam mutual funds. Under the settlement order, Putnam
Management has paid a civil penalty of $40 million and disgorgement of $1
to the Securities and Exchange Commission. These amounts, which are
included in Other income on the Statement of operations, subsequently will
be distributed to certain Putnam funds pursuant to a plan to be approved
by the Securities and Exchange Commission. As part of the settlement,
Putnam Management neither admitted nor denied any wrongdoing.
Putnam Investments has recorded a charge of $30 million for the estimated
cost that it believes will be necessary to address issues relating to the
calculation of certain amounts paid by the Putnam mutual funds in previous
years. The previous payments were cost reimbursements by the Putnam funds
to Putnam for transfer agent services relating to defined contribution
operations. Putnam currently anticipates that any payments made by Putnam
related to this issue will be paid to the Putnam funds. Review of this
issue is ongoing.
Federal tax information
(Unaudited)
The fund has designated 100% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
For its tax year ended May 31, 2005, the fund hereby designates 100%,
the maximum amount allowable, of its net taxable income as qualified
dividends taxed at individual net capital gain rates.
The Form 1099 you receive in January 2006 will show the tax status of
all distributions paid to your account in calendar 2005.
Results of November 11, 2004 and January 10, 2005 shareholder meetings
(Unaudited)
A special meeting of shareholders of the trust and of the fund was held
on November 11, 2004. At that meeting consideration of certain proposals
was adjourned to a final meeting held on January 10, 2005.
November 11, 2004 meeting
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes Votes
For Withheld
- ----------------------------------------------------------------
Jameson A. Baxter 24,449,758 1,200,176
Charles B. Curtis 24,455,940 1,193,994
Myra R. Drucker 24,462,580 1,187,354
Charles E. Haldeman, Jr. 24,455,631 1,194,303
John A. Hill 24,440,836 1,209,098
Ronald J. Jackson* 24,469,185 1,180,749
Paul L. Joskow 24,476,399 1,173,535
Elizabeth T. Kennan 24,427,256 1,222,678
John H. Mullin, III 24,451,709 1,198,225
Robert E. Patterson 24,459,062 1,190,872
George Putnam, III 24,434,845 1,215,089
A.J.C. Smith 24,430,915 1,219,019
W. Thomas Stephens 24,472,029 1,177,905
Richard B. Worley 24,469,354 1,180,580
A proposal to amend the fund's fundamental investment restriction
with respect to diversification of investments to enhance the fund's
ability to invest in registered investment companies such as Putnam
Prime Money Market Fund was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
18,271,094 970,477 6,408,363
* Mr. Jackson retired from the Board of Trustees on June 10, 2005.
+ Mr. Smith resigned from the Board of Trustees on January 14, 2005.
All tabulations are rounded to nearest whole number.
January 10, 2005 meeting
A proposal to amend the fund's fundamental investment restriction with
respect to borrowing to allow the fund the investment flexibility
permitted by the Investment Company Act was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
17,417,704 1,731,154 6,574,104
A proposal to amend the fund's fundamental investment restriction with
respect to making loans to enhance the fund's ability to participate in an
interfund borrowing and lending program was approved as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
17,598,522 1,599,524 6,524,916
A proposal to amend the fund's Agreement and Declaration of Trust to
permit the fund to satisfy redemption requests other than in cash was
defeated, with all funds of the trust voting together as a single class,
as follows:
Votes Votes
For Against Abstentions
- ----------------------------------------------------------------
17,459,567 1,621,333 6,642,062
All tabulations are rounded to nearest whole number.
Brokerage commissions
(Unaudited)
Brokerage commissions are paid to firms that execute trades on behalf of
your fund. When choosing these firms, Putnam is required by law to seek
the best execution of the trades, taking all relevant factors into
consideration, including expected quality of execution and commission
rate. Listed below are the largest relationships based upon brokerage
commissions for your fund and the other funds in Putnam's U.S. Core group
for the year ended May 31, 2005. The other Putnam mutual funds in this
group are Putnam Investors Fund, Putnam Tax Smart Equity Fund, Putnam VT
Capital Appreciation Fund, and Putnam VT Investors Fund.
The top five firms that received brokerage commissions for trades executed
for the U.S. Core group are (in descending order) Goldman Sachs, Lehman
Brothers, Merrill Lynch, Citigroup Global Markets, and JP Morgan Clearing.
Commissions paid to these firms together represented approximately 49% of
the total brokerage commissions paid for the year ended May 31, 2005.
Commissions paid to the next 10 firms together represented approximately
38% of the total brokerage commissions paid during the period. These firms
are (in alphabetical order) Bank of America, Bear Stearns & Company, CIBC
World Markets, Credit Suisse First Boston, Deutsche Bank Securities,
Lazard Freres & Co., Morgan Stanley Dean Witter, RBC Capital Markets, UBS
Warburg, and Wachovia Securities.
Additional information about brokerage commissions is available on the
Securities and Exchange Commission (SEC) Web site at www.sec.gov. Putnam
funds disclose commissions by firm to the SEC in semiannual filings on
form N-SAR.
About the Trustees
Jameson A. Baxter (9/6/43), Trustee since 1994
Ms. Baxter is the President of Baxter Associates, Inc., a private
investment firm that she founded in 1986.
Ms. Baxter serves as a Director of ASHTA Chemicals, Inc., Banta
Corporation (a printing and digital imaging firm), Ryerson Tull, Inc. (a
steel service corporation), the Mutual Fund Directors Forum, Advocate
Health Care and BoardSource, formerly the National Center for Nonprofit
Boards. She is Chairman Emeritus of the Board of Trustees, Mount Holyoke
College, having served as Chairman for five years and as a board member
for thirteen years. Until 2002, Ms. Baxter was a Director of Intermatic
Corporation (a manufacturer of energy control products).
Ms. Baxter has held various positions in investment banking and
corporate finance, including Vice President and Principal of the Regency
Group, and Vice President of and Consultant to First Boston Corporation.
She is a graduate of Mount Holyoke College.
Charles B. Curtis (4/27/40), Trustee since 2001
Mr. Curtis is President and Chief Operating Officer of the Nuclear
Threat Initiative (a private foundation dealing with national security
issues) and serves as Senior Advisor to the United Nations Foundation.
Mr. Curtis is a member of the Council on Foreign Relations and the
Trustee Advisory Council of the Applied Physics Laboratory, Johns
Hopkins University. Until 2003, Mr. Curtis was a member of the Electric
Power Research Institute Advisory Council and the University of Chicago
Board of Governors for Argonne National Laboratory. Prior to 2002, Mr.
Curtis was a Member of the Board of Directors of the Gas Technology
Institute and the Board of Directors of the Environment and Natural
Resources Program Steering Committee, John F. Kennedy School of
Government, Harvard University. Until 2001, Mr. Curtis was a member of
the Department of Defense Policy Board and Director of EG&G Technical
Services, Inc. (a fossil energy research and development support
company).
From August 1997 to December 1999, Mr. Curtis was a Partner at Hogan &
Hartson L.L.P., a Washington, D.C. law firm. Prior to May 1997, Mr.
Curtis was Deputy Secretary of Energy. He served as Chairman of the
Federal Energy Regulatory Commission from 1977 to 1981 and has held
positions on the staff of the U.S. House of Representatives, the U.S.
Treasury Department, and the SEC.
Myra R. Drucker (1/16/48), Trustee since 2004
Ms. Drucker is a Vice Chair of the Board of Trustees of Sarah Lawrence
College, a Trustee of Commonfund (a not-for-profit firm specializing in
asset management for educational endowments and foundations) and a member
of the Investment Committee of the Kresge Foundation (a charitable trust).
She is also an ex-officio member of the New York Stock Exchange (NYSE)
Pension Managers Advisory Committee, having served as Chair for seven
years and a member of the Executive Committee of the Committee on
Investment of Employee Benefit Assets. She is Chair of the Advisory Board
of Hamilton Lane Advisors (an investment management firm) and a member of
the Advisory Board of RCM (an investment management firm). Until August
31, 2004, Ms. Drucker was Managing Director and a member of the Board of
Directors of General Motors Asset Management and Chief Investment Officer
of General Motors Trust Bank. Ms. Drucker also served as a member of the
NYSE Corporate Accountability and Listing Standards Committee and the
NYSE/NASD IPO Advisory Committee.
Prior to joining General Motors Asset Management in 2001, Ms. Drucker
held various executive positions in the investment management industry.
Ms. Drucker served as Chief Investment Officer of Xerox Corporation (a
technology and service company in the document industry), where she was
responsible for the investment of the company's pension assets. Ms.
Drucker was also Staff Vice President and Director of Trust Investments
for International Paper (a paper, paper distribution, packaging and
forest products company) and previously served as Manager of Trust
Investments for Xerox Corporation. Ms. Drucker received a B.A. degree in
Literature and Psychology from Sarah Lawrence College and pursued
graduate studies in economics, statistics and portfolio theory at Temple
University.
John A. Hill (1/31/42), Trustee since 1985 and Chairman since 2000
Mr. Hill is Vice Chairman of First Reserve Corporation, a private equity
buyout firm that specializes in energy investments in the diversified
worldwide energy industry.
Mr. Hill is a Director of Devon Energy Corporation, TransMontaigne Oil
Company and various private companies controlled by First Reserve
Corporation, as well as a Trustee of TH Lee, Putnam Investment Trust (a
closed-end investment company advised by an affiliate of Putnam
Management). He is also a Trustee of Sarah Lawrence College. Until 2005,
he was a Director of Continuum Health Partners of New York.
Prior to acquiring First Reserve Corporation in 1983, Mr. Hill held
executive positions in investment banking and investment management with
several firms and with the federal government, including Deputy
Associate Director of the Office of Management and Budget and Deputy
Director of the Federal Energy Administration. He is active in various
business associations, including the Economic Club of New York, and
lectures on energy issues in the United States and Europe. Mr. Hill
holds a B.A. degree in Economics from Southern Methodist University and
pursued graduate studies there as a Woodrow Wilson Fellow.
Paul L. Joskow (6/30/47), Trustee since 1997
Dr. Joskow is the Elizabeth and James Killian Professor of Economics and
Management, and Director of the Center for Energy and Environmental
Policy Research at the Massachusetts Institute of Technology.
Dr. Joskow serves as a Director of National Grid Transco (a UK-based
holding company with interests in electric and gas transmission and
distribution and telecommunications infrastructure) and TransCanada
Corporation (an energy company focused on natural gas transmission and
power services). Prior to February 2005, he served on the board of the
Whitehead Institute for Biomedical Research (a non-profit research
institution) and has been President of the Yale University Council
since 1993. Prior to February 2002, he was a Director of State Farm
Indemnity Company (an automobile insurance company), and, prior to March
2000, he was a Director of New England Electric System (a public utility
holding company).
Dr. Joskow has published five books and numerous articles on topics in
industrial organization, government regulation of industry, and
competition policy. He is active in industry restructuring,
environmental, energy, competition and privatization policies -- serving
as an advisor to governments and corporations worldwide. Dr. Joskow
holds a Ph.D. and M. Phil from Yale University and a B.A. from Cornell
University.
Elizabeth T. Kennan (2/25/38), Trustee since 1992
Dr. Kennan is a Partner of Cambus-Kenneth Farm (thoroughbred horse and
cattle breeding). She is President Emeritus of Mount Holyoke College.
Dr. Kennan served as Chairman and is now Lead Director of Northeast
Utilities. Until 2005, she was a Director of Talbots, Inc. She has
served as Director on a number of other boards, including Bell Atlantic,
Chastain Real Estate, Shawmut Bank, Berkshire Life Insurance and
Kentucky Home Life Insurance. She is a Trustee of the National Trust for
Historic Preservation, of Centre College and of Midway College in
Midway, Kentucky. She is also a member of The Trustees of Reservations.
Dr. Kennan has served on the oversight committee of the Folger
Shakespeare Library, as President of Five Colleges Incorporated, as a
Trustee of Notre Dame University and is active in various educational
and civic associations.
As a member of the faculty of Catholic University for twelve years,
until 1978, Dr. Kennan directed the post-doctoral program in Patristic
and Medieval Studies, taught history and published numerous articles.
Dr. Kennan holds a Ph.D. from the University of Washington in Seattle,
an M.S. from St. Hilda's College at Oxford University and an A.B. from
Mount Holyoke College. She holds several honorary doctorates.
John H. Mullin, III (6/15/41), Trustee since 1997
Mr. Mullin is the Chairman and CEO of Ridgeway Farm (a limited liability
company engaged in timber and farming).
Mr. Mullin serves as a Director of The Liberty Corporation (a
broadcasting company), Progress Energy, Inc. (a utility company,
formerly known as Carolina Power & Light) and Sonoco Products, Inc. (a
packaging company). Mr. Mullin is Trustee Emeritus of The National
Humanities Center and Washington & Lee University, where he served as
Chairman of the Investment Committee. Prior to May 2001, he was a
Director of Graphic Packaging International Corp. Prior to February
2004, he was a Director of Alex Brown Realty, Inc.
Mr. Mullin is also a past Director of Adolph Coors Company; ACX
Technologies, Inc.; Crystal Brands, Inc.; Dillon, Read & Co., Inc.;
Fisher-Price, Inc.; and The Ryland Group, Inc. Mr. Mullin is a graduate
of Washington & Lee University and The Wharton Graduate School,
University of Pennsylvania.
Robert E. Patterson (3/15/45), Trustee since 1984
Mr. Patterson is Senior Partner of Cabot Properties, L.P. and Chairman
of Cabot Properties, Inc. (a private equity firm investing in commercial
real estate).
Mr. Patterson serves as Chairman Emeritus and Trustee of the Joslin
Diabetes Center and as a Director of Brandywine Trust Group, LLC. Prior
to June 2003, he was a Trustee of Sea Education Association. Prior to
December 2001, he was President and Trustee of Cabot Industrial Trust (a
publicly traded real estate investment trust). Prior to February 1998,
he was Executive Vice President and Director of Acquisitions of Cabot
Partners Limited Partnership (a registered investment adviser involved
in institutional real estate investments). Prior to 1990, he served as
Executive Vice President of Cabot, Cabot & Forbes Realty Advisors, Inc.
(the predecessor company of Cabot Partners).
Mr. Patterson practiced law and held various positions in state
government and was the founding Executive Director of the Massachusetts
Industrial Finance Agency. Mr. Patterson is a graduate of Harvard
College and Harvard Law School.
W. Thomas Stephens (9/2/42), Trustee since 1997
Mr. Stephens is Chairman and Chief Executive Officer of Boise Cascade,
L.L.C. (a paper, forest products and timberland assets company).
Mr. Stephens serves as a Director of TransCanada Pipelines Limited.
Until 2004, Mr. Stephens was a Director of Xcel Energy Incorporated (a
public utility company), Qwest Communications, and Norske Canada, Inc.
(a paper manufacturer). Until 2003, Mr. Stephens was a Director of
Mail-Well, Inc. (a diversified printing company). He served as Chairman
of Mail-Well until 2001 and as CEO of MacMillan-Bloedel, Ltd. (a forest
products company) until 1999.
Prior to 1996, Mr. Stephens was Chairman and Chief Executive Officer of
Johns Manville Corporation. He holds B.S. and M.S. degrees from the
University of Arkansas.
Richard B. Worley (11/15/45), Trustee since 2004
Mr. Worley is Managing Partner of Permit Capital, LLC, an investment
management firm.
Mr. Worley serves on the Executive Committee of the University of
Pennsylvania Medical Center, is a Trustee of The Robert Wood Johnson
Foundation (a philanthropic organization devoted to health care issues)
and is a Director of The Colonial Williamsburg Foundation (a historical
preservation organization). Mr. Worley also serves on the investment
committees of Mount Holyoke College and World Wildlife Fund (a wildlife
conservation organization).
Prior to joining Permit Capital LLC in 2002, Mr. Worley served as Chief
Strategic Officer of Morgan Stanley Investment Management. He previously
served as President, Chief Executive Officer and Chief Investment
Officer of Morgan Stanley Dean Witter Investment Management and as a
Managing Director of Morgan Stanley, a financial services firm. Mr.
Worley also was the Chairman of Miller Anderson & Sherrerd, an
investment management firm.
Mr. Worley holds a B.S. degree from University of Tennessee and pursued
graduate studies in economics at the University of Texas.
Charles E. Haldeman, Jr.* (10/29/48), Trustee since 2004
Mr. Haldeman is President and Chief Executive Officer of Putnam, LLC
("Putnam Investments"). He is a member of Putnam Investments' Executive
Board of Directors and Advisory Council. Prior to November 2003, Mr.
Haldeman served as Co-Head of Putnam Investments' Investment Division.
Prior to joining Putnam Investments in 2002, Mr. Haldeman held executive
positions in the investment management industry. He previously served as
Chief Executive Officer of Delaware Investments and President & Chief
Operating Officer of United Asset Management. Mr. Haldeman was also a
partner and director of Cooke & Bieler, Inc. (an investment management
firm).
Mr. Haldeman currently serves as a Trustee of Dartmouth College and as
Emeritus Trustee of Abington Memorial Hospital. He is a graduate of
Dartmouth College, Harvard Law School and Harvard Business School. Mr.
Haldeman is also a Chartered Financial Analyst (CFA) charterholder.
George Putnam, III* (8/10/51), Trustee since 1984 and President
since 2000
Mr. Putnam is President of New Generation Research, Inc. (a publisher of
financial advisory and other research services), and of New Generation
Advisers, Inc. (a registered investment advisor to private funds). Mr.
Putnam founded the New Generation companies in 1986.
Mr. Putnam is a Director of The Boston Family Office, LLC (a registered
investment adviser). He is a Trustee of St. Mark's School, Shore Country
Day School, and until 2002 was a Trustee of the Sea Education
Association.
Mr. Putnam previously worked as an attorney with the law firm of Dechert
LLP (formerly known as Dechert Price & Rhoads) in Philadelphia. He is a
graduate of Harvard College, Harvard Business School and Harvard Law
School.
The address of each Trustee is One Post Office Square, Boston, MA 02109.
As of May 31, 2005, there were 108 Putnam Funds. All Trustees serve as
Trustees of all Putnam funds.
Each Trustee serves for an indefinite term, until his or her
resignation, retirement at age 72, death, or removal.
* Trustees who are or may be deemed to be "interested persons" (as
defined in the Investment Company Act of 1940) of the fund, Putnam
Management, Putnam Retail Management, or Marsh & McLennan Companies,
Inc., the parent company of Putnam, LLC and its affiliated companies.
Messrs. Haldeman and Putnam III are deemed "interested persons" by
virtue of their positions as officers of the fund, Putnam Management or
Putnam Retail Management and as shareholders of Marsh & McLennan
Companies, Inc. Mr. Putnam, III is the President of your fund and each
of the other Putnam funds. Mr. Haldeman is President and Chief Executive
Officer of Putnam Investments.
Officers
In addition to George Putnam, III, the other officers of the
fund are shown below:
Charles E. Porter (7/26/38)
Executive Vice President, Associate Treasurer and Principal
Executive Officer
Since 1989
Jonathan S. Horwitz (6/4/55)
Senior Vice President and Treasurer
Since 2004
Prior to 2004, Managing Director,
Putnam Investments
Steven D. Krichmar (6/27/58)
Vice President and Principal Financial Officer
Since 2002
Senior Managing Director, Putnam Investments. Prior to July
2001, Partner, PricewaterhouseCoopers LLP
Michael T. Healy (1/24/58)
Assistant Treasurer and Principal
Accounting Officer
Since 2000
Managing Director, Putnam Investments
Beth S. Mazor (4/6/58)
Vice President
Since 2002
Senior Vice President, Putnam Investments
Daniel T. Gallagher (2/27/62)
Senior Vice President, Staff Counsel and Compliance Liaison
Since 2004
Prior to 2004, Associate, Ropes & Gray LLP; prior to 2000,
Law Clerk, Massachusetts Supreme Judicial Court
Francis J. McNamara, III (8/19/55)
Vice President and Chief Legal Officer
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2004, General Counsel,
State Street Research & Management Company
James P. Pappas (2/24/53)
Vice President
Since 2004
Managing Director, Putnam Investments and Putnam Management.
During 2002, Chief Operating Officer, Atalanta/Sosnoff
Management Corporation; prior to 2001, President and Chief
Executive Officer, UAM Investment Services, Inc.
Richard S. Robie, III (3/30/60)
Vice President
Since 2004
Senior Managing Director, Putnam
Investments, Putnam Management and
Putnam Retail Management. Prior to 2003, Senior Vice
President, United Asset Management Corporation
Charles A. Ruys de Perez (10/17/57)
Vice President and Chief Compliance Officer
Since 2004
Managing Director, Putnam Investments
Mark C. Trenchard (6/5/62)
Vice President and BSA Compliance Officer
Since 2002
Senior Vice President, Putnam Investments
Judith Cohen (6/7/45)
Vice President, Clerk and Assistant Treasurer
Since 1993
The address of each Officer is One Post Office Square,
Boston, MA 02109.
Fund information
One of the largest mutual fund families in the United States, Putnam
Investments has a heritage of investment leadership dating back to Judge
Samuel Putnam, whose Prudent Man Rule has defined fiduciary tradition
and practice since 1830. Founded over 65 years ago, Putnam Investments
was built around the concept that a balance between risk and reward is
the hallmark of a well-rounded financial program. We presently manage
over 100 mutual funds in growth, value, blend, fixed income, and
international.
Investment Manager
Putnam Investment
Management, LLC
One Post Office Square
Boston, MA 02109
Marketing Services
Putnam Retail Management
One Post Office Square
Boston, MA 02109
Custodian
Putnam Fiduciary Trust Company
Legal Counsel
Ropes & Gray LLP
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
Trustees
John A. Hill, Chairman
Jameson Adkins Baxter
Charles B. Curtis
Myra R. Drucker
Charles E. Haldeman, Jr.
Paul L. Joskow
Elizabeth T. Kennan
John H. Mullin, III
Robert E. Patterson
George Putnam, III
W. Thomas Stephens
Richard B. Worley
Officers
George Putnam, III
President
Charles E. Porter
Executive Vice President,
Associate Treasurer and
Principal Executive Officer
Jonathan S. Horwitz
Senior Vice President and Treasurer
Steven D. Krichmar
Vice President and Principal
Financial Officer
Michael T. Healy
Assistant Treasurer and
Principal Accounting Officer
Beth S. Mazor
Vice President
Daniel T. Gallagher
Senior Vice President, Staff
Counsel and Compliance Liaison
James P. Pappas
Vice President
Richard S. Robie, III
Vice President
Mark C. Trenchard
Vice President and BSA Compliance Officer
Francis J. McNamara, III
Vice President and Chief Legal Officer
Charles A. Ruys de Perez
Vice President and Chief Compliance Officer
Judith Cohen
Vice President, Clerk and
Assistant Treasurer
This report is for the information of shareholders of Putnam Capital
Appreciation Fund. It may also be used as sales literature when preceded
or accompanied by the current prospectus, the most recent copy of
Putnam's Quarterly Performance Summary, and Putnam's Quarterly Ranking
Summary. For more recent performance, please visit
www.putnaminvestments.com. Investors should carefully consider the
investment objective, risks, charges, and expenses of a fund, which are
described in its prospectus. For this and other information or to
request a prospectus, call 1-800-225-1581 toll free. Please read the
prospectus carefully before investing. The fund's Statement of
Additional Information contains additional information about the fund's
Trustees and is available without charge upon request by calling
1-800-225-1581.
[LOGO OMITTED]
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
PRSRT STD
U.S. POSTAGE PAID
PUTNAM
INVESTMENTS
Call 1-800-225-1581 or visit our Web site
www.putnaminvestments.com.
AN002-225853 7/05
Not FDIC Insured May Lose Value No Bank Guarantee
Item 2. Code of Ethics:
- -----------------------
(a) All officers of the Fund, including its principal executive, financial and
accounting officers, are employees of Putnam Investment Management, LLC,
the Fund's investment manager. As such they are subject to a comprehensive
Code of Ethics adopted and administered by Putnam Investments which is
designed to protect the interests of the firm and its clients. The Fund
has adopted a Code of Ethics which incorporates the Code of Ethics of
Putnam Investments with respect to all of its officers and Trustees who are
employees of Putnam Investment Management, LLC. For this reason, the Fund
has not adopted a separate code of ethics governing its principal
executive, financial and accounting officers.
(c) In July 2004, Putnam Investment Management, LLC, the Fund's investment
manager, Putnam Retail Management Limited Partnership, the Fund's principal
underwriter, and Putnam Investments Limited, the sub-manager for a portion
of the assets of certain funds as determined by Putnam Management from time
to time, adopted several amendments to their Code of Ethics. Some of these
amendments were adopted as a result of Putnam Investment Management's
partial settlement order with the SEC on November 13, 2003. Insofar as such
Code of Ethics applies to the Fund's principal executive officer, principal
financial officer and principal accounting officer, the amendments provided
for the following: (i) a 90-day blackout period for all shares of Putnam
open-end funds (except for money market funds) purchased or sold (including
exchanges into or out of a fund) by Putnam employees and certain family
members; (ii) a one-year holding period for all access persons that operates
in the same manner as the 90-day rule; (iii) delivery by Putnam employees to
the Code of Ethics Administrator of both quarterly account statements for
all brokerage accounts (irrespective of activity in the accounts) and
account statements for any Putnam funds not held at Putnam or for any funds
sub-advised by Putnam; (iv) a prohibition of Putnam employees from making
more than 25 trades in individual securities in their personal accounts in
any given quarter; (v) the extension of the existing prohibition of access
persons from a purchase and sale or sale and purchase of an individual
security within 60 days to include trading based on tax-lot election; (vi)
the inclusion of trades in Marsh & McLennan Companies, Inc. (ultimate parent
company of Putnam Investment Management) securities in pre-clearance and
reporting requirements; (vii) a prohibition of limit and good-until-canceled
orders as inconsistent with the requirements of daily pre-clearance; (viii)
new limits and procedures for accounts managed by outside managers and
brokers, in order for trading in such accounts to be exempt from
pre-clearance requirements; (ix) a new gift and entertainment policy that
imposes a reporting obligation on all meals and entertainment and new limits
on non-meal entertainment; (x) a number of alternatives for the reporting of
irregular activity.
In December 2004, additional amendments to the Code of Ethics were adopted.
Insofar as such Code of Ethics applies to the Fund's principal executive
officer, principal financial officer and principal accounting officer, the
amendments provided for the following: (i) implementation of minimum
monetary sanctions for violations of the Code; (ii) expansion of the
definition of "access person" under the Code include all Putnam employees
with access to non-public information regarding Putnam-managed mutual fund
portfolio holdings; (iii) lengthening the period during which access persons
are required to complete quarterly reports; (iv) reducing the maximum number
of trades than can be made by Putnam employees in their personal accounts in
any calendar quarter from 25 trades to 10 trades; and (v) lengthening the
required holding period for securities by access persons from 60 days to 90
days.
In March 2005, additional amendments to the Code of Ethics were adopted,
that went into effect on April 1, 2005. Insofar as such Code of Ethics
applies to the Fund's principal executive officer, principal financial
officer and principal accounting officer, the amendments (i) prohibit Putnam
employees and their immediate family members from having any direct or
indirect personal financial interest in companies that do business with
Putnam (excluding investment holdings in public companies that are not
material to the employee), unless such interest is disclosed and approved by
the Code of Ethics Officer; (ii) prohibit Putnam employees from using Putnam
assets, letterhead or other resources in making political or campaign
contributions, solicitations or endorsements;(iii) require Putnam employees
to obtain pre-clearance of personal political or campaign contributions or
other gifts to government officials or political candidates in certain
jurisdictions and to officials or candidates with whom Putnam has or is
seeking to establish a business relationship and (iv) require Putnam
employees to obtain pre-approval from Putnam's Director of Government
Relations prior to engaging in lobbying activities.
Item 3. Audit Committee Financial Expert:
- -----------------------------------------
The Funds' Audit and Pricing Committee is comprised solely of Trustees
who are "independent" (as such term has been defined by the Securities
and Exchange Commission ("SEC") in regulations implementing Section 407
of the Sarbanes-Oxley Act (the "Regulations")). The Trustees believe
that each of the members of the Audit and Pricing Committee also possess
a combination of knowledge and experience with respect to financial
accounting matters, as well as other attributes, that qualify them for
service on the Committee. In addition, the Trustees have determined
that all members of the Funds' Audit and Pricing Committee meet the
financial literacy requirements of the New York Stock Exchange's rules
and that Mr. Patterson, Mr. Stephens and Mr. Worley qualify as "audit
committee financial experts" (as such term has been defined by the
Regulations) based on their review of their pertinent experience and
education. Certain other Trustees, although not on the Audit and Pricing
Committee, would also qualify as "audit committee financial experts."
The SEC has stated that the designation or identification of a person as
an audit committee financial expert pursuant to this Item 3 of Form N-CSR
does not impose on such person any duties, obligations or liability that
are greater than the duties, obligations and liability imposed on such
person as a member of the Audit and Pricing Committee and the Board of
Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services:
- -----------------------------------------------
The following table presents fees billed in each of the last two fiscal
years for services rendered to the fund by the fund's independent auditors:
Audit Audit-Related Tax All Other
Fiscal year ended Fees Fees Fees Fees
- ----------------- ---------- ------------- ------- ---------
May 31, 2005 $54,009* $-- $3,533 $371
May 31, 2004 $47,050* $-- $3,174 $158
* Includes fees of $ 818 and $ 326 billed by the fund's independent auditor
to the fund for audit procedures necessitated by regulatory and litigation
matters for the fiscal years ended May 31, 2005 and May 31, 2004,
respectively. These fees were reimbursed to the fund by Putnam.
For the fiscal years ended May 31, 2005 and May 31, 2004, the fund's
independent auditors billed aggregate non-audit fees in the amounts of $
186,017 and $ 133,821 respectively, to the fund, Putnam Management and any
entity controlling, controlled by or under common control with Putnam
Management that provides ongoing services to the fund.
Audit Fees represents fees billed for the fund's last two fiscal years.
Audit-Related Fees represents fees billed in the fund's last two fiscal
years for services traditionally performed by the fund's auditor, including
accounting consultation for proposed transactions or concerning financial
accounting and reporting standards and other audit or attest services not
required by statute or regulation.
Tax Fees represent fees billed in the fund's last two fiscal years for tax
compliance, tax planning and tax advice services. Tax planning and tax
advice services include assistance with tax audits, employee benefit plans
and requests for rulings or technical advice from taxing authorities.
All Other Fees Fees represent fees billed for services relating to an
analysis of recordkeeping fees and fund expense processing.
Pre-Approval Policies of the Audit and Pricing Committee. The Audit and
Pricing Committee of the Putnam funds has determined that, as a matter of
policy, all work performed for the funds by the funds' independent auditors
will be pre-approved by the Committee and will generally not be subject to
pre-approval procedures.
Under certain circumstances, the Audit and Pricing Committee believes that
it may be appropriate for Putnam Investment Management, LLC ("Putnam
Management") and certain of its affiliates to engage the services of the
funds' independent auditors, but only after prior approval by the Committee.
Such requests are required to be submitted in writing to the Committee and
explain, among other things, the nature of the proposed engagement, the
estimated fees, and why this work must be performed by that particular audit
firm. The Committee will review the proposed engagement at its next
meeting.
Since May 6, 2003, all work performed by the independent auditors for the
funds, Putnam Management and any entity controlling, controlled by or under
common control with Putnam Management that provides ongoing services to the
fund was pre-approved by the Committee or a member of the Committee pursuant
to the pre-approval policies discussed above. Prior to that date, the
Committee had a general policy to pre-approve the independent auditor's
engagements for non-audit services with the funds, Putnam Management and any
entity controlling, controlled by or under common control with Putnam
Management that provides ongoing services to the fund.
The following table presents fees billed by the fund's principal auditor for
services required to be approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X.
Audit-Related Tax All Other Total Non-
Fiscal year ended Fees Fees Fees Audit Fees
- ----------------- ------------- ---- --------- ----------
May 31, 2005 $-- $-- $-- $--
May 31, 2004 $-- $-- $-- $--
Item 5. Audit Committee: Not applicable
- -------------------------
Item 6. Schedule of Investments: Not applicable
- --------------------------------
Item 7. Disclosure of Proxy Voting Policies and Procedures For Closed-End
- -------------------------------------------------------------------------
Management Investment Companies: Not applicable
--------------------------------
Item 8. Purchases of Equity Securities by Closed-End Management Investment
- --------------------------------------------------------------------------
Companies and Affiliated Purchasers: Not applicable
------------------------------------
Item 9. Submission of Matters to a Vote of Security Holders:
- ------------------------------------------------------------
Not applicable
Item 10. Controls and Procedures:
- --------------------------------
(a) The registrant's principal executive officer and principal
financial officer have concluded, based on their evaluation of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as of a date within 90 days of
the filing date of this report, that the design and operation of
such procedures are generally effective to provide reasonable
assurance that information required to be disclosed by the registrant
in this report is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms.
(b) Changes in internal control over financial reporting:
Not applicable
Item 11. Exhibits:
- ------------------
(a) The Code of Ethics of The Putnam Funds, which incorporates the
Code of Ethics of Putnam Investments, is filed herewith.
(b) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Investment Company Act of 1940, as amended, and the officer
certifications as required by Section 906 of the Sarbanes-Oxley Act
of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NAME OF REGISTRANT
By (Signature and Title): /s/Michael T. Healy
--------------------------
Michael T. Healy
Principal Accounting Officer
Date: July 28, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By (Signature and Title): /s/Charles E. Porter
---------------------------
Charles E. Porter
Principal Executive Officer
Date: July 28, 2005
By (Signature and Title): /s/Steven D. Krichmar
---------------------------
Steven D. Krichmar
Principal Financial Officer
Date: July 28, 2005